University:
Boston University
Course:
CAS EC 507 | Statistics for Economists
Academic year:

2024
Views:

45

Pages:

2
Author:

Kasazami2c24

APPENDIX: A FORMAL MODEL OF A FIRM’S HIRING DECISION Suppose that a firm produces disposable razors. Holding all other inputs fixed, the relationship between the number of workers (the “quantity of labor”) hired and the number of razors that can be produced in a day is given in the first two columns of Table 7.1. From these first two columns, the marginal physical product of labor (MPPL) of each additional worker can be computed. For example, one worker can produce 5 razors, but adding an additional worker makes possible the production of 12 razors, so the marginal physical product of the second worker is 7 razors. Note that the marginal physical product of labor first rises and then falls. Table 7.1 Labor Analysis of Hypothetical Razor Firm Quantity of labor 1 2 3 4 5 6 7 8 Quantity of razors 5 12 18 23 27 30 32 33 MPPL 5 7 6 5 4 3 2 1 MRPL 15 21 18 15 12 9 6 3 MFCL 12 12 12 12 12 12 12 12 marginal physical product of labor (MPPL): the amount that a unit of additional labor contributes to the physical product of a firm marginal factor cost of labor (MFCL): the cost of hiring one more unit of labor We further assume that the firm sells razors in a competitive market and that the price received per razor is constant at $3. Hence the marginal revenue product of labor (MRPL), the monetary value of the additional physical production, is always just $3 × MPPL. We assume that the firm buys labor in a perfectly competitive labor market, at a constant wage of $12. Hence the marginal factor cost of labor (MFCL) is constant at $12. The MRPL and MFCL curves are graphed in Figure 7.12. The MRPL curve has an initial hump, because the MPPL initially increases and then declines. For all workers up to the fifth worker, hiring the additional worker adds more to revenues than to costs. The profit-maximizing firm should stop hiring workers when MRPL = MFCL, at an employment level of five workers. Figure 7.12 Marginal Revenue Product of Labor and Marginal Factor Cost of Labor