Factor Market Check

The demand curve for labor is derived from

• the market labor demand curve

• the demand curve for the output produced by labor

• the labor supply curve for the firm

• the equilibrium wage in the labor market

• the market labor supply curve

Answer explanation

Remember that the factor market looks at the demand for a resource based on what the resource can produce - a derived demand. Therefore, the demand for a resource is based on the demand for the finished good or service produced by the resource.

The market demand curve for labor will shift to the right when

• the number of firms increases

• the price of the output decreases

• the labor supply curve shifts to the right

• the labor supply curve shifts to the left

• the marginal product of labor decreases

Answer explanation

As more firms enter a market, there will be a greater need for workers. This shifts the demand for workers to the right.

If the price of the finished product decreases, or the productivity of the resource, the demand for the resource will shift left. If the supply of the resource changes, it will be a shift along the derived demand for the resource, not a new curve.

Loony Spoons corporation sells silverware in a competitive market at a constant price of $2 per piece. A competitive labor market sets the wage at $5 per hour. The table indicates the total product per hour using various numbers of workers. How many workers should Loony Spoons hire per hour?

• 1 worker

• 2 workers

• 3 workers

• 4 workers

• 5 workers

Answer explanation

The firm wants to hire where MRP=MRC. The wage acts as the MRC for the firm. The MRP is found by looking at the change in total revenue/number of workers.

Notice that because you are selling spoons in a perfectly competitive market, you can also find MP by taking the wage and dividing by the price of the product - $5/$2 = 2.5. This is the additional MP of the worker. Notice that will be the third worker since the 4th worker will produce less than 2.5. You can also see this with the MRP of the third worker and 4th worker.

Loony Spoons corporation sells silverware in a competitive market at a constant price of $3 per piece. A competitive labor market sets the wage at $5 per hour. The table indicates the total product per hour using various numbers of workers. How many workers should Loony Spoons hire per hour?

• 1 worker

• 2 workers

• 3 workers

• 4 workers

• 5 workers

Answer explanation

The firm wants to hire where MRP=MRC. The wage acts as the MRC for the firm. The MRP is found by looking at the change in total revenue/number of workers.

Notice that because you are selling spoons in a perfectly competitive market, you can also find MP by taking the wage and dividing by the price of the product - $5/$3 = 1.66. This is the additional MP of the worker. Notice that will be the fourth worker since the 4th worker will produce less than 1.66. You can also see this with the MRP of the fourth worker and 5th worker.

Loony Spoons corporation sells silverware in a competitive market at a constant price of $2 per piece. If the competitive labor market sets the wage at $8 per hour, how many workers should Loony Spoons hire per hour?

• 1 worker

• 2 workers

• 3 workers

• 4 workers

• 5 workers

Answer explanation

The firm wants to hire where MRP=MRC. The wage acts as the MRC for the firm. The MRP is found by looking at the change in total revenue/number of workers.

Notice that because you are selling spoons in a perfectly competitive market, you can also find MP by taking the wage and dividing by the price of the product - $8/$2 = 4. This is the additional MP of the worker. Notice that will be the second worker.

Which of the following will increase the wages for tuba makers?

• An increase in the number of graduates at tuba maker training school

• An increase in the price of tubas

• An increase in the price of tuba lessons

• An increase in the tax on tubas

• An effective price ceiling for tubas

Answer explanation

The demand for a resource is derived from the demand for the product the resource creates. Therefore, increasing the revenue the final product produces will increase the value the resource provides. This will create an increase in the payment for the resource. Therefore, increasing the price of the tuba will increase the money paid to tuba makers.

The table provides the total number of workers and the resulting total output of Bike's Unlimited per hour, holding all other inputs constant. Which of the following statements can be made with certainty based on the available information?

• The firm faces decreasing returns to scale

• Diminishing marginal returns begin when the second worker is hired

• The firm faces increasing returns to scale

• The firm should not hire five workers

• Diminishing marginal returns begin when the fourth worker is hired

Answer explanation

Diminishing marginal returns begins with the fourth worker since previous workers continue to increase production. The fourth worker adds to production, but at a diminishing rate compared to the third worker.

Assume a firm hires labor for $15 each and sells its products for $3 each. If the MP of the 3rd worker is 10, which of the following statements would be the most true?

• The firm should hire more labor so that the MRP will increase.

• The firm should hire more labor so the the MRP will decrease.

• The firm should hire less labor so that the MRP will increase.

• The firm should hire less labor so that the MRP will decrease.

• The firm should do nothing because it is currently maximizing profit.

Answer explanation

Remember that a firm will hire where MRP = MRC. The MRC for the third worker is $15. The third worker adds 10 items to production which are sold for $3 each. This means the MRP for the third worker is $30, greater than their wage. Therefore, the firm should continue to hire workers. Because of diminishing marginal returns, MP will fall and MRP will become smaller getting closer to MRP=MRC.

A bilateral monopoly exists when

• a monopsony buys from a monopoly

• a monopoly sells to two different types of consumers

• a monopoly buys from a monopsony

• a monopolist sells two different types of goods

• a monopoly sells at two different prices

Answer explanation

Remember that a bilateral monopoly exists when a monopsony meets a monopoly. The monopsony is the only buyer of a resource. The monopoly would mean that there is only one seller of the resource.

The price of labor is $2, and the price of capital is $1. The marginal product of labor is 200, and the marginal product of capital is 50. What should the firm do?

• Increase capital and decrease labor so that the marginal product of capital falls and the marginal product of labor rises.

• Increase capital and decrease labor so that the marginal product of capital rises and marginal product of labor falls.

• Decrease captial and increase labor so that the marginal product of capital rises and the marginal product of labor falls.

• Decrease capital and increase labor so that the marginal product of capital falls and the marginal product of labor rises.

• Increase both capital and labor until the ratio of marginal products per dollar is equal.

Answer explanation

You want to look at the ratio of MP/MRC for each resource. You want the ratios to be equal for both.

Labor = 200/$2 = 100

Capital = 50/$1 = 50

Increasing labor will decrease MP and decreasing capital will increase MP. Doing this will get the ratios closer.