Paper Presentation on Marginal Revenue Product And Optimal Employment Level: An Illustration of Student Involvement Dr. Eugene Steadman, Jr. Averett University 7Th Annual Economics Teaching Conference Gulf States Economic Association New Orleans, Louisiana October 27, 2011 Background Many students have trouble grasping how marginal revenue product (MRP) and marginal cost (MC) concepts relate in hiring the optimal number of employees, under differing sets of employment conditions. From my experience, when students become personally involved in applications of these concepts and have a stake in the outcome, they understand better the concepts. On end-of-course final exams where these concepts are tested, the students perform quite well in critically thinking their way to correct answers. In order to help achieve the desired student learning outcomes from economic courses, I create a hypothetical holiday wreath business, for which I am the owner. In the classroom, I point out an area where I have purchased and installed a wire-bending machine that processes and welds the wreath assembly support structure. From the assembly of materials and the processing of welded support structures for the holiday wreaths, the assembly of a wreath goes through another eight workstations to attain the final product. In total, there are 10 workstations, each of which has to be performed by student workers that I will employ from the class. The ten workstations are shown in Figure I. I presume that my students know what a holiday wreath is, and have little trouble envisioning it. I explain that it has pine cones, ribbons, bows, berries, and frosted parts from spraying glitter paint on parts of the wreath. Quality control, assembly, and shipping to the customer are briefly reviewed in the description of my business. Then, starting with the first student as my first employee, I ask the class how many wreaths do they think the first student can make, based on an eight-hour workday. Over many classes, the consensus is that a total of six wreaths could be completed. Essentially, this entails over an eight-hour period, the performance of 10 X 6 = 60 workstation tasks; about one and one-third hours, on average, for each wreath to be completed and shipped. Starting with the second student, they are asked about how many wreaths two students can complete in one day. Some students express the view that it must be 2 X 6 = 12 wreaths, based on the first student’s performance; but in general, most students grasp the fact that the two students can divide the 10 workstations into 5 stations each, and thus become more proficient at each of the fi ...

1. Paper Presentation on Marginal Revenue
Product
And Optimal Employment Level:
An Illustration of Student Involvement
Dr. Eugene Steadman, Jr.
Averett University
7Th Annual Economics Teaching
Conference
Gulf States Economic Association
New Orleans, Louisiana
October 27, 2011
Background
Many students have trouble grasping how marginal revenue
product (MRP) and marginal cost (MC) concepts relate in hiring
the optimal number of employees, under differing sets of
employment conditions. From my experience, when students
become personally involved in applications of these concepts
and have a stake in the outcome, they understand better the
concepts. On end-of-course final exams where these concepts
are tested, the students perform quite well in critically thinking
their way to correct answers.
In order to help achieve the desired student learning outcomes
from economic courses, I create a hypothetical holiday wreath
business, for which I am the owner. In the classroom, I point
out an area where I have purchased and installed a wire-bending
machine that processes and welds the wreath assembly support
structure. From the assembly of materials and the processing of
welded support structures for the holiday wreaths, the assembly

2. of a wreath goes through another eight workstations to attain
the final product. In total, there are 10 workstations, each of
which has to be performed by student workers that I will
employ from the class. The ten workstations are shown in
Figure I.
I presume that my students know what a holiday wreath is, and
have little trouble envisioning it. I explain that it has pine
cones, ribbons, bows, berries, and frosted parts from spraying
glitter paint on parts of the wreath. Quality control, assembly,
and shipping to the customer are briefly reviewed in the
description of my business.
Then, starting with the first student as my first employee, I ask
the class how many wreaths do they think the first student can
make, based on an eight-hour workday. Over many classes, the
consensus is that a total of six wreaths could be completed.
Essentially, this entails over an eight-hour period, the
performance of 10 X 6 = 60 workstation tasks; about one and
one-third hours, on average, for each wreath to be completed
and shipped.
Starting with the second student, they are asked about how
many wreaths two students can complete in one day. Some
students express the view that it must be 2 X 6 = 12 wreaths,
based on the first student’s performance; but in general, most
students grasp the fact that the two students can divide the 10
workstations into 5 stations each, and thus become more
proficient at each of the five workstations. Thus, the majority
of the class “sense” that more than 12 wreaths can be produced
by the two students. Over several classes, 14 wreaths has
proven to be a good number that all class members can agree
on. Given that the students intuitively realize that something is
happening between the two workers—that the second worker, at
the margin, produces eight additional wreaths, while the first
student only produced six wreaths—some suggest that the

