A firm is willing to hire a worker when the worker increases the firm’s revenues more than the firm’s costs
Marginal product of labor: the increase in a firm’s revenue created by hiring an additional laborer
- The increase in costs created by hiring an additional worker is the worker’s wage
A firm is willing to hire a worker when the marginal product of labor is greater than the wage
Ex: when the cavaliers signed Lebron James, they won more, their attendance increased, and they were able to sell more merchandise
- His salary may be high, but so is Lebron’s marginal product
Ex: McDonald’s considers marginal product when the company hires people to run the restaurant and keep it looking clean
- No one wants to eat in a restaurant that’s unclean
- Cleaner restaurant increases profit
- At some point, additional cleanliness costs more than it’s worth
- To maximize profit, McDonalds will hire janitors as long as the increase in revenue from hiring another janitor exceeds the janitor’s wage
- How many janitors will McDonalds hire?
- Depends on the wage
- When the wage falls, they hire more janitors and assigns them to less important tasks
- As the wage falls, so does MPL
- The wage and the marginal product of labor will always be close together because McDonald’s will keep hiring workers as long as the MPL is greater than W
The marginal product of labor usually declines as more labor is hired
- If there is one janitor, they’ll focus on the most important tasks so the marginal product of labor is high
- As they add janitors, each janitor is assigned to a less important task, so the marginal product of labor falls
What determines the wage?
- Many firms demand janitors, so wage of janitors will be determined by the market demand and the supply of janitors
- At a high wage, only some firms will demand janitors
- As the wage falls, more and more firms will demand janitors
- Market demand for janitors is downward-sloping
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