Economics Exam 2 Essay
1. With capital, we mean investments in technology. Capital investment such as machinery and equipment to enhance the productivity of labor can increase the marginal product of labor. In other words, capital investment can enhance productivity of labor given other factors of production remain the same. More college education, if standalone - meaning without additional investment in technology, might not produce the same results.
Thus, capital investment might be a better investment in the short run. However, as the marginal utility of capital investment diminishes, sending labor to college to get further college education might complement the diminishing marginal returns on capital to further enhance productivity. Capital investment and college education or further training at the same time is the best investment option.
In a more objective decision making, the better investment should be identified ...view middle of the document...
Without the training MP is low, and this is precisely why the training is given. It is expected that the training will increase MP and this will contribute to growth of the firm. Accordingly the MRP is slow before training and higher after training is complete, as MR remains unchanged and of firm’s control (as it is based on demand conditions for the final good).
As per optimal rule in real life this may not happen and firms end up paying a constant salary irrespective of training. In this sense the rule is violated temporarily. But in the long run, after training the MP rises substantially. As a result, the MRP can even exceed MC -violating the rule, even after training. Higher salaries (that exceed MRP) to new workers do not violate any rule, when we consider the total horizon. Overtime the firm recovers its costs and higher MC from the employee in some way-by retaining him or asking for the costs upfront. If the worker is retained after training the MRP rises enough to exceed MC. This balances out the opposite inequality before training. Overall if we account for the long run we can use the present value of future MRP and future MC. It will be seen that the discounted MRP equals the discounted MC. This is the rule that firms follow.
This logic lies at the heart of many agreements that a worker is asked to enter into before training. These take the form of bonds that retain a worker long enough for a firm to recoup its training costs. Employees are often required to sign a bond where they promise to stay in the firm for a fixed period before they are sent for training. They are not to leave the firm before this period is over. Typically this period is based on recovery of the cost of training provided. These agreements ensure that the firm recovers its costs of raining and training is not in optimal. In other cases workers are made to partly pay for the training so that they have some stake in the training costs. Therefore, in the short run it may seem irrational to train and incur MC>MRP. But over long run, optimality is ensured as MRP often exceeds MC. Overall the sum of MC and MRP over time will be equal. Optimality is not violated in long run.