3. second student must be more productive than the first. Again,
the majority of the class does not agree, and seize on the fact
that the students have divided the work, and thus have become
more efficient at their individual tasks.
Law of Diminishing (Marginal) Returns
Before proceeding further, the law of diminishing returns (or,
the law of diminishing marginal returns) is examined, and
explained in some detail. Basically, Figure II reflects this law,
and the students are pushed to understand its importance,
particularly from the fact that this law is the basis for variable
costs, as a function of output, for all known goods and services
companies, anywhere in the world today.
Main points emphasized are:
· During the stage of increasing returns, the line slope is
positive and increasing, up to an inflection point where the
curve, while still positive in slope, becomes less so. The curve
represents the effects from the division of labor and
specialization of tasks in producing products, and is covered by
most microeconomics textbooks.
· Total output continues to increase, even during the stage of
diminishing returns, up to the point where marginal productivity
is zero, when the curve becomes perfectly elastic (a horizontal
slope of 0). Past that point, the product output declines as more
of the variable input factor is employed, and the slope of the
line becomes negative.
· A key in the analysis, that is reinforced with students, is the
reason that the curve changes slope, i.e., the reason the
marginal productivity begins to decline. Simply put, according
to the law itself, the variable input factor is beginning to
“overwhelm” the fixed factors of production. In this case, as
the number of students are increased (the variable input factor),
the number of tasks each has to do becomes less, and they

4. become quicker/more efficient at doing each of their assigned
tasks. But, back at the front end in this case, the machine (the
fixed factor) can only operate at a certain speed, and can only
turn out so much wreath support structures, so that the increase
in the productivity begins to diminish for additional employees
as they are added. This is reached at the inflection point on the
curve. Finally, in the area where the diminishing returns turns
into negative returns, not only is the fixed machine not turning
out enough frames to supply to all the student workers that are
now only doing two work stations, as an example, the students
are beginning to “stand around” and get in each other’s way,
talking instead of working, so that the variable factor in and of
itself begins to be an impediment. Thus, output reverses, and
actually begins to fall. Sometimes, the illustration is used that
if I cram 1,000 students into the classroom with the one fixed
machine, we may not be able to turn out a single, completed
wreath. We’ve really gone backwards using the variable input
factor of student workers!
After this explanation, with the textbook as a reinforcement, we
quickly proceed around the room, considering up to the first
eight students to work on wreaths. Depending on the size of the
class, the students can be picked contiguously, or randomly.
The random approach can serve to keep the students “on their
feet and alert,” if required. Figure III is shown as the final
production numbers from each student being hired.
This point is stressed: all known production systems for goods
or services, anywhere in the world, follow this law. If a student
plans on going into business, either for themselves or to work
for an employer, it’s very wise to understand and appreciate the
importance of this law.
Marginal Returns and Marginal Revenue Product
Students understand that they have to pay a price for any good
or service. So, for this business, the price of each holiday

