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Marginal product of labor ( MPL )

Marginal product of labor ( MPL ). def: The extra output the firm can produce using an additional unit of labor (holding other inputs fixed): MPL = F ( K , L + 1 ) – F ( K , L ). Determine MPL at each value of L Graph the production function

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Marginal product of labor ( MPL )

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  1. Marginal product of labor (MPL) def:The extra output the firm can produce using an additional unit of labor (holding other inputs fixed): MPL= F(K,L +1)– F(K,L)

  2. Determine MPL at each value of L Graph the production function Graph the MPL curve with MPL on the vertical axis and L on the horizontal axis L YMPL 0 0 n.a. 1 10 ? 2 19 ? 3 27 8 4 34 ? 5 40 ? 6 45 ? 7 49 ? 8 52 ? 9 54 ? 10 55 ? Exercise: compute & graph MPL

  3. answers:

  4. MPL 1 As more labor is added, MPL  MPL 1 Slope of the production function equals MPL 1 The MPL and the production function Y output MPL L labor

  5. Consumption (C) • durable goodslast a long time ex: cars, home appliances • non-durable goodslast a short time ex: food, clothing • serviceswork done for consumers ex: dry cleaning, air travel. def: the value of all goods and services bought by households. Includes:

  6. U.S. Consumption, 2001

  7. Investment (I) def1: spending on [the factor of production] capital. def2: spending on goods bought for future use. Includes: • business fixed investmentspending on plant and equipment that firms will use to produce other goods & services • residential fixed investmentspending on housing units by consumers and landlords • inventory investmentthe change in the value of all firms’ inventories

  8. U.S. Investment, 2001

  9. Government spending (G) • G includes all government spending on goods and services. • G excludes transfer payments (e.g. unemployment insurance payments), because they do not represent spending on goods and services.

  10. Government spending, 2001

  11. Net exports (NX = EX - IM) def: the value of total exports (EX) minus the value of total imports (IM)

  12. CASE STUDY The Reagan Deficits • Reagan policies during early 1980s: • increases in defense spending: G > 0 • big tax cuts: T < 0 • According to our model, both policies reduce national saving:

  13. r r2 r1 I(r) S, I 1. The Reagan deficits, cont. 1. The increase in the deficit reduces saving… 2. …which causes the real interest rate to rise… 3. …which reduces the level of investment. I2 I1

  14. Are the data consistent with these results? variable 1970s 1980s T – G –2.2 –3.9 S 19.6 17.4 r 1.1 6.3 I 19.9 19.4 T–G, S, and I are expressed as a percent of GDP All figures are averages over the decade shown.

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