1. Warm-Up P = $0.50 and W = $1 What is the MRP of the 4th unit of labor?
Quantity of Labor
MPL 1 20 2 16 3 12 4 10 5 8 6 7
P = $0.50 and W = $1
What is the MRP of the 4th unit of labor?
Would you employ the 4th worker?
Profit-maximizing amount of labor?
New profit-maximizing amount of labor if the wage increases to $4?

2. Income Distribution and Capital/Land Markets
Chapter 20: Factor Markets and the Distribution of Income (pages )

3. Factor Distribution of Income
Interest
5.4%
Corporate profits
14.3%
Compensation of employees
70.4%
Rent
0.6%
Proprietors’ income
9.3%

4. Factor Distribution of Income
Share depends on productivity
Can theory explain wage differences?
Let’s see …

5. Differences Explained
Marginal productivity explains wage differences because of:
Compensating differentials
Differences in talent
Differences in human capital

6. Compensating Differentials
Unpleasant jobs earn higher wages
Assumes skills are equal
EXAMPLE: HAZMAT vs. bread trucks
EXAMPLE: NYC cop vs. Joliet, MT
EXAMPLE: “Graveyard” shift vs. day shift

7. Differences in Talent
More talented people earn more

8. Differences in Human Capital
More skills = higher wages

9. The Exceptions … The theory doesn’t always hold… Market power
Efficiency wage
Discrimination

10. Market Power Unions represent workers
Collective bargaining acts like a monopoly
Wages tend to be higher than non- union workers

11. Efficiency Wage Firms may pay more than equilibrium wage
Gives incentive for workers to stay
Reduces turnover
Acts as a price floor

12. Discrimination Competitive markets should eliminate discrimination
MRP > W for discriminated workers
Firms should shift hiring practice
Wages should equalize
Discrimination still exists, though

13. Marginal Analysis… General rule: MB = MC Factors: MRP = MC
Labor: Wages (W)
Land/capital: Rental Rate (R)

14. Land and Capital Demand
Price = Rental Rate (R)
Firms hire capital or land until MRP = R

15. Land and Capital Supply
(a) The Market for Land
(b) The Market for Capital
Rental rate
Rental rate S
Land R* S
Land
Capital R*
Capital Q* Q*
Land
Quantity
Capital
Quantity

16. Equilibrium
(a) The Market for Land
(b) The Market for Capital
Rental rate
Rental rate S
Land R* S
Land
Capital R*
Capital D D
Land
Capital Q* Q*
Land
Quantity
Capital
Quantity
Supply and Demand in factor markets behaves similar to in product markets

17. For a competitive firm experiencing diminishing marginal productivity, the value of the marginal product
(i) increases when the price of output decreases.
(ii) changes when marginal product changes.
(iii) diminishes as the number of workers rises.
a. (i) only
b. (i) and (ii) only
c. (i) and (iii) only
d. (ii) and (iii) only
e. (i), (ii), and (iii)

18. For maximum profit, a firm hires labor up to the point at which the wage equals
(i) the value of the marginal product of labor.
(ii) the marginal cost of an additional unit of output.
(iii) output price multiplied by the marginal product of labor.
a. (ii) only
b. (i) and (ii) only
c. (i) and (iii) only
d. (ii) and (iii) only
e. (i), (ii), and (iii)

19. Golf balls sell for $2. 50 per ball. Wage rates are $325 per day
Golf balls sell for $2.50 per ball. Wage rates are $325 per day. Complete the table below…
Labor Q MP
MRP
Wage
Marginal Profit 1
200 2
380 3
540 4
680 5
800 6
900