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?

Income Distribution and Capital/Land Markets Chapter 20: Factor Markets and the Distribution of Income (pages 519-528)

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

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

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

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

Differences in Talent More talented people earn more

Differences in Human Capital More skills = higher wages

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

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

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

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

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

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

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

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

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)

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)

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