Firm's Hiring Decision

9.4 of The Economy 1.0 & The Economy #5

What does:

HR know and set

Marketing know and set

Production know and set

-HR knows about prices, wages and employment in other firms. Thus will set the nominal wage, W

-Marketing knows all above and the demand function. Thus will set the price of output, p

-Production knows all above, plus labour productivity, and amount firm can sell, so sets employment, n

Assuming that wages are only a firm’s cost of production, how can marketing set the price?

-Remember that the firm can’t set the quantity - that’s given by the demand function. Thus, like how a profit-maximising firm decides where to produce, they simply equate the MRS of the iso-profit curve to the MRT of the demand curve.

-Thus, we can see the profit per unit output and the wage per unit output.

Given this, where is the markup?

-The markup is the difference between a firm’s cost of production and what the price the firm is setting

-Thus here, the markup is the profit per unit output. So here, it is

(p-W)/p

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