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Such being the case, the firm finds the equilibrium price fj by moving along its demand curve for access rights until its profits are maximised, as a typical firm under monopolistic competition will. Since the marginal cost of the sale of access rights is zero, profits are maximised at the point in wh ich the marginal revenue from the sale of access rights is zero, that is, where fj + Lj(af/iJLj) = O. 2». 1 illustrates thesolution for firm i in the linear case. 7) of Chapter 3 shows that L *i = Li and w* = w.
Much the same reasoning can be extended to deal with the similar but distinct problem of remuneration as an incentive to effort for identical workers whose individual productivity cannot be perfectly observed by the firm. As will be more thoroughly explained in Chapter 7, according to the efficiency wage models of the wage system, each firm sets its own wage so as to extract the efficient level of effort, given the technology of supervision and the overall rate of unemployment. As this 'efficiency wage' has to be higher than the reservation wage, involuntary unemployment arises in the system.
4, notional demand for labour in the piece-rate firm is less than in the revenuesharing firm, which (in the pure case) would demand labour until R'j(Lj) = O. This is because in this case R'j(Qj) falls to zero before Q'j(Lj), that is, the elasticity of demand for output reaches unit value before maximum capacity utilisation is reached. If that should not be the case, then the marginal revenue per worker curve would fall to zero at the same point where the marginal physical labour productivity curve falls to zero, meaning that the upper bound on notional output would then be set by plant capacity rather than by market demand.
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