EC306 Chapter Notes - Chapter 5: Marginal Revenue Productivity Theory Of Wages, Marginal Product, Isocost
Document Summary
Lo1,2 demand for labor in the short run. The amount of capital is fixed at k = k0, so the production function is simply a function of n (with k fixed). The quantity of labor services can be varied by changing either the number of employees or hours worked by each employee, or both. Two decision rules follow from the assumption of profit maximization: the firm will operate as long as it can cover its variable costs. Fixed costs are sunk costs: if the firm produces at all (it is able to cover its variable costs), it should produce the quantity q* at which marginal revenue (mr) equal marginal cost (mc). The firm should increase output until the additional cost associated with the last unit produced equals the additional revenue associated with that unit. The profit-maximizing decision rules can be stated in terms of the employment of inputs rather than in terms of the quantity of output to produce.
