Question

APL, MPL RENT Wage Rate APL MPL Lc Units of labor 4. The graph, drawn above, shows the average product of labor and the marginal product of labor applied on a fixed resource, like land. Explain why the resource is overused (Lc labor units are applied on the resource), if it is a common property but it is properly used (L* labor units are applied on the resource), if it is privately owned.

Answer 1

L^c is open market eqn, which is when AP_L = wages L^x is profit Max Eqn, which occurs when MO_L = wages BW_2 at pi max, max pi = TR - TC. pi = total product - wages labor Thus FOC: d pi/dL = 0. Thus MP_L = wages Profit Max Eqn is private Mkt Eqn. When Resource is not privately owned, then the individually Rational o/c results in over exploitation of the resource pi/L = wages rightarrow Thus AP_L = wages