5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

Table 10.1—cont’d

LABOR TOTAL

INPUT PRODUCT MARGINAL MARGINAL MARGINAL

(WORKERS (TPL) (CUPS PRODUCT REVENUE REVENUE PRODUCT

PER HOUR) PER HOUR) (MPL)(MR =P) (MRPL=MPL ¥MR)

4 70 10 $.50 $5.00

5 75 5 $.50 $2.50

670 - 5 $.50 -$2.50

760 - 10 $.50 -$5.00

Profit-Maximizing Resource Employment

Yet again, we are faced with a decision that must be based upon marginal benefits and mar-

ginal costs. Our decision rule is, and has always been:

• If MB >MC, do more of it.


• If MB <MC, do less of it.


• If MB =MC, stop here.

In the case of resource hiring, the marginal benefit is MRP. The marginal cost of

resource hiring is marginal resource cost (MRC), a measure of how much cost the firm

incurs from using an additional unit of an input. When the firm is hiring labor in a com-

petitive labor market, MRC is equal to the wage (w).

Change in total resource cost

MRC =

Change in resource quantity

=Wage

With this measure of marginal cost, the profit-maximizing employer of labor would

hire to the point where MRPL=MRC =Wage. Table 10.2 adds a competitive $7.50 hourly

wage to Molly’s table of lemonade production. At this wage, Molly should employ three

hourly workers to her fixed capital.

Table 10.2

TOTAL MARGINAL

LABOR REVENUE MARGINAL

INPUT PRODUCT MARGINAL MARGINAL PRODUCT RESOURCE

(WORKERS (TPL) (CUPS PRODUCT REVENUE (MRPL= COST (MRC =

PER HOUR) PER HOUR) (MPL)(MR =P)MPL ¥ MR) WAGE)

00

1 25 25 $.50 $12.50 $7.50

2 45 20 $.50 $10.00 $7.50

3 60 15 $.50 $7.50 $7.50

4 70 10 $.50 $5.00 $7.50

5 75 5 $.50 $2.50 $7.50

670 - 5 $.50 -$2.50 $7.50

760 - 10 $.50 -$5.00 $7.50

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