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Lecture 19

EC120 Lecture Notes - Lecture 19: Marginal Revenue, Profit Maximization, TakersPremium

6 pages100 viewsFall 2018

Department
Economics
Course Code
EC120
Professor
Steffen Ziss
Lecture
19

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Marginal Revenue Product, Marginal Factor Cost:
- Marginal Revenue Product (MRP) = Δ(PxQ)/ΔL
- equals
- For price-takers in output markets MRP = PxMPL
- Average Factor Cost (AFC) = (wxL)/L = w
- Marginal Factor Cost (MFC) = Δ(wxL)ΔL
- For price takers in labour markets MFC =
Profit maximizing factor use:
- Profits are maximized at L* if
- MRP=MFC at L=L* if L is continuous
- MRP≥MFC at L=L* if L is discrete
- MRP<MFC for L>L*
- A firm can increase profits by…
- Hiring more labour if MRP>MFC
- Hiring less labour if MRP<MFC
Profit maximization example:
Demand of Labour in Competitive Labour Markets:
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Supply of labour:
- Population. Net immigration and birth rates rise in good economic times
- Labour force participation rises in good economic times and if attitudes change (e.g.
female participation)
- Hours per person. Higher real wages result in
- A substitution effect
- Rise in opportunity cost of leisure → rise in hours
- An income effect
- Rise in income → decrease in hours if leisure is normal
Factor mobility ensures that wage differentials reflect
- Different costs of acquiring skills
- Referred to as acquired differences
- Eg. Dentist vs dental hygienist
- Different working conditions
- Referred to as compensating differentials
- Eg. High rise construction workers
- Different quality of inputs
- Referred to as intrinsic differences
- Eg. NHL vs AHL hockey players
- Demand changes in DR but not in LR (Fig. 13-3)
- Referred to as a temporary wage differential
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