5. wreath is set at $25 each, no matter how many wreaths are
produced. Thus, each wreath sold has a marginal revenue of
$25, and the average revenue is also $25. Although it’s very
easy to make a classroom case for lowering the price of the
wreaths as the quantity is increased (that is, to follow the law of
demand whereby the demand curve is downward sloping), I
defer this aspect to a later part of the course, where I
demonstrate the concept of economies of scale. Basically at
that point, I inform the class that demand is so strong that we
are knocking down the wall to the adjourning classroom,
doubling the space, adding another machine, and actually
increasing the scale of the operation by 100%. Then, the
question is whether we have achieved an increasing, decreasing,
or constant returns to scale operation. Based on the answer, if
it is decided that we have achieved an increased economy of
scale, I then lower the prices for the holiday wreath. But,
regardless, since the focus of this paper is on marginal revenue
from a single variable factor of production, rather than
considering all factors to be variable as is the case in
considering economies of scale, the product price is assumed to
remain constant at $25.
Given the assumption of a constant price, the students quickly
see that the marginal revenue is, indeed, $25--each wreath sold
brings in $25. From that point, the focus is on each student’s
financial contribution to the business: given the number of
students that might be employed, is each one creating enough
revenue to cover their employment costs? To “get at” that
answer, each of the student employees is asked how much
revenue have they brought in for the company? Intuitively,
again, they recognize that the amount of money they’ve each
brought in must be the price of each wreath ($25), multiplied by
the number of wreaths they produced, at the margin, during the
eight-hour shift. For the first student that produced only six
wreaths, the income brought in was 6 X $25, or $150. This
finding is then used to reinforce the concept of marginal
revenue product (MRP): MRP = MR X MP, or marginal

6. revenue product equals marginal revenue times marginal
productivity. This process is then repeated for all of the eight
students considered in the production of holiday wreaths. As
shown in Figure IV, without any labor costs yet considered and
due only to the law of diminishing returns, the optimal
employment of students is at six. Hiring more or less than that
number will lower the “profit” of $975 per day, or $234,000 per
year, as shown on the chart.
At this point in achieving learning outcomes, the students have
grasped well the law of diminishing returns, the concept of
marginal revenue, and the concept of marginal revenue product.
Marginal Cost
At this point, it now becomes appropriate to ask each student
what they would like to make, given the nature of the tasks
involved in making holiday wreaths. Again, over many classes,
the generally agreed wage is $7 per hour. For an eight-hour
day, the marginal cost to me as the employer becomes $56 per
day. I assume no part-time workers, no sick leave, no paid
vacation, and no benefits whatsoever. Simply, each additional
worker, at the margin, costs $56 per day. Given this new piece
of information so critical to running a successful business, that
is, the variable cost, the question becomes, how many students
should we now hire? At first, most students do not deduce how
to arrive at the correct answer, based on economic reasoning.
When I then ask how much money they must “bring in” to cover
their employment costs, given that my goal is to maximize
profits (that is, I won’t hire them if they cost me more than they
can create in revenue), they begin to see that, as an employer, I
will not hire any more students than those that can cover their
employment costs, through the sale of holiday wreaths that they
helped manufacture, at the margin. Using Figure V as a guide,
the students quickly realize that, given the labor costs I now am
incurring, I would not as a logical and rational employer, hire
any more than five of them. They realize that one of the “free”

7. volunteers is no longer going to be able to remain a part of the
holiday wreath business. In other words, the student “Karl”
cannot cover, at his marginal productivity, his costs of
employment to me.
The students then focus on the fact that profits have declined
from the old figure of $234,000, down to $154,800. This
reflects the added costs of $56 per day for five students, for 240
workdays, plus the loss of $12,000 in revenue from the sixth
student that is no longer working in the company.
To reinforce the learning that a “wise” employer will always
hire employees up to the point where the marginal revenue
product covers each employee’s marginal cost in order to
maximize profits, benefits costs are now added to the analysis.
The students demand health care and a 401-K benefit plan, for
an additional cost of $40 per day for each employed student.
Again, the students are asked to determine how many students
should I hire, given these new costs?
Using Figure VI, it again becomes clear that the optimal level
of employment remains at five students. No one loses their job,
but it is pointed out that the profit drops further, from the
original $234,000 down to the earlier $154,800, and now down
to a new level of $106,800. The latter difference is accounted
for from the additional cost of $40 per student per day, for 240
days.
At this point, the students have achieved critical thinking such
that they know, for a business to succeed, its variable cost
factors (such as student labor in this case) must be covered from
revenue generation by that factor, or the decision to employ that
variable factor of production will not be a good decision.
Minimum Wage Impacts
This illustration becomes quite a learning experience for many
students. Most students, at least in the beginning of explaining
the impacts from raises in the minimum wage, believe that

