An economics textbook publishing company is hiring new sales associates to sell

Question

An economics textbook publishing company is hiring new sales associates to sell textbooks to universities across the country. The company first hires Kevin, who increase the number of textbooks sold by2500 per year. Next, the company hires Hilary, who increases the number of textbooks sold by 2000 per year. Then, the company hires Maria. who increases the number of textbooks sold by 1500 per year. Finally, the company hires Sam, who increases the number of textbooks sold by 1000 per year.

The market price of each textbook is $80. The company decides to stop hiring after it hires Sam, because four additional workers is the profit-maximizing amount of labor.

Calculate and enter the value of the marginal product of labor of each worker in the following table.

Kevin:

Hilary:

Maria:

Sam:

Assume that all the sales associates have the same amount of human capital and are equally skilled at selling textbooks. The company pays each sales associate $80,000 per year.

suppose Kevin sues the company for discrimination. He thinks he should be paid his VMPL. In light of the marginal productivity theory of income distribution, what will be the judge's verdict when Kevin goes to court?

a.there is no evidence of discrimination-the company is paying each associate the VMPL of the last associate hired.

b.there is no evidence of discrimination; however, the company should pay each associate his or her VMPL.

c. there is evidence of discrimination; the company should pay each associate his or her VMPL. d. there is evidence of discrimination, Kevin should be paid his VMPL; other sales associates ' salaries should remain unchanged.

