Transcript Factor Markets - pm

Factor Markets
aka Resource Markets…
aka Input Markets
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
Question:
Factors of Production
• If you decide to open a pizza shop in
Millersville, what factors of production
will you need?
 Labor
 Land
 Capital (Physical & Human)
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
• If demand increases for your pizza, how
will that affect your demand for any of
these factors??
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
The Factor Market
• The following terms describe the
PRICE paid by firms to hire each type
of factor/resource:
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
• Labor - WAGES
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
• Land - RENT
• Capital - INTEREST
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
The Labor Market
• **The AP Exam will usually use Labor
in their examples, so we will often use
labor as well. But know that these
ideas would be the same for hiring
Capital or Land as well.
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
The Labor Market
• When firms decide what combination of
resources to use to create their product,
they must “hire” these resources from a
factor market.
• One big difference between the labor
market and the product market is, in the
LABOR MARKET:
 households are the ‘sellers’
 firms are the ‘buyers’
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Labor Market Graph
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Adjusting for Inflation
• Wage – The price of labor defined as
currency per unit of labor worked.
 NOMINAL Wage – The price of
labor not adjusted for inflation.
 REAL wage – The price of labor
adjusted for inflation; Economists
use the CPI to adjust numbers from
prices/wages from different times
into a consistent unit of measure (ie.
“2010 dollars”)
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Average Wage (1964-2006)
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Wage Trends
Other US labor market trends:
1) Workers with higher skills are paid
more than unskilled workers. This
gap is increasing.
2) College graduates earn more than high
school graduates and the gap has been
increasing.
3) Women, on average, are paid lower
than men, although the gap has
become more narrow over the years.
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Derived Factor Demand
• The factor market is a DERIVED
MARKET. This means that the
demand for the product determines the
demand for the factor (ie. labor).
• For example: If consumers demand
more pizza, firms will demand more
labor, ovens, etc. to produce the pizza.
• However, if consumers demand less
pizza, firms will demand less labor,
ovens, etc. to produce the pizza.
Factor Markets:
KEY CONCEPTS
Draw: Market & Factor Graphs
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Product Market
for Pizzas
Factor Market for
________________
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
MRP = MRC Rule
• MRP (Marginal Revenue Product)
 MRP = ∆ TR / ∆ Q of Factor
 MRP = MP x MR (or MP x P … in Perf.
Competitive Labor Market)
 Definition: Additional REVENUE created by
hiring one additional unit of a resource (land,
LABOR, capital)
• MFC (Marginal Factor Cost)
[aka MRC]
 MFC = ∆ TC of that factor / ∆ Q of Factor
• Also: MFC = Wage (W) of additional worker when dealing
with LABOR.
 Definition: The cost of hiring an additional unit of
a resource. (WAGE, interest, …)
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Optimal Employment Rule
• When only ONE resource is variable
 AP Exam will use *LABOR* most often.
• Firms will ALWAYS profit-maximize
when it hires until MRP = MFC (or as
close as they can get).
• But never when MFC is greater than MRP
 In other words, firms will continue to hire
labor as long as the MFC is not greater
than its MRP.
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
Least-Cost Rule
• A firm is always minimizing its cost at
a specific output when the last dollar
spent on one factor and the last dollar
spent on another factor both result in
the same Marginal product. For
example, using Labor (L) & Capital (K)
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
MPL/PL = MPK/PK
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Practice Question
Taken from 2000 Exam:
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
Individual Labor Supply Curve
(backward bending)
S
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
• Shows trade-off between income and leisure.
• Why does it bend backwards when wage is
above W2?
• For you… what do you think your W2 is?
MRP (Marginal Revenue Product)
Factor Markets:
KEY CONCEPTS
• As a firm increases the # of workers per day, it can
produce more widgets per day. Assume that the fixed
2. MRP = Marginal
cost = $10, and labor is the only Variable Cost. Selling
Revenue Product
Price = $2/widget, and each worker is paid $100/day.
MFC = Marginal
1. Factor Demand is
Derived from Product
Demand
Factor Cost
3. Optimal
#workers
Employment Rule:
(Q)
TP
0
0
1
80
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
2
180
3
250
4
310
5
350
6. Perfectly
Competitive Labor
Market vs.
Monopsony
MP
TR
MRP
MRP (Marginal Revenue Product)
Factor Markets:
KEY CONCEPTS
• As a firm increases the # of workers per day, it can
produce more widgets per day. Assume that the fixed
2. MRP = Marginal
cost = $10, and labor is the only Variable Cost. Selling
Revenue Product
Price = $2/widget, and each worker is paid $100/day.