8. increases are a good thing, either for themselves or for someone
they know (e.g., a friend or relative). For many, working in a
fast-food restaurant or similar business is an underpaid
experience, and increases in the minimum wage are believed to
be justified and indeed, deserved. After the economics are
traced through, the students really begin to understand, ceteris
paribus, that jobs are lost somewhere in the economic system as
a result. This, of course, presumes nothing else is changed;
there is no additional training or education to economically
justify an increased wage.
Using Figure VII to illustrate this principle, the assumption is
made that the minimum wage is increased from the current $7
per hour, to $13 per hour, with the benefits unchanged. One can
always argue with the size of the increase in the wage, but that
is really not relevant to the purpose: any increase in the
minimum wage, without some economic justification, means
that somewhere (maintaining profit margins and so forth), some
costs have to be reduced, and that can only come from the
variable factor that has the increased cost. Thus, jobs are lost.
Further, for the wreath business, profits really fall, from
$106,800 in the prior case, all the way down to $53,760.
Besides having less workers, this has really eroded my
capability or incentive to invent in expanding my business, or
doing research on how better to make holiday wreaths. In the
area of “welfare economics,” this has clearly been a shift from
producer surplus (from the employer), to consumer surplus (the
employees).
Figure VII shows that we incur a 20% reduction in the
workforce. This is a hefty price to pay for a minimum wage
increase, but in my holiday wreath business, I am left with no
choice. Students can argue about getting a more efficient
machine, or training the workers to perform better, or installing
a better computerized way to track demand and materials
inventories, but all of those violate the basic premise: ceteris

9. paribus. On its face, simply put, “there is no free lunch” and
within the economic system, someone’s gain is another’s loss.
Thus, while Renee, Emily, David, and Zack get nice pay raises,
it’s too bad that Malika loses her job.
Students really begin to see the import of raising the minimum
wage from this example. When they do, they usually begin to
ask why government decision makers don’t understand this.
Why is this done at all? Why would any policy maker do
something that causes people to lose their jobs? I point out
that, in many cases, our public policy makers are not
economists. And, additionally, politics can involve many
powerful groups, and some groups such as labor unions may
well be in favor of a raise in the minimum wage. Why? Simply
put, it gives those groups more leverage to fight for increases in
the wage rates for their own specific constituency.
A final, but most important point is made here. To
economically justify an increase in the minimum wage, workers
need to be able to produce more in order to offset the increased
costs. This ability to produce more, in terms of better quality or
more quantities, or perhaps a higher level of goods and services,
can only come from training and education. In the final
analysis, then, by getting an undergraduate degree or a graduate
degree, college graduates have an economic basis for earning
more than a high school graduate. Essentially, salaries should
increase, consistent with the additional education earned.
Impacts from Illegal Immigration
Compared to the minimum wage increase whereby job losses are
incurred (for mostly lower level wage earners), the opposite
extreme is now demonstrated to the class, again using the
holiday wreath business. Ignoring the ethical implications, the
question is asked of the class, what will be the impact if I, as
the business owner, can employ illegal immigrants at a wage
rate of $4 per hour, with no benefits?
Given the assumption of identical productivity levels, that is,

