Unit 5
Resource Market
1
Minimum Wage
Assume the government was
interest in increasing the federal
minimum wage to $15 an hour
Do you support this
new law?
Why or why not?
2
Is increasing minimum wage
GOOD or BAD?
GOOD IDEAWe don’t want poor people living in the
street, so we should make sure they
have enough to live on.
BAD IDEAIncreasing minimum wage too much leads
to more unemployment and higher prices.
3
Fast Food Cooks
Wage
Surplus of workers
(Unemployment)
SL
Above
Equilibrium
$15
The government wants to
HELP workers because the
equilibrium wage is too low
$10
Government sets up
a “__________.”
Wage Floor
$6
DL
QD
QE
QS
WHERE?
Q Labor
4
1. How many workers are hired?
2. How many workers are fired?
3. How many workers entered the industry?
4. How many workers are unemployed?
Wage
$15
SL
Wage Floor
$10
$5
DL
50 60 70 80 90 100 110 120
QL
5
“Glass Ceilings”
10
Combining Resources
Up to this point we have analyzed the use of only one resource.
What about a
firm wants to
combine different
resources?
For consumers, we want Utility Maximization, which
means every penny we spend worth the money.
For producers, we want Cost Minimization, which
means every worker we hire worth the money.
Utility Maximization
$10
If you only have $25, what
combination of movies and go
carts maximizes your utility?
2 movies & 1 go cart
#
Times
Going
1st
2nd
3rd
4th
Marginal MUm/Pm Marginal
Utility
Utility
($10)
(Movies)
(Go Carts)
30
20
10
5
3
2
1
.50
10
5
2
1
$5
MUc/Pc
($5)
2
1
.40
.20
Least Cost Hiring Rule
How much additional output does each
resource generate per dollar spent?
$10
$5
If you only have $35,
whatYou’d
combination
hire 2 robots
of robots
& 3and
workers
workers
will maximize output?
# of
MP/W
MP
X
labor
employed (Robot) (WR=$10)
1
2
3
4
30
20
10
5
3
2
1
.50
MP
MP/WY
20
15
10
5
4
3
2
1
(Labor)
(WL=$5)
Least Cost Rule
$10
If you only have $75, what
combination of Horses & Ox will
maximize output?
$15
MP MP/WX MP MP/WY
# of labor
employed
(Horses)
1
2
3
4
5
6
80
70
60
50
45
30
($10)
(Ox)
90
75
60
45
15
5
($15)
Least Cost Rule
If you only have $100, what
combination of R2-D2 & Wall-E
will maximize output?
$25
$15
# of labor MP MP/W
MP MP/WY
X
employed (R2-D2)
(Wall-E)
($25)
($15)
1
150
150
2
125
120
3
100
90
4
50
60
5
25
45
6
5
30
MPx
Wx
=
MPy
Wy
Profit Maximizing Rule
(Least-Cost Rule) for Combining Resources
MRPx
MRCx
MRPy
= MRCy
=1
This means that the firm is hiring where
MRP = MRC for each resource x & y
Practice: What should the firm do?
hire more, hire less, or stay put?
MRP
MRC
>1
Hire More
MRP
MRC
=1
Stay Put
MRP
MRC
<1
Hire Less
MRPL= $15
PL= $6
MRPC= $10
PC= $10
MRPL= $5
PL= $10
MRPC= $10
PC= $15
MRPL= $25
PL= $20
MRPC= $15
PC= $15
MRPL= $12
PL= $12
MRPC= $50
PC= $40
MRPL= $20
PL= $15
MRPC= $100
PC= $40