MFC = Marginal
1. Factor Demand is
Derived from Product
Demand
Factor Cost
3. Optimal
#workers
Employment Rule:
(Q)
TP
MP
0
0
--
1
80
80
2
180
100
3
250
70
4
310
60
5
350
40
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
TR
MRP
MRP (Marginal Revenue Product)
Factor Markets:
KEY CONCEPTS
• As a firm increases the # of workers per day, it can
produce more widgets per day. Assume that the fixed
2. MRP = Marginal
cost = $10, and labor is the only Variable Cost. Selling
Revenue Product
Price = $2/widget, and each worker is paid $100/day.
MFC = Marginal
1. Factor Demand is
Derived from Product
Demand
Factor Cost
3. Optimal
#workers
Employment Rule:
(Q)
TP
MP
TR
0
0
--
0
1
80
80
160
2
180
100
360
3
250
70
500
4
310
60
620
5
350
40
700
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
MRP
MRP (Marginal Revenue Product)
Factor Markets:
KEY CONCEPTS
• As a firm increases the # of workers per day, it can
produce more widgets per day. Assume that the fixed
2. MRP = Marginal
cost = $10, and labor is the only Variable Cost. Selling
Revenue Product
Price = $2/widget, and each worker is paid $100/day.
MFC = Marginal
1. Factor Demand is
Derived from Product
Demand
Factor Cost
3. Optimal
#workers
Employment Rule:
(Q)
TP
MP
TR
MRP
0
0
--
0
0
1
80
80
160
160
2
180
100
360
200
3
250
70
500
140
4
310
60
620
120
5
350
40
700
80
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
MRP (Marginal Revenue Product)
Factor Markets:
KEY CONCEPTS
• Now, assume that the selling price remains at $2/widget, but the
wage for each worker increases to $125 per day.
2. MRP
Marginal
• =How
many workers should this profit-maximizing firm hire?
1. Factor Demand is
Derived from Product
Demand
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
#workers
Employment Rule:
(Q)
TP
MP
0
0
--
1
80
80
2
180
100
3
250
70
4
310
60
5
350
40
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
TR
MRP
Labor Market: Perfectly Competitive
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Product Market
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Factor Market
Factor Markets:
KEY CONCEPTS
Labor Market: Monopsony
1. Factor Demand is
Derived from Product
Demand
Product Market
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Factor Market
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #1
Which of the following situations illustrates the
2. MRP = Marginal
concept of derived demand?
Revenue Product
MFC = Marginal
A. If P of orange juice increases, D for apple
Factor Cost
juice increases
3. Optimal
Employment Rule:
B. If D for shoes increases, then D for
Hire until MRP=MRC
shoelaces increases.
4. Least Cost Rule
(MP/P) = (MP/P)
C. If P of cars increases, D for gasoline
5. Indiv. Labor Supply
increases.
6. Perfectly
Competitive Labor
D. If D for taxi rides increases, D for taxi
Market vs.
Monopsony
drivers increases.
E. If S of hot dogs increases, D for hot dog
buns increases.
L
K…
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #2
Each worker hired adds less to total output than
2. MRP = Marginal
the worker before, according to the:
Revenue Product
MFC = Marginal
A. Law of Demand
Factor Cost
B. Law of Diminishing Returns
3. Optimal
Employment Rule:
C. Law of Diminishing Marginal Utility
Hire until MRP=MRC
4. Least Cost Rule
D. Least-Cost Rule
(MP/P) = (MP/P)
E. Principle of Derived Demand
5. Indiv. Labor Supply
L
K…
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #3
Marginal Revenue Product measures the
2. MRP = Marginal
additional:
Revenue Product
MFC = Marginal
A. Output produced from hiring one more
Factor Cost
worker.
3. Optimal
Employment Rule:
B. Income to the firm from producing one
Hire until MRP=MRC
more product.
4. Least Cost Rule
(MP/P) = (MP/P)
C. Cost to the firm for producing one more
5. Indiv. Labor Supply
product.
6. Perfectly
Competitive Labor
D. Wage required to hire one more worker.
Market vs.
Monopsony
E. Income to the firm from hiring one more
worker.
L
K…
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #4
In order to maximize profit, the firm should hire
2. MRP = Marginal
the number of workers where the:
Revenue Product
MFC = Marginal
A. Marginal cost equals the marginal revenue
Factor Cost
B. Marginal revenue product equals the
3. Optimal
Employment Rule:
marginal cost
Hire until MRP=MRC
C. Wage equals the product price
4. Least Cost Rule
(MP/P) = (MP/P)
D. Marginal factor cost equals the marginal
5. Indiv. Labor Supply
revenue product
6. Perfectly
Competitive Labor
E. Marginal revenue equals the marginal
Market vs.
