Author Question: We showed above that a profit-maximizing firm will hire the number of workers such that the wage is ... (Read 123 times)

asan beg · **on:** Jun 29, 2018

We showed above that a profit-maximizing firm will hire the number of workers such that the wage is equal to the value of the marginal product of labor.

But, as the text showed in an earlier chapter, a profit-maximizing firm will produce the quantity of output such that price equals marginal cost. Are these two rules inconsistent?

Question 2

Which of the following will not occur as the result of a decrease in net taxes?

A) a shift to the left of the supply curve for loanable funds
B) decreased government saving
C) decreased household saving
D) all of the above

mammy1697 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

No. To see this let p = price of output, MPL = marginal product of labor, w = wage rate, VMPL = value of the marginal product of labor, and MC = marginal cost. To see that there is no inconsistency, note the following:
i. Firms maximize profits by producing the level of output such that price equals marginal cost and therefore p = MC.
ii. Firms maximize profits by hiring the number of workers such the wage rate equals the value of the marginal product of labor and therefore w = VMPL.
iii. By definition the value of the marginal product equals the price of output times the marginal product of labor and therefore w = p x MPL, which implies p = w / MPL
iv. MC must equal w / MPL. If a firm wants to produce one more unit of output it would need to hire 1 / MPL additional workers. So, for example, if the MPL is 2 then a firm would have to hire half an additional worker to produce one more unit of output. The cost of these additional workers is w / MPL, which is the cost of producing one more unit of output.
v. Therefore if a firm follows the w = VMPL rule in its hiring decision it will also follow the p = MC rule in its output decision.

Answer to Question 2

C