10. illegal immigrants can make holiday wreaths just as well as
college students, no better or worse, Figure VIII reflects that I
should hire six immigrants. This means I can add two workers,
a 50% increase in my workforce, compared to the previous
situation of just having four student employees.
Further, looking at the profit level, I have increased from
$53,760, all the way up to $187,920. This is over a tripling of
profit! Given that I am in the business of maximizing profits,
there is little doubt that I will “lay off” all of the student
employees, and hire the illegal immigrants, again ignoring any
ethical implications and, of course, ceteris paribus.
Summary
At this point, due to the personal involvement of the class, the
students “get it.” They have grasped marginal productivity,
marginal revenue, marginal revenue product, marginal cost,
minimum wage increases and the impacts, and see the illegal
immigration issue as it impacts employment in this country. I
find that by involving each of them in this hypothetical holiday
wreath business, it has gotten “personal” for them.
Consequently, they become empowered in the process, and are
forced to understand better these concepts for their betterment.
It should be noted that this author is in the process of building a
“custom textbook,” working with Cengage Publishing, for a
course in Managerial Economics. The contents of this paper
will be included in that textbook, which should be completed in
time for Fall, 2011, classes.
PAGE
1
Marginal Revenue Product and Optimal Employment
Levels: An Illustration of Student Involvement

11. in the Classroom
Dr. Eugene Steadman, Jr.
Professor of Business Administration
Graduate & Professional Studies Program
Averett University, Danville, VA
7th Annual Economics Teaching Conference
New Orleans, Louisiana
October 27, 2011
Major Areas Covered
Law of Diminishing (Marginal) Returns (MP)
Specialization/Division of Work Tasks
Marginal Revenue (MR)
Marginal Revenue Product (MP X MR)
Marginal Costs (MC, or Marginal Labor Costs)
Optimal Employment Level(s)
Minimum Wage Increase & Impact on Employment Level
Illegal Immigration Impact on Employment Level
Efficiency Wages…and Minimum Wage Debate
A Suggestion to Achieve Better Student Learning Outcomes:
Involve Them in the Decision Process
Put them to work in a hypothetical business: making holiday
wreaths
Involves 10 distinct work tasks, from cutting on a basic
wire/metal bending machine, to painting and drying the support
structure, to mounting all the ornaments, bows, pine cones, etc.,
to quality control, to packing and shipping

12. Figure 1
Work Stations for
Holiday Wreath Manufacture
Arranging
Materials
Maintaining Machine
And Making Support
Structure
Painting and
Drying Support
Structure
Attaching Material
For Mounting
Decorations
Green boughs,
Pine Cones
Nuts Added
Add Flowers
And Red Bows
Spray Reflective
Paint/Flecks on
Selected
Decorations
Quality Control
Packing
Ship Final
Wreath to
Customer

13. Figure 2
Law of Diminishing Returns
Increasing Marginal Returns Up to Inflection Point – Increasing
Slope of Line (Pts A to B to C to D)
Decreasing Marginal Returns Past Inflection Point- Decreasing
but Positive Line Slope (Pts D to E to F to G to H)
Negative Marginal Returns Past Peak Point (H…to I, etc., line
becomes negative slope)
Figure 3
Daily Wreath Production as Function of Variable Labor Input
Factor
Number of Number of Daily Wreath Marginal
Product
Students Machines Output (MP)
0 1 0 0
1/Renee 1 6 6
2/Emily 1 14 8
3/David 1 24 10
4/Zack 1 32 8
5/Malika 1 37 5
6/Karl 1 39 2
7/Ron 1 38 -1
8/Betty 1 35 -3
Points:
1) students estimate daily wreath output levels, as fellow

