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Describes the technology the firm uses to produce its output q.

Consider only 2 factor inputs:

capital K; and

labour (number of employee hours hired) E


E=Number of workers (L)  number of hours (h)

This assumes that the firm gets the same output from hiring: 10L for 8h as 20L for 4h.

 Wages are exogenously determined

The marginal product of labour is the change in output resulting from hiring an additional worker, holding constant the quantities of other inputs

MPE= Δq/ΔE =δq/ δE

MP is the slope of the total product curve

Law of diminishing returns: eventually, the marginal product of labour declines

Average product of labour: the amount of output produced by the typical worker

APE = q/E

Short-run period in which it is not possible to change physical equipment i.e. capital is fixed.

Value of Marginal Product (VMP) is the marginal product of labour times the pound value of the output

This indicates the benefit derived from hiring an additional worker, holding capital constant

VMPE = p x MPE

Value of Average Product is the pound value of output per worker

VAPE = p x APE

If p=£2:

How many workers should the firm hire?

If the wage rate w=£22 then the firm will hire 8 workers i.e.

VMPE = w

i.e. the marginal gain from hiring an additional worker is equal to the cost of the hire

&#61552;Does not pay to expand further. VMP of 9th worker only £18<£22.

&#61552;If only 6 workers, the additional revenue gained from hiring a 7th worker is £26 > w (£22).

&#61552;Note that VMP=w if firm hired just a single worker. However, because at this point VMP is upward sloping 1 worker does not maximise profits.

&#61552;If w was high at say £38 then the firm should hire 4 workers, but VAP is £32 here so VAP<w : hence the firm would be losing money because the per worker contribution to revenue is less than the wage rate so the firm would exit the market.

&#61552;Only relevant points on VMP function are those below the point where the VAPE curve intersects the VMPE.

The employment decision in the short-run

1200 words

deadline: 1st May MAX

Kemahiran: Sumber Manusia, Penulisan Penyelidikan

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