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| | 6. "why a firm's "demand for labor" is called a "derived demand" | | 6. "why a firm's "demand for labor" is called a "derived demand" |
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| | + | :This is an easy point to pick up on an exam. A firm's demand for an input (such as labor) is called a "derived demand" because it depends on the demand for the goods produced by that input. For example, a restaurant's demand for waitresses is entirely dependent on the public's demand to be served at the restaurant. If there is no public demand to be waited on at the restaurant, then the restaurant (the firm) has no demand for waitresses! |
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| | 7. "what causes an increase in demand for labor" | | 7. "what causes an increase in demand for labor" |
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| | + | :This is another easy issue, similar to the prior one above. If the public demand for the product of the labor increases, then there is an increase in demand for the labor itself. If more people want to eat McDonald's hamburgers, then there is more demand for workers to make McDonald's hamburgers. |
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| | + | :How do we know when the demand by the public for the product of certain labor increases? When the price of the good or service produced by the labor increases. When that price goes up, then there is an increase in demand for the workers who make that good or service. |
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| | 8. "the relation between hiring additional workers and the marginal cost" | | 8. "the relation between hiring additional workers and the marginal cost" |
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| | + | :This is a more challenging issue that requires two steps rather than one in order to answer correctly. Marginal cost is additional cost to a firm for making one more unit. It is measured in dollars, not in units. Making sure you have the right measure (dollars or units) for your answer will help you reduce mistakes. ''The answer for any question about marginal cost must be in dollars (or cents) per unit''. |
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| | + | :Accordingly, if you are told how many additional units are produced by each additional worker, then calculating the marginal cost requires dividing the cost of the additional worker by the additional number of units he produces. The more units an additional worker produces, the lower the marginal cost that results from adding that worker. |
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| | + | :Example: suppose a firm hires Tom and sees the output increase by 20 units, and then hires Mary at the same wage and sees the output increase by 15 units. When is the marginal cost of the firm the lowest? After it hires Tom, but before it hires Mary. That's because the marginal cost of hiring Tom is his wage divided by 20, while the marginal cost of hiring Mary is the same wave divided by 15. A wage divided by 20 is less than the same wage divided by 15, so the marginal cost to the firm after hiring Tom is less than after hiring Mary. |
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| | 9. "calculating overall costs (total cost and average variable cost) based on wages" | | 9. "calculating overall costs (total cost and average variable cost) based on wages" |
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| | + | :The key here is simply to be careful in doing the calculations, and then double-check your answer. You have to be sure you are using the correct level of output before you calculate the total cost (TC) and average variable cost (AVC) at that level of output. To find the total cost, add the fixed cost (FC) to the labor cost (total wages times the number of workers), ''for a given level of output''. Then, to find the average variable cost, find the total variable cost (TVC=TC-FC) and divide by that level of output. |
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| | + | :Example: a firm can produce 100 units with 5 workers and 200 units with 10 workers. Its fixed cost is $50 and its wage rate is $20 per day. What is its total cost and average variable cost to produce 100 units? |
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| | + | ::Answer: note first that the question asks about the costs at 100 units in output, not 200 units. Total cost at 100 units is the fixed cost ($50) plus the labor cost ($20 times times 5 workers, or $100), for a total of $150. The average variable cost is the total cost ($150) minus the fixed cost ($50), divided by the output (100), for a total of $10 per unit. |
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| | ==Review: Government Regulation/Policy== | | ==Review: Government Regulation/Policy== |