14. students are employed…Instructor acts as facilitator, providing
insights as needed
2) specialization of labor/division of tasks…is Emily more
productive than Renee, and David more productive than Emily?
Why not hire 3 Davids, and get rid of Renee and Emily?
3) illustrates area of increasing returns (Renee, Emily and
David), area of diminishing returns (Zack, Malika, and Karl),
and area of negative returns (Ron, Betty)
4) important to emphasize that the “diminishing” occurs because
the variable factor begins to overwhelm the fixed factor, the
machine…otherwise, every variable factor would keep
increasing its marginal product for adding several more
students, but the machine has only so much capacity to produce
at the second work station
5) the number of machines is fixed at 1…but, this can be varied
and is best illustrated using “economies of scale” concept
Figure 5
Holiday Wreath Material Costs
MP Order Quantities Av. Cost/Wreath($) Semi-Variable
Material Additional Material Costs
(Note 1) (Note 2) Costs @ Student
MP ($) Per Student Hired ($)
0 0 0 0
0
6 1-10 3.00 18.00 (x 6)
18.00
8 11-20 2.75 38.50 (x 14)
20.50
10 21-30 2.50 60.00 (x 24)
21.50

15. 8 31-40 2.25 72.00 (x32)
12.00
5 Same Same 83.25 (x37)
11.25
2 Same Same 87.25 (x39)
4.00
-1 Same Same 85.50 (x38)
-1.75
-3 Same Same 78.75 (x35)
-6.75
Notes: (1) Quantity (purchasing) discounts allow lower
material costs per unit as more wreaths are produced.
(2) Includes materials (e.g., berries, wire, paint) &
electricity/power costs.
Figure 4
Marginal Revenue and Marginal Revenue Product
Number of Marginal Marginal Daily
Marginal Revenue Add.Material Costs Adjusted
MRP, Less Total Profit/
Students Product (MP) Revenue (MR)* Product = MP
X MR = MRP ($) Per Student Hired ($) Material Costs ($)
Revenue ($)
0 0 wreaths $25/wreath 0 X $25 =
0 0 0

16. 0
1/Renee 6 $25 6 X $25 =
150 18.00 132
132.00
2/Emily 8 $25 8 X $25
= 200 20.50 179.50
311.50
3/David 10 $25 10 X $25
= 250 21.50 228.50
540.00
4/Zack 8 $25 8 X $25
= 200 12.00 188.00
728.00
5/Malika 5 $25 5 X $25
= 125 11.25 113.75
841.75
6/Karl 2 $25 2 X $25
= 50 4.00 46.00
887.75
7/Ron -1 $25 -1 X $25
= -25 -1.75 -23.25
864.50
8/Betty -3 $25 -3 X $25
= -75 -6.75 -68.25
796.25
*Price of holiday wreaths held constant at $25 each. Each
additional wreath creates $25 of revenue/income to the
company. {You could reduce prices as a f (quantity) and
illustrate principle}.
Even though marginal revenue product is decreasing in the area
of diminishing returns, please note that the total revenue
continues to increase up to the point where negative returns
begin
On the basis of just maximizing total revenue, how many
students would you utilize? Answer is 6, where the total

17. revenue is a maximum (assumption is “free” or “volunteer” no-
cost labor).
“Profit” is now $887.75 per day, or $213,060 per 240 days per
year, for a worthy cause. Any more
or less student workers will lower my profit.
How Much Should We Pay Each Student
to Work, Per Hour?
Adding the major variable cost, labor, assume we pay each
student the current federal minimum wage of$7.25/hour, but no
benefits, for 8 hrs/day
How many students should we now hire?
Use the basic rule: go to the point where your marginal revenue
product = your marginal cost. Then, you’ve “squeezed” every
penny of profit that you can get. Each student up to that point
will have “earned their keep” (covered their employment costs,
from the sale of their marginal output produced in concert with
the other production factors)
Will it be the same level of 6 as shown on the previous chart?
Figure 6
Marginal Revenue Product Compared to Marginal Cost
Student Daily
Number Wreaths MP MR MRP Adj. MRP MC Total
Revenue Total Labor Cost Total Profit Added Profit?
0 0 0 $25 $0 $ 0 $0 $0
$0 $0 None
1/Renee 6 6 25 150 132.00 58
$132.00 $58 $74 $ 74.00
2/Emily 14 8 25 200 179.50 58
$311.50 $116 $195.50 $121.50
3/David 24 10 25 250 228.50 58
$540.00 $174 $366.00 $170.50
4/Zack 32 8 25 200 188.00 58