Explanation / Answer

In economics, a theory developed at the end of the 19th century by a number of writers, including John Bates Clark and Philip Henry Wicksteed, who argued that a business firm would be willing to pay a productive agent only what he adds to the firm's well-being or utility; that it is clearly unprofitable to buy, for example, a man-hour of labour if it adds less to its buyer's income.Clark sought to prove that every unit of labor and capital is paid precisely the value it adds to total product – its marginal productivity. His model hinges on resource mobility, competition, and the law of diminishing returns. Labor and capital are each interchangeable, according to Clark, so each worker or piece of capital is, in a sense, the last one. Clark reasoned that, although tasks within a firm differ in importance, if a worker engaged in an important task were removed, the remaining work would be reassigned so that all essential tasks would be done, leaving the least important tasks undone. This means that no single unit of labor is more important than any other. Firms operate in a region of their production functions where diminishing marginal returns cause each worker added to a work force to raise total output by a smaller amount than did the previous worker. The employer will hire more workers as long as the last one hired contributes at least as much to total revenue as the cost of employing that worker. Because every worker is the marginal worker, and because the last worker hired adds to the employer's gross income an amount equaling the wage rate in a competitive labor market, all workers are paid the values of their marginal products. Properly understood, Clark's marginal productivity theory is a rebuttal to Marx's charge that competitive capitalism systematically robs labor because workers contribute more to total product than the wages they receive. Clark maintained, on the contrary, that the payment to capital is also determined by its marginal productivity and that there is no “surplus value” expropriated from labor as alleged by Marx. Whatever amount of labor is employed, capital so shapes itself that each unit of equivalent labor is working with the same amount of capital. Thus, the product of every unit of capital is also equivalent to every other; when every unit is paid the value of its contribution to total product, there is no surplus to be expropriated. In short, each factor receives a payment determined by the product of its own final increment, and the reward to capital, no less than the reward to labor, is a necessary payment for its productivity. Early economists were even more prone to take positions on normative issues than are economists today, many of whom pride themselves on their scientific objectivity (if such a thing is possible). Clark tried to use his positive findings to “prove” that payments of income according to contribution (marginal productivity) are inherently equitable. The fact that this idea is as controversial today as it was when Clark first pronounced and published his “proof” is testimony that normative issues cannot be resolved scientifically. Today, both Marx and Clarke appear too elementary and wrong to be worth of any discussion or use by economists. It is surprising that even now people discuss their theories that are irrelevant to the current World. It is sheer wastage of money, time, effort and precious resources. Now read the excellent article below: John Bates Clark (1889, 1891) contended that this equality would hold. In other words, he asserted that when each factor is paid its marginal product, the sum of factor incomes will exhaust total output. This proposition became known as the marginal productivity theory of distribution or the product-exhaustion theorem. Clark himself provided a rather loose verbal "proof" of this contention. Philip H. Wicksteed (1894) was the first to prove it mathematically. However, Wicksteed also revealed that there was a necessary condition for this to hold: namely, the aggregate production function must be linearly homogeneous. Specifically, if the aggregate production function Y = ¦ (K, L, T) is homogeneous of degree one, then if each factor was paid its marginal product, then income shares would indeed "add up". Wicksteed's proof, as A.W. Flux (1894) noted in his review, was a simple application of Euler's Theorem . Namely, by Euler's Theorem, if a function is homogeneous of degree r, then, then: rY = ¦ LL + ¦ KK + ¦TT where ¦i is the first derivative of the function with respect to the ith argument. Consequently, if, as Wicksteed proposes, the production function is homogeneous of degree one, so r = 1, then: Y = ¦ LL + ¦ KK + ¦TT But this is precisely the product-exhaustion result we were looking for! So, in sum, the marginal productivity theorem of distribution says that if all factors are paid their marginal products, then the sum of factor incomes will add up to total product. The marginal productivity theory caused something of a little tornado around the turn-of-the-century, which deserve some attention as they helped clarify what the theory says and what it does not say [accounts of the debates surrounding marginal productivity abound -- those of Joan Robinson (1934), George Stigler (1941: Ch. 12) and John Hicks (1932, 1934) are probably the best. Also worthwhile are the accounts by Henry Schultz (1929), Dennis H. Robertson (1931) and Paul Douglas (1934)]. One of the immediate debates surrounded that of priority. Who "discovered" the marginal productivity theory of distribution? The first verbal exposition of the marginal productivity hypothesis is due to John Bates Clark (1889), which was followed up in Clark (1890, 1899) and, independently, Hobson (1891). Largely unaware of Clark, Philip H. Wicksteed (1894) presented the same theory and proved the product-exhaustion theorem mathematically, although, as noted, it was A.W. Flux (1894) who noted the equivalence between Wicksteed's mathematical statement and Euler's Theorem. Here a few strange footnotes begin. Enrico Barone had discovered marginal productivity theory independently, but his work was published after he had become aware of Wicksteed's achievement (Barone, 1895, 1896), thus his claim to priority was unluckily lost. Barone convinced Léon Walras to incorporate the marginal productivity theory in the third 1896 edition of his Elements (lesson 36) but then Walras affixed a famous ill-spirited note (App. 3) commending Wicksteed's performance yet claiming that the theorem was already implicit in his early work, and thus that it should be he (Walras), and not Wicksteed, that should be given credit for discovering it. This blatantly opportunistic move outraged even Walras's supporters, and he duly withdrew the note in the fourth edition of his book. During this sorry affair, Knut Wicksell (1900) rose to defend of Wicksteed's claim as discoverer of the theory. But in a surprising twist, it turns out that Wicksell had actually discovered it himself in 1893 -- before Wicksteed -- and had just forgotten about it! To add a bizarre finale, it turns out that a Lausanne mathematician, Hermann Amstein, had basically handed Walras the entire product-exhaustion theorem and its proof in 1877, but Walras had not understood the mathematics and consequently ignored it (cf. Jaffé, 1964). Despite the fight over priority, the marginal productivity theory of distribution was not immediately embraced by other economists, not even the other Neoclassicals, largely because it was not clear what the theorem said nor what its implications were. As such, it might be useful to clarify a few points of confusion. The first and most straightforward error (which is sometimes repeated today) is to assume that the marginal productivity theory says that factor prices are determined by marginal products. The tone of the exposition in John Bates Clark (1899) sometimes implies this, and many contemporaries took it at face value. As such, loose critics have gone on to "prove" that the marginal productivity theory is contradictory because it claims that factor prices are determined by marginal products and yet the theory of production tells us quite the opposite, namely that the amount of factors employed (and thus their marginal products) depend on factor prices. The argument is circular, critics claim, ergo the marginal productivity theory is faulty. The absurdity of this "proof" is evident when one recognizes that the marginal productivity theory does not say that marginal products determine factor prices. It has never said that, regardless of whatever Clark let himself say in unguarded moments. Factor prices and factor quantities are determined by the demand and supply of factors, period. The theory of production, which makes marginal products dependent on factor prices, gives us only a factor demand schedule and not the equilibrium position. In other words, at equilibrium, factors are paid their marginal products because, by definition, equilibrium is the equality of demand and supply and, by derivation from the theory of the producer, the demand curve is a marginal product schedule. There is thus no "one-way" causality between factor payments and marginal products. At best, as Dennis Robertson (1931) suggests, factor payments are the measure of marginal products in equilibrium and consequently, the marginal productivity theory can be regarded as a mere technical characterization of that equilibrium. . As Alfred Marshall aptly warns us: "This [marginal productivity] doctrine has sometimes been put forward as a theory of wages. But there is no valid ground for any such pretension. The doctrine that the earnings of a worker tend to be equal to the net product of his work, has by itself no real meaning;

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