CHAPTER 3 | Productivity, Output, and Employment 105

At The Clip Joint the price of output, P, is $30 per grooming, so the MRPN of each
worker, column (4), equals the MPN of the worker, column (3), multiplied by $30.
Now suppose that the wage, W, that The Clip Joint must pay to attract quali-
fied workers is $240 per day. (We refer to the wage, W, when measured in the
conventional way in terms of today’s dollars, as the nominal wage.) How many
workers should The Clip Joint employ to maximize its profits? To answer this
question, The Clip Joint compares the benefits and costs of employing each addi-
tional worker. The benefit of employing an additional worker, in dollars per day,
is the worker’s marginal revenue product, MRPN. The cost of an additional
worker, in dollars per day, is the nominal daily wage, W.
Table 3.2 shows that the MRPN of the first worker is $330 per day, which
exceeds the daily wage of $240, so employing the first worker is profitable for
The Clip Joint. Adding a second worker increases The Clip Joint’s profit as well
because the MRPN of the second worker ($270 per day) also exceeds the daily
wage. However, employing a third worker reduces The Clip Joint’s profit
because the third worker’s MRPN of $210 per day is less than the $240 daily
wage. Therefore, The Clip Joint’s profit-maximizing level of employment at
$240/day—equivalently, the quantity of labor demanded by The Clip Joint—is
two workers.
In finding the quantity of labor demanded by The Clip Joint, we measured the
benefits and costs of an extra worker in nominal, or dollar, terms. If we measure
the benefits and costs of an extra worker in real terms, the results would be the
same. In real terms the benefit to The Clip Joint of an extra worker is the number
of extra groomings that the extra worker provides, which is the marginal product
of labor, MPN. The real cost of adding another worker is the real wage, which is
the wage measured in terms of units of output. Algebraically, the real wage, w,
equals the nominal wage, W, divided by the price of output, P.
In this example the nominal wage, W, is $240 per day and the price of
output, P, is $30 per grooming, so the real wage, w, equals ($240 per day)/($30
per grooming), or 8 groomings per day. To find the profit-maximizing level of
employment, The Clip Joint compares this real cost of an additional worker
with the real benefit of an additional worker, the MPN. The MPN of the first
worker is 11 groomings per day, which exceeds the real wage of 8 groomings
per day, so employing this worker is profitable. The second worker also
should be hired, as the second worker’s MPN of 9 groomings per day also
exceeds the real wage of 8 groomings per day. However, a third worker should
not be hired because the third worker’s MPN of 7 groomings per day is less
than the real wage. The quantity of labor demanded by The Clip Joint is there-
fore two workers, which is the same result we got when we compared costs
and benefits in nominal terms.
This example shows that, when the benefit of an additional worker exceeds
the cost of an additional worker, the firm should increase employment so as to
maximize profits. Similarly, if at the firm’s current employment level the benefit of
the last worker employed is less than the cost of the worker, the firm should reduce
employment. For example, if The Clip Joint currently employed three workers, the
MRPN of the third worker is $210, which is less than the nominal wage of $240, so
the firm should fire one worker. Summary table 2 compares benefits and costs
of additional labor in both real and nominal terms. In the choice of the profit-
maximizing level of employment, a comparison of benefits and costs in either real
or nominal terms is equally valid.

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