18. $728.00 $232 $496.00 $130.00
5/Malika 37 5 25 125 113.75 58
$841.75 $290 $551.75 $ 55.75
6/Karl 39 2 25 50 46.00 58
$887.75 $348 $539.25 -$12.50
7/Ron 38 -1 25 -25 -23.25 58
$864.50 $406 $458.50 -$80.75
8/Betty 35 -3 25 -75 -68.25 58
$796.25 $464 $332.25 -$126.25
Question: How many students do you hire? Do we stay with
the 6 workers
previously? Answer: Look at the additions to your
profit…to maximize profit,
you go to the point where the lowest additional
profit occurs, i.e., hire just 5
students now. The prior sixth student will now not
be able to cover their wage
cost and will not be offered a paying job! (This is a
16.7% reduction in workers).
My profits are now at $551.75 per day, or $132,420 per 240
days per year. Any more or less
student workers will lower my profit.
Students Protest – They Now Want
Benefits!
Students now demand comprehensive health care benefits, and a
401-K savings plan…costs add up to another $40 per student per
day (about a 40% overhead factor with today’s workforce)
That means my student cost per day is now $58 labor + $40
overhead = $98 per day, per student.
How does that change my employment levels, if at all?

19. Figure 7
Marginal Revenue Product Compared to New Marginal Costs
Student Adj. Marginal New Marginal Total Labor
Added Profit?
Number Revenue Product ($) Cost ($) Cost ($)
($)
0 0 0 0
No
1/Renee 132.00 98 98
34
2/Emily 179.50 98 196
81.50
3/David 228.50 98 294
130.50
4/Zack 188.00 98 392
90.00
5/Malika 113.75 98 490
15.75
6/Karl 46.00 98 588
-52.00
7/Ron -23.25 98 686
-121.50
8/Betty -68.25 98 784
-166.25
Question: How many students do we hire now? Do we stay
with the 5 students we
hired the last time? Yes, at 5 students we are still
adding to our profits, but
at a lower amount per student due to the increased
overhead costs.
My profits are now at $551.75 - $40 X 5 = $351.75 per day, or

20. $84,420 per 240 days per year. Any more or less student
workers will decrease my profit.
Figure 8
What Happens If You Increase the Minimum Wage?
Assume Government Imposes a Higher Minimum Wage of
$9.25/Hour ($74/day) + Benefits ($40/day)
Assuming all else remains equal (e.g., profit margin), what
happens to the level of employment?
Number of Adj.
Students MRP($) MC($) Addition to Profits ($)
Outcome on Students
0 0 0 0
None
1/Renee 132 114 18.00
Renee gets a nice raise
2/Emily 179.50 114 65.50
Emily gets a nice raise
3/David 228.50 114 114.50
David gets a nice raise
4/Zack 188 114 74.00
Zack gets a nice raise
5/Malika 113.75 114 -0.25
Malika loses her job!
6/Karl 46 114 -98.00
No chance of ever hiring Karl (6),
Ron (7), or Betty (8)
Renee, Emily, David, and Zack all get nice pay raises, but our
prior co-worker, Malika, loses her job.
This represents a 20% reduction in my workforce!

