International Trade - Theory and Policy, 2010a

product line for a representative textile firm,VMPT = PT MPT, and the market wage rate, wT, with respect
to the labor supply.
The wage is assumed to be exogenous to each firm and is independent of the labor supply. Hence it is
drawn as a horizontal line at the level of the wage, wT. [1]
Figure 5.12 Specific Factor Model—Single-Firm Equilibrium
The value of the marginal product is a decreasing function of labor. This means that at higher levels of
labor usage, each additional unit of labor applied to production adds fewer units of output. The intuition
for this is straightforward. Imagine more and more workers being assigned to use the same machine in a
production process. Each additional worker may help in the production process and add output
(thus MP > 0), but as more and more are added, overcrowding will set in and each person will find less
and less to do that is helpful. Thus the marginal product will fall. Since we draw the value of the marginal
product line under the assumption that there is a fixed amount of specific capital in the industry, the same
overcrowding argument applies at the larger industry scale.
The position of the VMP line is dependent on the market price and the amount of specific capital, both
assumed to be exogenous. If the price of the product rises (falls), the VMP line shifts upward (downward).
The same applies for changes in the amount of specific capital. If the amount of specific capital in the
industry were to rise (fall), the VMP line would shift upward (downward).
The profit-maximizing choice of labor input by the industry is determined at level LEon the horizontal
axis, where the wage wT is equal to the value of the marginal productVMPT at point E. To see why,
consider what it would mean if the industry chose a different labor input, say L1. At L1, VMPL 1 > wT. This
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