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Micro Review Utility, Wages, and Externalities TP and AP • Total Product (TP)- the total output of a particular good or service produced • Average Product (AP)- the total output produced per unit of a resource employed • AP = total product divided by quantity of resource employed Marginal Product (MP) • Additional output resulting from using each additional unit of labor • Law of diminishing returns applies to marginal product---at some point the MP will decrease Marginal Revenue Product (MRP) • The change in a firm’s total revenue when it employs 1 additional unit of a resource • MRP = change in total revenue/change in the quantity of the resource employed Marginal Resource Cost (MRC) aka Marginal Factor Cost (MFC) • The amount that each additional unit of a resource adds to the firm’s total (resource) cost • MRC = change in total (resource) cost/unit change in resource quantity MRP=MRC Rule • To maximize profit a firm should employ the quantity of a resource at which MRP=MRC • To maximize profit, a firm should hire any additional units of a specific resource as long as each successive unit adds more to the firm’s TR than it adds to cost TC Labor Market Equilibrium • The intersection of the market labor demand curve and the market supply curve determines the equilibrium wage rate and level of employment S ($10) WC D=MRP (∑ mrps) 0 QC (1000) Quantity of Labor Individual Firm Wage Rate (Dollars) • The individual firm in a perfectly competitive firm maximizes profit by hiring workers to the point where Wage rate = MRP s=MRC ($10) WC 0 c d=mrp qC (5) Quantity of Labor Derived Demand • Demand that is derived from the products that the resource helps produce • Resources don’t usually go directly to satisfy the consumer---indirectly through their use in goods and services • EX- land, tractor, farmer lead to demand for food Law of Diminishing Marginal Utility • Added satisfaction declines as a consumer acquires additional units of a given product • The more the consumer obtains the less they want more of it • Ex- cars (excluding collectors) Optimal Level for Utility • MU of product A/Price of A = MU of B/Price B • If this equation is not true, then the consumer should reallocate their funds differently Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (2) Product A: Price = $1 (1) Unit of Product (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (3) Product B: Price = $2 (a) Marginal Utility, Utils First 10 10 24 Second 8 8 20 Third 7 7 18 Compare Marginal Utilities Fourth 6 6 16 Then Compare Per Dollar - MU/Price Fifth 5 5 12 Choose the Highest Sixth 4 4 6 Check Seventh Budget3 - Proceed 3 to Next Item 4 (b) Marginal Utility Per Dollar (MU/Price) 12 10 9 8 6 3 2 (2) Product A: Price = $1 (1) Unit of Product (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (3) Product B: Price = $2 (a) Marginal Utility, Utils First 10 10 24 Second 8 8 20 Third 7 7 18 Again, Compare Per Dollar - MU/Price Fourth 6 6 16 Choose the Highest Fifth 5 5 12 Buy – Budget Has $5 6Left Sixth One of Each 4 4 Proceed to Next Item 3 Seventh 3 4 (b) Marginal Utility Per Dollar (MU/Price) 12 10 9 8 6 3 2 (2) Product A: Price = $1 (1) Unit of Product (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) First 10 10 Second 8 8 Third 7 7 Fourth 6 6 Again, Compare Per Dollar Fifth 5 5 Buy Sixth One More 4 B – Budget 4 Proceed to Next Item 3 Seventh 3 (3) Product B: Price = $2 (a) Marginal Utility, Utils 24 20 18 16 - MU/Price 12 Has $36 Left 4 (b) Marginal Utility Per Dollar (MU/Price) 12 10 9 8 6 3 2 (2) Product A: Price = $1 (1) Unit of Product (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (3) Product B: Price = $2 (a) Marginal Utility, Utils First 10 10 24 Second 8 8 20 Third 7 7 18 Fourth 6 6 16 Fifth 5 5 12 Again, Compare - MU/Price Sixth 4 Per Dollar 4 6 Buy One of Each – Budget Exhausted Seventh 3 3 4 (b) Marginal Utility Per Dollar (MU/Price) 12 10 9 8 6 3 2 Monopsony A single employer of labor has substantial buying (hiring power) with the following characteristics: 1. Only a single buyer of a particular good 2. Labor is immobile (workers would have to move or acquire new skills) 3. The firm is a wage maker **monopsony power can vary Monopsony Model Monopsonistic Labor Market Wage Rate (Dollars) MRC W 14.1 S b a Wc Wm c MRP 0 Qm Qc Quantity of Labor Examples of Monopsony Power Positive Externalities P S Spillover Benefit Subsidy P D Social D private Q mkt Q Social Quantity The government can correct this externality by subsidizing the producer or the consumer (vouchers) Negative Externalities P S Social S private Spillover Costs = Pollution Tax Pmkt D Quantity