Monopsony
factor cost.
L
K…
Question #5
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
# of
workers
1
TP
2
45
3
60
4
70
5
75
25
What is the marginal
product of the third
worker?
A. 15 units
B. 60 units
C. 35 units
D. 20 units
E. 30 units
Question #6
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
# of
workers
1
TP
2
45
3
60
4
70
5
75
25
If the firm sells its
products for $10
each, and the wage
per worker is
$100/day, how
many workers
should the firm
hire to maximize
profits?
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #7
A firm selling products in a monopoly product market
2. MRP = Marginal
finds its marginal revenue product falling much more
Revenue Product
quickly than a firm selling in a perfectly competitive
MFC = Marginal
product market, because in addition to diminishing
Factor Cost
returns,
3. Optimal
Employment Rule:
A. The government is required to regulate the
Hire until MRP=MRC
product.
4. Least Cost Rule
B. The firm becomes inefficient by trying to sell too
(MP/P) = (MP/P)
many units of output.
5. Indiv. Labor Supply
C. The firm must lower the price of all products in
6. Perfectly
Competitive Labor
order to sell more units.
Market vs.
Monopsony
D. Workers tend to earn higher wages in monopoly
product firms.
E. Consumers prefer not to buy from monopolies.
L
K…
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #8
The demand for Tyrone’s auto repair shop would
2. MRP = Marginal
increase if:
Revenue Product
MFC = Marginal
A. The cost of capital for a complementary
Factor Cost
good significantly fell.
3. Optimal
Employment Rule:
B. The cost of capital for a substitute good
Hire until MRP=MRC
significantly fell.
4. Least Cost Rule
(MP/P) = (MP/P)
C. Wages of auto repair workers significantly
5. Indiv. Labor Supply
fell.
6. Perfectly
Competitive Labor
D. Mild weather resulted in fewer car crashes
Market vs.
Monopsony
this winter.
E. Workers at the auto repair shop became
less productive.
L
K…
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #9
When the wage increases 5 percent, the quantity
2. MRP = Marginal
of workers hired falls 1 percent. This
Revenue Product
indicates that the demand for labor is
MFC = Marginal
Factor Cost
A. Perfectly inelastic
3. Optimal
Employment Rule:
B. Relatively inelastic
Hire until MRP=MRC
C. Unit elastic
4. Least Cost Rule
(MP/P) = (MP/P)
D. Relatively elastic
5. Indiv. Labor Supply
E. Perfectly elastic
6. Perfectly
L
K…
Competitive Labor
Market vs.
Monopsony
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #10
According to the profit-maximizing rule for hiring
2. MRP = Marginal
resources, the firm should hire labor and
Revenue Product
capital until the marginal revenue product for
MFC = Marginal
Factor Cost
each equals the:
3. Optimal
Employment Rule:
A. Market price of the product.
Hire until MRP=MRC
B. Quantity of labor and capital hired.
4. Least Cost Rule
(MP/P) = (MP/P)
C. Price ceiling for the product.
5. Indiv. Labor Supply
D. Profit per unit for each.
6. Perfectly
Competitive Labor
E. Marginal Resource Cost
Market vs.
L
Monopsony
K…
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #1
Which of the following situations illustrates the
2. MRP = Marginal
concept of derived demand?
Revenue Product
MFC = Marginal
A. If P of orange juice increases, D for apple
Factor Cost
juice increases
3. Optimal
Employment Rule:
B. If D for shoes increases, then D for
Hire until MRP=MRC
shoelaces increases.
4. Least Cost Rule
(MP/P) = (MP/P)
C. If P of cars increases, D for gasoline
5. Indiv. Labor Supply
increases.
6. Perfectly
Competitive Labor
D. If D for taxi rides increases, D for taxi
Market vs.
Monopsony
drivers increases.
E. If S of hot dogs increases, D for hot dog
buns increases.
L
K…
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #2
Each worker hired adds less to total output than
2. MRP = Marginal
the worker before, according to the:
Revenue Product
MFC = Marginal
A. Law of Demand
Factor Cost
B. Law of Diminishing Returns
3. Optimal
Employment Rule:
C. Law of Diminishing Marginal Utility
Hire until MRP=MRC
4. Least Cost Rule
D. Least-Cost Rule
(MP/P) = (MP/P)
E. Principle of Derived Demand
5. Indiv. Labor Supply
L
K…
6. Perfectly
Competitive Labor
Market vs.
Monopsony
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #3
Marginal Revenue Product measures the
2. MRP = Marginal
additional:
Revenue Product
MFC = Marginal
A. Output produced from hiring one more
Factor Cost
worker.
