1. Addison Wesley Longman, Inc. © 2000 Chapter 3 The Demand for Labor

2. Addison Wesley Longman, Inc. © 2000 Profit Maximization Marginal Benefit –Marginal Product (MP) –MP = change in Q/change in L –Marginal Revenue (MR) = P –MB=MP*MR Marginal Expense = wages Optimal Solution: MB=ME

3. Addison Wesley Longman, Inc. © 2000 Short Run K fixed Firm chooses Q Chooses L given K Marginal Product of Labor changes

4. Addison Wesley Longman, Inc. © 2000 Example – Apples are $.50 Wages are $4.50 # hiredoutputMPLPriceMRP 00-.50- 116.508 23216.508 34210.505 4508.504

5. Addison Wesley Longman, Inc. © 2000 Demand for Labor in the Short Run (Real Wage)Figure 3.1

6. Addison Wesley Longman, Inc. © 2000 Demand for Labor in the Short Run (Money Wage)Figure 3.2

7. Addison Wesley Longman, Inc. © 2000 Long Run K can vary MRP L = MR*MP = wage MRP K =MR*MP = cost of capital If MR=P then P=w/MPL P=c/MPK W/MPL=C/MPK

8. Addison Wesley Longman, Inc. © 2000 If wages rise Equation is no longer equal - cut L, raise K –MPL rises –MPK falls –Cut K –Adjust until optimal again Scale Effect – less of both Substitution Effect – less L, more K

9. Addison Wesley Longman, Inc. © 2000 Effect of Increase in the Price of One Input (k) on Demand for Another Input ( j ), Where Inputs Are Substitutes in Production Figure 3.3

10. Addison Wesley Longman, Inc. © 2000 The Market Demand Curve and Effects of an Employer-Financed Payroll Tax Figure 3.7

11. Addison Wesley Longman, Inc. © 2000 Payroll Tax with a Vertical Supply CurveFigure 3.8

12. Addison Wesley Longman, Inc. © 2000 A Production FunctionFigure 3A.1

13. Addison Wesley Longman, Inc. © 2000 The Decline Marginal Productivity of LaborFigure 3A.2

14. Addison Wesley Longman, Inc. © 2000 Cost Minimization in the Production of Q* (Wage = $10 per Hour; Price of a Unit of Capital = $20) Figure 3A.3

15. Addison Wesley Longman, Inc. © 2000 Cost Minimization in the Production of Q* (Wage = $20 per Hour; Price of a Unit of Capital = $20) Figure 3A.4

16. Addison Wesley Longman, Inc. © 2000 The Substitution and Scale Effects of a Wage IncreaseFigure 3A.5