Question 1

Use the following statements to answer this question: I. Under profit maximization, the quantity of labor used in production is optimal if MR = w/MP_L. II) The expression MR = w/MPL implies that the revenue earned from the last unit of output produced equals the marginal cost of the last unit of output.

Accepted Answer

Statement I is true because under profit maximization, the firm hires labor until the marginal revenue product (MRP) of labor equals the wage rate (w), which is expressed as MR = w/MPL. Statement II is also true because MR = w/MPL implies that the marginal revenue from the last unit of output equals the marginal cost of producing that unit, where w/MPL represents the marginal cost.

Question 2

Figure 14.1.2
-Assume that as the wage rate rises a worker's substitution effect for leisure is larger than the income effect. We can conclude that in this region, the worker's:

Accepted Answer

When the substitution effect for leisure is larger than the income effect as wage rates rise, it means that the worker is more inclined to substitute leisure for labor (i.e., work more) because the opportunity cost of not working is higher. This leads to an increase in the quantity of labor supplied as wages rise, which is represented by the usual upward slope of the labor supply curve.

Question 3

Figure 14.1.2
-Refer to Figure 14.1.2 above. Which of these two effects prevails in the backward bending portion of the supply curve?

Accepted Answer

The income effect prevails in the backward bending portion of the supply curve for labor. This occurs because as wages increase, workers may choose to work less, valuing leisure time more than the additional income from working extra hours.

Question 4

Suppose a firm has one variable input, labor. Why is the MRP_L curve for a competitive firm above the MRP_L curve for a monopolist?

Accepted Answer

The MRP_L curve for a competitive firm is above the MRP_L curve for a monopolist because the marginal revenue of the monopoly declines with output due to its pricing power. This means that although the marginal product of labor may be the same under both market structures, the monopolist will produce less output and hire less labor to maximize its profits. Therefore, the MRP_L curve for a monopolist is lower than that of a competitive firm. Choice A is incorrect because monopolies may have higher efficiency in some cases due to economies of scale. Choice C is incorrect because it is not necessarily true that monopolies have less incentive to invest in worker training or productivity improvement.

Question 5

The Acme Company is a perfect competitor in its input markets and a monopolist in its output market. The marginal product of labor is 20 and the price of Acme's output is $10. For Acme Company, the marginal revenue product of labor is:

Accepted Answer

The answer of The Acme Company is a perfect competitor...

Question 6

Electric power utility companies use various fuel sources (e.g., coal, natural gas, nuclear) to generate electricity for their customers. What happens to the demand for natural gas used to generate electricity as we move from a short-run planning horizon to a long-run planning horizon? Why?

Accepted Answer

As time passes, advancements in technology and the development of alternative energy sources increase the number of options available to power companies, making them less reliant on natural gas. This greater choice of options makes the demand for natural gas used to generate electricity more elastic over the long run.

Question 7

Suppose labor and capital are variable inputs. The wage rate is $20 per hour, the marginal product of labor is 30 units, the rental rate of capital is $100 per machine hour, and the marginal product of capital is 150 units. If the wage rate declines to $15 per hour, the firm employs more labor and the marginal product of labor declines to 20 units. Assuming the rental rate of capital remains the same, what happens to the amount of capital used by the firm?

Accepted Answer

The answer of Suppose labor and capital are variable inputs....

Question 8

The Acme Company is a perfect competitor in its input markets and a monopolist in its output market. Its average product of labor is 30, the marginal product of labor is 20, the price of labor is $20, and the price of the output is $5. For Acme Company, the marginal revenue product of labor:

Accepted Answer

The answer of The Acme Company is a perfect competitor...

Question 9

Let P be the output price for a particular good. Why is the value P*MP_L greater than MRP_L for a monopolist?

Accepted Answer

The value P*MPS (Marginal Product of Labor) is greater than MRP (Marginal Revenue Product) for a monopolist because the monopolist sets a price (P) that is higher than marginal revenue (MR), and due to hiring less labor, the marginal product of labor (MPS) is higher under monopoly than under perfect competition.

Question 10

Labor is typically assumed to be the only variable input in very short-run production systems, and the number of variable inputs increases as we lengthen our planning horizon from short run to long run. What happens to the labor demand curve as we move from short run to long run?

Accepted Answer

In the short run, the demand for labor is typically inelastic because businesses have a fixed level of capital and cannot easily adjust their output or production processes. As we move from short run to long run, businesses can adjust their capital inputs and production processes, making the demand for labor more elastic. Therefore, the demand curve becomes more elastic in the long run.

Question 11

The Acme Company is a perfect competitor in its input markets and its output market. Its average product of labor is at its maximum and equals 30. The marginal revenue product of labor is $300. The price of its output:

Accepted Answer

The optimal hiring rule for a perfectly competitive firm is to hire workers up to the point where the marginal revenue product of labor equals the wage rate. In this case, the marginal revenue product of labor is $300, so the firm should hire workers up to the point where the wage rate equals $300. However, we are not given the actual wage rate, so we cannot determine the exact price of the output. But since the average product of labor is at its maximum and equals 30, we know that the total product of labor is also at its maximum. Therefore, the price of output must be high enough to support a total revenue of at least $9,000 (30 x $300), which rules out options A and D. The only answer choice remaining is B, which gives a price of $10 per unit of output.

