Profit Maximization and The Demand for Labor: Review

As we learned in Chapter 6, the way to maximize profits then is to hire enough labor so that

VMP=wage

where the wage is the price of labor, per hour or week or year as the case may be, and VMP stands for the Value of the Marginal Product. In turn the VMP is defined as follows:

VMP=p*MP

where p is the price of output and MP is the marginal productivity of labor in units of output. We may think of the VMP as the marginal productivity of labor in money terms.

Using the example of producing potatos, p would be the market price of potatos, MP would be the marginal productivity of labor in the potato industry. We recall the definition of

marginal productivity of labor:: the additional output as a result of adding one unit of labor, with all other inputs held steady and ceteris paribus.

Thus, the value of the marginal productivity (in the potato example) is the market value of the additional potatos produced by one additional worker in the potato industry.