Explain how the following events would affect the demand for labor. a. A new education program...

Explain how the following events would affect the demand for labor.

a. A new education program administered by the company increases labor’s marginal product.

b. The firm completes a new plant with a larger workspace and new machinery that workers can utilize and that does not substitute for the functions provided by workers’ labor.

Expert Solution

Answer

a. The demand for labor will rise.

A new education program administered by the company increases labor's marginal product or MP_L.

The profit maximizing company hires that quantity of inputs at which the marginal productivity of the inputs equals the remuneration paid to the inputs.The workers will get the wage according to their marginal productivity.Here in the example, as the MP_L rises, it will generate more of output. And as the output rises, company's revenue and profit will also rise.The company will hire more workers now.So the demand for labor will rise. With the rise in MP_L and demand for labor, the wage rate will also rise. The company will hire more labors until the MP_L becomes equal to the wage rate. When MP_Lbecomes equal to the wage rate, the revenue earned from extra unit of output becomes equal to the extra cost for hiring an additional unit of labor. So a new education program administered by the company that increases labor's marginal product will increase the demand for labor.

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b. The demand for labor will increase.

If a firm completes a new plant with a larger workspace and new machinery that workers can utilize and that does not substitute for the functions provided by workers’ labor, it will increase the demand for labor. A new plant with larger workspace means firm's scale of operation has increased. New machinery that workers can utilize and that does not substitute the functions provided by the workers' labor means, the firm needs more workers to utilize those machines.The firm is increasing its productive capacity and scale of operations, so it will require more labors to utilize that capacity.The new machinery that the workers can utilize will increase the the marginal productivity of inputs.It will raise the total production and will decrease the average cost of production because of the larger scale of operation.As a result the revenue will rise. So the demand for labor will rise to utilize those machinery as they are not substitute for labor. Again the larger scale of operation and higher revenue, and profit will raise the demand for labor.

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Rahul Sunny answered 1 year ago

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