Question 12

Figure 14.1.3
A consumer's original utility maximizing combination of income and leisure is shown in the diagram above as point A. After a wage increase, the consumer's utility maximizing combination changes to point C.
-Refer to Figure 14.1.3. The income effect of the wage increase on the amount of hours of leisure is:

Accepted Answer

The income effect of the wage increase on the amount of hours of leisure is the movement from L0 to L1.

Question 13

Figure 14.1.4
A consumer's original utility maximizing combination of income and leisure is shown in the diagram above as point A. After a wage decrease, the consumer's utility maximizing combination changes to point C.
-Refer to Figure 14.1.4 above. The substitution effect of the wage decrease on the amount of hours of leisure is:

Accepted Answer

The answer of  Figure 14.1.4
A consumer's original utility maximizing...

Question 14

The marginal product of labor for Acme, Inc. is 15. The average product of labor is 25, and the price of labor is $10. Assuming that Acme, Inc. is a competitor in its output and input markets, the marginal revenue product of labor:

Accepted Answer

The answer of The marginal product of labor for Acme,...

Question 15

Figure 14.1.3
A consumer's original utility maximizing combination of income and leisure is shown in the diagram above as point A. After a wage increase, the consumer's utility maximizing combination changes to point C.
-Refer to Figure 14.1.3 above. The substitution effect of the wage increase on the amount of hours of leisure is:

Accepted Answer

The substitution effect of the wage increase on the amount of hours of leisure is from L1 to L0. This is because the wage increase makes leisure more expensive relative to work, so people will substitute away from leisure and towards work.

Question 16

If the firms in an industry could take advantage of a reduced wage, how would one best describe the firms' demand for labor? The MRP_L:

Accepted Answer

The MRPS (Marginal Revenue Product of Labor Schedule) would remain unchanged because it reflects the additional revenue a firm earns from hiring one more unit of labor, assuming product prices and productivity remain constant. A reduced wage does not change the productivity or the revenue generated per unit of labor; it simply means that labor is cheaper, so firms would hire more labor at the lower wage without the MRPS itself changing.

Question 17

Figure 14.1.4
A consumer's original utility maximizing combination of income and leisure is shown in the diagram above as point A. After a wage decrease, the consumer's utility maximizing combination changes to point C.
-Refer to Figure 14.1.4 above. The income effect of the wage decrease on the amount of hours of leisure is:

Accepted Answer

Without access to Figure 14.1.4 or specific details about the shifts in leisure and labor supply, it's impossible to accurately determine the income effect of a wage decrease on hours of leisure. The correct answer would depend on visual or descriptive information about how the wage decrease affects the individual's budget constraint and utility maximization, which is not provided here.

Question 18

The industry demand curve for labor is the:

Accepted Answer

The industry demand curve for labor is the horizontal sum of individual firm labor demand curves because each firm's hiring decision affects the total amount of labor demanded in the industry. Therefore, the industry demand curve is found by adding up (or horizontally summing) the individual firm demand curves.

Question 19

The Acme Company is a perfect competitor in its input markets and its output market. Its average product of labor is 30, the marginal product of labor is 20, the price of labor is $20, and the price of the output is $5. For Acme Company, the marginal revenue product of labor:

Accepted Answer

The marginal revenue product of labor (MRP) is calculated by multiplying the marginal product of labor (MPL) by the price of the output. Here, MPL is 20 and the price of the output is $5, so MRP = 20 * 5 = $100.

Question 20

Suppose labor and capital are variable inputs. The wage rate is $20 per hour, the marginal product of labor is 30 units, the rental rate of capital is $100 per machine hour, and the marginal product of capital is 150 units. If the wage rate declines to $15 per hour, the firm employs more labor and the marginal product of labor declines to 20 units. Assuming the rental rate of capital remains the same, what is the marginal product of capital at the new optimal level of input usage?

Accepted Answer

The firm will adjust inputs to equalize the marginal product per dollar spent on each input. Initially, MPL/PL = 30/20 = 1.5 and MPK/PK = 150/100 = 1.5. After the wage rate declines, MPL/PL = 20/15 = 1.33. To maintain equality, MPK/PK should also be 1.33, so MPK = 1.33 * 100 = 133 units.

Quiz 14: Markets for Factor Inputs

Figure 14.1.2 -Assume that as the wage rate rises a worker's substitution effect for leisure is larger than the income effect. We can conclude that in this region, the worker's:

Figure 14.1.2 -Refer to Figure 14.1.2 above. Which of these two effects prevails in the backward bending portion of the supply curve?

Suppose a firm has one variable input, labor. Why is the MRPL curve for a competitive firm above the MRPL curve for a monopolist?