Based on the information given in the table in Figure 12.3 “Marginal Product and Marginal Revenue Product”, we know that the five accountants will handle a total of 93 calls per evening TeleTax will earn total revenue of $930 per evening. TeleTax will maximize profit by hiring additional units of labor up to the point where the downward-sloping portion of the marginal revenue product curve intersects the marginal factor cost curve we see in Figure 12.4 “Marginal Revenue Product and Demand” that it will hire five accountants. At a marginal factor cost of $150, TeleTax hires the services of five accountants. The downward-sloping portion of a firm’s marginal revenue product curve is its demand curve for a variable factor. To obtain marginal revenue product, we multiply the marginal product of each accountant by $10 the marginal revenue product curve is shown in Panel (b) of Figure 12.3 “Marginal Product and Marginal Revenue Product”.įigure 12.4 Marginal Revenue Product and Demand The marginal product curve shown in Panel (a) of Figure 12.3 “Marginal Product and Marginal Revenue Product” thus rises and then falls.Įach call TeleTax handles increases the firm’s revenues by $10. The marginal product of additional accountants continues to decline after that. The fourth accountant increases output by 20 calls. As more accountants are added, the firm will begin to experience diminishing marginal returns. They also share a stock of reference materials to use in answering calls. Suppose the accountants share a fixed facility for screening and routing calls. Hiring the third accountant increases TeleTax’s output per evening by 23 calls. With two accountants, a degree of specialization is possible if each accountant takes calls dealing with questions about which he or she has particular expertise. Adding a second accountant increases the number of calls handled by 20. The first accountant can handle 13 calls per evening. Panel (a) shows the increase in the number of calls handled by each additional accountant-that accountant’s marginal product. The table in Figure 12.3 “Marginal Product and Marginal Revenue Product” gives the relationship between the number of accountants available to answer calls each evening and the number of calls TeleTax handles. Lancaster adds accountants, her service can take more calls. She must determine how many accountants to hire.Īs Ms. Lancaster’s business has expanded, so she hires other accountants to handle the calls. Lancaster’s firm, TeleTax, is one of several firms offering similar advice the going market price is $10 per call. and 10 p.m., customers can call and get advice on their income taxes. Suppose that an accountant, Stephanie Lancaster, has started an evening call-in tax advisory service. If marginal product is falling, marginal revenue product must be falling as well. The law of diminishing marginal returns tells us that if the quantity of a factor is increased while other inputs are held constant, its marginal product will eventually decline. In \: perfect \: competition, \: MRP_L = MP_L \times P If still another programmer would increase annual total revenue by $48,000 but would also add $49,000 to the firm’s total cost, that programmer should not be hired because he or she would add less to total revenue than to total cost and would reduce profit. Since the programmer will add $49,000 to total cost and $50,000 to total revenue, hiring the programmer will increase the company’s profit by $1,000. It will continue to hire more and more labor up to the point that the extra revenue generated by the additional labor no longer exceeds the extra cost of the labor.įor example, if a computer software company could increase its annual total revenue by $50,000 by hiring a programmer at a cost of $49,000 per year, the marginal decision rule says that it should do so. But how much labor will the firm employ? A profit-maximizing firm will base its decision to hire additional units of labor on the marginal decision rule: If the extra output that is produced by hiring one more unit of labor adds more to total revenue than it adds to total cost, the firm will increase profit by increasing its use of labor. Describe how to find the market demand curve for labor and discuss the factors that can cause the market demand curve for labor to shift.Ī firm must have labor to produce goods and services.Apply the marginal decision rule to determine the quantity of labor that a firm in a perfectly competitive market will demand and illustrate this quantity graphically using the marginal revenue product and marginal factor cost curves.
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