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Managerial Economics & Business Strategy. Chapter 4 The Theory of Individual Behavior. Labor-Leisure Choices. What do I have to do to get you to give up some of your leisure? Compensate you Overtime Extra credit 24 hours in a day to split up between work and leisure
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Managerial Economics & Business Strategy Chapter 4 The Theory of Individual Behavior
Labor-Leisure Choices • What do I have to do to get you to give up some of your leisure? • Compensate you • Overtime • Extra credit • 24 hours in a day to split up between work and leisure • Total Earnings (E) = Fixed payment + wage (24 – leisure hours)
Income (per day) 240 80 Leisure (per day) 16 24 8 hours of work 16 hours of leisure
Which is better: overtime or higher wages? • For consumers? • Higher wages • For firms? • Overtime • People tend to work more hours with overtime • Leisure is a NORMAL good • Wages increase consume more leisure
Managerial Economics & Business Strategy Chapter 5 The Production Process and Costs
Production Analysis • Production Function • Q = F(K,L) • The maximum amount of output that can be produced with K units of capital and L units of labor. • Short-Run vs. Long-Run Decisions • SR some fixed and variable inputs • LR everything is variable • Fixed vs. Variable Inputs • Fixed cannot be changed right now • Sometimes denoted as K* • Variable can change at anytime
Cobb-Douglas Production Function • Q = F(K,L) = K.5 L.5 • K is fixed at 16 units. • Short run production function: Q = (16).5 L.5 = 4 L.5 • Production when 100 units of labor are used? Q = 4 (100).5 = 4(10) = 40 units
Important terms • Total Product • Maximum level of output that can be produced given inputs. • Do we always get the maximum?? • Average Product • Q/L or Q/K • Good for looking overtime or comparisons of firms • Marginal Product • Additional (or change in output) due to a change in an input • Increases and then decreases Why??
Marginal Productivity Measures • Marginal Product of Labor: MPL = DQ/DL • Output produced by the last worker. • Slope of the short-run production function (with respect to labor). • How do you find the slope of a function??? • First Derivative • Marginal Product of Capital: MPK = DQ/DK • Output produced by the last unit of capital. • Slope of the production function (with respect to capital).
Average Productivity Measures • Average Product of Labor • Q = F(K,L) = K.5 L.5 • If the inputs are K = 12 and L = 16, what is the average product of labor • APL = [(12) 0.5(16)0.5]/16 = 0.866. • Average Product of Capital • Q = F(K,L) = K.5 L.5 • If the inputs are K = 12 and L = 16, then what is the average product of capital • APK = [(12)0.5(16)0.5]/12 = 1.154.
Q AP L MP Increasing, Diminishing and Negative Marginal Returns Negative Marginal Returns Increasing Marginal Returns Diminishing Marginal Returns Q=F(K,L)
Important points • MPL is at its maximum at the change in concavity of the TP curve • MPL intersects the APL at its maximum • MPL is zero where TP reaches its maximum