Question

1) Define the marginal product of labor. How does it relate to diminishing returns?

2)   Explain why the demand for labor is the price of output times the marginal product of labor.

3) What does the area below the demand for labor curve and above the wage rate measure? Why?

4)   Describe the motivation for the migration of labor. In the simple model labor migrates between what two sets of countries?

5) Identify the winners and losers that result from labor migration. How does this relate to the Factor Endowment Trade Model?

Answer 1

Answer 1.)
Marginal product of labor is the additional unit of goods produced by an additional unit of labor.
For example, if the total product increases from 10 units to 15 units after hiring an additional unit of labor, the marginal product of labor is equal to 5 units (15 - 10) of goods.
Diminishing returns refer to the decrease in the marginal product as more unit of input is utilized.
It is related to labor in the sense that as more and more units of labor are hired, the marginal product of labor decreases, thus leading to diminishing returns.

Answer 2.)

The labor is demanded until the wage is equal to the marginal revenue product (marginal product multiplied by Price).

It is based upon the marginal analysis meaning that the labor is hired until the point where the marginal revenue product is equal to marginal cost (wage).Betond this point , it would not be profitable for the producer to hire more labor units.

Answer 3.)

The area below the labor demand curve and above the wage rate is equal to the employer surplus.It simply measures the amount of benefit that an employer receives by hiring each unit of labor at a given wage rate.