21. With 4 employees, my profits are now at $272 per day, or
$65,280 per 240 days per year. Any more or less student
workers
will decrease my profit.
As most economists realize but many students and the public at
large do not, ceteris paribus, increases in the minimum wage
level, particularly in today’s fierce global competitive
environment, will cause job losses, unless increases in
productivity, either through other offsetting costs (e.g., pay
increases are offset by decreased benefit costs) or through
increases in marginal productivity, are adequate to keep the
same number of workers.
This serves to illustrate why training and education to enhance
employee skills and productivity are so important in today’s
economy.
Figure 9
Effect on Employment Levels from Illegal Immigration
What if we can lower wage costs by hiring illegal immigrants at
just $5 per hour ($40/day) and no benefits, but with the same
ability to assemble holiday wreaths (i.e., same productivity),
how many (lower-wage) workers could you hire?
Worker/Student Adj.MRP($) MC($) Addition to Profit($)
Worker Impact
0 0 0 0
No workers, revenue, variable costs
1 132 40 92
Hire Don Jose
2 179.50 40 139.50
Hire Oxana Voicu
3 228.50 40 188.50

22. Hire Don Juan
4 188 40 148
Hire Chow Teng
5 113.75 40 73.75
Hire Dona Marilyn
6 46 40 6
Hire Patty O’Brien
7 -23.25 40 -63.25
Do not hire Roberto Giorio
8 -68.25 40 -108.25
Do not hire Dona Tracey
From the previous level of employment (4), I am able to
increase my workforce by 50% (add two new workers)! (The
other, prior workers all leave and look for better jobs?)
For jobs requiring little to no training, this labor displacement
can occur in many occupations
At 6 employees, my profits now are at $647.75 per day, or
$155,460 per 240 days/year. Any more
or less immigrant workers will lower my profit.
Efficiency Wages, Questions on Whether Increases in Minimum
Wage Levels Cause Unemployment
“Efficiency Wages” are increases in wages, usually designed to
keep specific “high value” or “critical” employees from
leaving…so, in this instance, you have a special case of
increased wages with no job losses, ceteris paribus. But, from
personal experience, this can be explained in economic terms;
i.e., the wage increase is “paid for” by more output/results, or
higher quality results that bring more value or profit to the
company
As noted by Professors Baumol & Blinder in their 12th Edition
of “Economics, Principles & Policy” (2012, Cengage), on page
497 is a policy debate portal on whether the minimum wage
causes unemployment. This “debate” is based on work done in

23. the 1990s by economists David Card and Alan Krueger and
covered in their book, “Myth and Measurement: The New
Economics of the Minimum Wage,” Princeton University Press,
1995. Their research is based on increases in the minimum
wage in New Jersey, Texas, and California fast-food restaurants
(1992, 1991, and 1988, respectively), all of which did not seem
to reduce employment. Their research was the basis for
increases in the federal minimum wage under President Clinton
in 1996, and to some extent for the current minimum wage of
$7.25/hour.
For the first point above, “efficiency wages” are generally
geared to specialized expertise, and not to the unskilled or
lower skilled labor upon which the minimum wage argument is
usually based (as in this presentation). For the second point,
the assumption of ceteris paribus, for me, is violated. When
wages increase and no job losses occur as a result, either profit
margins are reduced; or wage costs are added to the fast-food
menu prices; or the higher wages draw higher-skilled workers
into the restaurant, thereby causing an increase in customer
revenues to cover the costs; or as stated previously, if the same
number of employees are kept, perhaps other benefit coverages
are reduced. But, no matter, you cannot defy the economic fact
that there is “no free lunch.” And, for the labor demand curve,
the law of diminishing marginal utility is intact?
Summary
Involving students and “making it personal” serves to reinforce
several key economic concepts
Relationship of marginal productivity, marginal revenue,
marginal revenue product, and marginal cost interrelationships,
in a business setting with student employees, seems to work
well in achieving student learning outcomes. Test scores in this
area show very good results!
“Eyes are opened” from the impact on employment levels from
(unwarranted) increases in the minimum wage and from illegal

24. immigration
Easier to see, for a profit-driven company, why hiring/laying off
actions, such as those shown in the holiday wreath business, can
and do occur
QUESTIONS: Contact
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