3. Optimal
Employment Rule:
B. Revenue to the firm from producing one
Hire until MRP=MRC
more product.
4. Least Cost Rule
(MP/P) = (MP/P)
C. Cost to the firm for producing one more
5. Indiv. Labor Supply
product.
6. Perfectly
Competitive Labor
D. Wage required to hire one more worker.
Market vs.
Monopsony
E. Revenue to the firm from hiring one
more worker.
L
K…
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #4
In order to maximize profit, the firm should hire
2. MRP = Marginal
the number of workers where the:
Revenue Product
MFC = Marginal
A. Marginal cost equals the marginal revenue
Factor Cost
B. Marginal revenue product equals the
3. Optimal
Employment Rule:
marginal cost
Hire until MRP=MRC
C. Wage equals the product price
4. Least Cost Rule
(MP/P) = (MP/P)
D. Marginal factor cost equals the marginal
5. Indiv. Labor Supply
revenue product
6. Perfectly
Competitive Labor
E. Marginal factor equals the marginal
Market vs.
Monopsony
resource cost.
L
K…
Question #5
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
# of
workers
1
TP
2
45
3
60
4
70
5
75
25
What is the marginal
product of the third
worker?
A. 15 units
B. 60 units
C. 35 units
D. 20 units
E. 30 units
Question #6
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
2. MRP = Marginal
Revenue Product
MFC = Marginal
Factor Cost
3. Optimal
Employment Rule:
Hire until MRP=MRC
4. Least Cost Rule
(MP/P)L = (MP/P)K…
5. Indiv. Labor Supply
6. Perfectly
Competitive Labor
Market vs.
Monopsony
# of
workers
1
TP
2
45
3
60
4
70
5
75
25
If the firm sells its
products for $10
each, and the wage
per worker is
$100/day, how
many workers
should the firm
hire to maximize
profits?
4 Workers
Because…
MRP= 10 X $10
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #7
A firm selling products in a monopoly product market
2. MRP = Marginal
finds its marginal revenue product falling much more
Revenue Product
quickly than a firm selling in a perfectly competitive
MFC = Marginal
product market, because in addition to diminishing
Factor Cost
returns,
3. Optimal
Employment Rule:
A. The government is required to regulate the
Hire until MRP=MRC
product.
4. Least Cost Rule
B. The firm becomes inefficient by trying to sell too
(MP/P) = (MP/P)
many units of output.
5. Indiv. Labor Supply
C. The firm must lower the price of all products in
6. Perfectly
Competitive Labor
order to sell more units.
Market vs.
Monopsony
D. Workers tend to earn higher wages in monopoly
product firms.
E. Consumers prefer not to buy from monopolies.
L
K…
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #8
The demand for Tyrone’s auto repair shop would
2. MRP = Marginal
increase if:
Revenue Product
MFC = Marginal
A. The cost of capital for a complementary
Factor Cost
good significantly fell.
3. Optimal
Employment Rule:
B. The cost of capital for a substitute good
Hire until MRP=MRC
significantly fell.
4. Least Cost Rule
(MP/P) = (MP/P)
C. Wages of auto repair workers significantly
5. Indiv. Labor Supply
fell.
6. Perfectly
Competitive Labor
D. Mild weather resulted in fewer car crashes
Market vs.
Monopsony
this winter.
E. Workers at the auto repair shop became
less productive.
L
K…
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #9
When the wage increases 5 percent, the quantity
2. MRP = Marginal
of workers hired falls 1 percent. This
Revenue Product
indicates that the demand for labor is
MFC = Marginal
Factor Cost
A. Perfectly inelastic
3. Optimal
Employment Rule:
B. Relatively inelastic
Hire until MRP=MRC
C. Unit elastic
4. Least Cost Rule
(MP/P) = (MP/P)
D. Relatively elastic
5. Indiv. Labor Supply
E. Perfectly elastic
6. Perfectly
L
K…
Competitive Labor
Market vs.
Monopsony
Factor Markets:
KEY CONCEPTS
1. Factor Demand is
Derived from Product
Demand
Question #10
According to the profit-maximizing rule for hiring
2. MRP = Marginal
resources, the firm should hire labor and
Revenue Product
capital until the marginal revenue product for
MFC = Marginal
Factor Cost
each equals the:
3. Optimal
Employment Rule:
A. Market price of the product.
Hire until MRP=MRC
B. Quantity of labor and capital hired.
4. Least Cost Rule
(MP/P) = (MP/P)
C. Price ceiling for the product.
5. Indiv. Labor Supply
D. Profit per unit for each.
6. Perfectly
Competitive Labor
E. Marginal Factor Cost
Market vs.
L
Monopsony
K…