Firms and individuals determine if it’s worth it to invest in capital improvements when the marginal product of capital is more than the interest paid on each unit of capital.
Similarly, when the marginal product of labor is more than the wage rate of each unit of labor, until then the firms and individuals will keep on hiring additional workers.
The individual will decide to work till the point where his wage rate received is more than the tax rate paid.
2. (Shifts of Resource Demand) A local pizzeria hires college students to make pizza, wait on tables, take phone orders, and deliver pizzas. For each situation described, determine whether the demand for student employees by the restaurant would increase, decrease, or remain unchanged. Briefly explain each answer.
a. The demand for pizza increases.
Answer – when the demand for pizza increases, then the demand for student employees by the restraint would increase as it would need more people to work to meet the increased demand for pizza.
b. Another pizzeria opens up next door.
Answer – Since, there is introduction of substitute goods which increases the competition in the pizza market. Our restaurant will reduce the price of its pizza, therefore this cost-cutting will be adjusted by reducing the number of student employees hired for pizza delivery.
c. An increase in the minimum wage raises the cost of hiring student employees.
Answer – When the minimum wage rises, it will lead to increase in the cost of hiring student employees, therefore the demand for student employees will reduce.
d. The restaurant buys a computer system for taking phone orders.
Answer – Increase in technology level will lead to reduction in the number of employees hired.
3. (Selling Output as a Price Taker) If a competitive firm hires