1. Slides By Timothy Diette and Kevin Brady Input Markets Begin Interactive Examples To navigate, please click the appropriate green buttons. (Do not use the arrows on your keyboard) Material from this presentation can be found in: Chapter 11 CoreEconomics, 2e

2. Answer QUESTION: Consider a small business that sells tee shirts in a competitive market. The table to the right shows the number of workers, output, product price, and wage. 1. Fill in the marginal physical product of labor for each number of workers employed. 2. Fill in the marginal revenue product of labor column? 3. Why is the marginal revenue product equal to the value of the marginal product? In general, is this always true? 4. How many workers should this small business hire? Input Markets Interactive Examples LQMPP L PMRP L =VMP L W ---0 5 11005625 22505625 34505625 45755625 56755625

3. ANSWER: 1. Fill in the marginal physical product of labor for each number of workers employed. The marginal physical product of labor equals the change in output divided by the change in the number of workers employed. For example, the marginal physical product of the fourth worker is: (575-450) / (4-3) = 125 Input Markets Interactive Examples LQMPP L PMRP L =VMP L W ---0 5 1100 5625 22501505625 34502005625 45751255625 56751005625 Next

4. ANSWER: 2. Fill in the marginal revenue product of labor column. The marginal revenue product of labor equals the marginal physical product of labor times marginal revenue. Since the market is competitive, the marginal revenue is the price, or $5. For example, the marginal revenue product of labor for the third worker is: 200 x 5 = $1000 Input Markets Interactive Examples LQMPP L PMRP L =VMP L W ---0 5 1100 5500625 22501505750625 345020051000625 45751255625 56751005500625 Next

5. ANSWER: 3. Why is the marginal revenue product equal to the value of the marginal product? In general, is this always true? The marginal revenue product of labor is equal to the marginal physical product of labor times marginal revenue. The value of the marginal product is equal to the marginal physical product of labor times the price. In a competitive market, firms are price takers. The marginal revenue equals the price. This is not always true! When the market is not competitive, the marginal revenue is less than the price. Input Markets Interactive Examples LQMPP L PMRP L =VMP L W ---0 5 1100 5500625 22501505750625 345020051000625 45751255625 56751005500625 Next

6. ANSWER: 4. How many workers should this small business hire? Profits are maximized for the competitive firm when workers are hired out to the point where the value of the marginal product equals the wage. For this small business, this occurs when the fourth worker is hired. The value of the marginal product of the fourth worker is $625, which equals the wage. Input Markets Interactive Examples LQMPP L PMRP L =VMP L W ---0 5 1100 5500625 22501505750625 345020051000625 45751255625 56751005500625 The End