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C. Sample Problems
D. Criticisms of Neoclassical Theory
E. Summary

A.

What NeoClassical Economic Theory Is

B.

Examples of Necoclassical Theory

C.

Sample Problems

D.

Criticisms of Neoclassical Theory

E.

Summary

         The next pages walk you through six problems that
         show you how to do these very practical things:

        1. How to find the marginal product of a worker
        2. How to find the marginal product of every worker
        3. Compute VMP value of a worker’s marginal product
        4. Decide how many workers to hire
        5. Compute revenues, costs, and profits for each worker
        6. Determine that hiring until declining VMP equals a wage rate maximizes profit

Let’s see if following the neoclassical model for hiring laborers will make you a better business person!

Principle: The value of labor’s marginal product (VMP) determines the extent to which businessmen hire workers.

Definition: VMP, the value of hiring one more worker, equals the price of the final product multiplied the number of products that worker adds to the total.

Example: Weed Your Garden Using Gerry’s Weed-Wacker-Workers

Gerry pays her weed-wackers $40 per day. The market for her services has many buyers and sellers. Gerry charges you $20 to weed your garden. The table shows how many gardens can be weeded by hiring workers:

Workers	Gardens Weeded per day
1	3
2	7
3	14
4	18
5	20
6	21

1. Find the marginal product of the third worker.
Solution: Since 2 workers weed 7 gardens and 3 workers week 14 gardens, the 3^rd worker’s marginal product was
14-7 = 7 additional gardens.

2. Find the VMP of the third worker.
Solution: A weeded garden adds $20 to Gerry’s revenues.
So the third worker’s VMP is 7 gardens X $20 = $140.

3. Complete the table of marginal products added by each worker.

Solution:

Workers	Gardens weeded daily	Marginal Product of each worker
1	3	3-0 = 3
2	7	7-3 = 4
3	14	14-7 = 7
4	18	18-14 = 4
5	20	20-18 = 2
6	21	21-20 = 1

4. What is the VMP of each worker:

Solution: Multiply the marginal product of each worker by the price of weeded garden.

Workers	Marginal Product of each worker X Revenue per garden	VMP per worker
1	3 X $20 =	$60
2	4 X $20 =	$80
3	7 X $20 =	$140
4	4 X $20 =	$80
5	2 X $20 =	$40
6	1 X $20 =	$20

5. How many workers will Gerry hire so as to maximize profits?

Solution: Hire workers until their VMP no longer exceeds their wage rate.

Workers	VMP per worker	Wage Rate
1	$60	$40
2	$80	$40
3	$140	$40
4	$80	$40
5	$40	$40
6	$20	$40

Do not hire the 6^th worker because that worker adds more to costs than his or her value of marginal product adds to the firm’s revenues.

6. What are Gerry’s total revenues, total costs, and profits associated with hiring each worker?

Solution:

Workers	Total Revenues = Gardens weeded daily X $20	Total Costs = workers X $40 per day	Profits = total revenues – total costs
1	3 X $20 = $60	1 X $40 = $40	60 – 40 = $20
2	7 X $20 = $140	2 X $40 = $80	140 – 80 = $60
3	14 X $20 = $280	3 X $40 = $120	280 – 120 = $160
4	18 X $20 = $360	4 X $40 = $160	360 – 160 = $200
5	20 X $20 = $400	5 X $40 = $200	400 – 200 = $200
6	21 X $20 = $420	6 X 40 = $240	420 – 240 = $180

6. Did hiring until the declining VMP (value added to the firm’s revenues) equaled the wage rate produce the same maximum profit found by subtracting total costs from total revenues?

Solution: Yes. Gerry hired five workers, knowing that the demand for labor, known as “value of marginal product” when set equal to wage rate maximizes profit.

Subtracting total costs from total revenues also produced maximum profit when five workers were hired.

Neoclassical economics produces precisely calculated results.

Neoclassical econ makes (1) profs scientific, and (2) students happy!

Go on to:
D. Criticisms of Neoclassical Theory

A.	What NeoClassical Economic Theory Is
B.	Examples of Necoclassical Theory
C.	Sample Problems
D.	Criticisms of Neoclassical Theory
E.	Summary