Deck 10: Input Demand: the Labor and Land Markets

Question 1

Comment on the following statement: "A firm's demand for labor can be affected by the availability of other inputs."

Answer 1

The statement is true. If two inputs are complements, the presence of one will increase the productivity of the other. For example, if capital and labor are complements, the presence of capital will increase the demand for labor. However, it is possible for two inputs to be substitutes for one another. In that case, the presence of one will lead to a drop in the demand for the other.

Question 2

What does the productivity of an input measure?

Answer 2

The productivity of an input measures the amount of output produced per unit of that input.

Question 3

What happens when a firm encounters diminishing returns? What causes diminishing returns?

Answer 3

The firm encounters diminishing returns when the marginal product of variable inputs declines. This occurs because other inputs are unchanged in the short run.

Question 4

What role do households play in the market for inputs? What role do firms play?

Question 5

If barbers in Mexico are just a productive as their counterparts in the United States then why do they earn lower wages?

Question 6

What is the shape of a firm's marginal revenue product curve? Why does it look this way?

Question 7

Use Table 10.1 to answer the following question. Construct a marginal product table from the information listed in the table and explain where diminishing marginal productivity sets in.

Question 8

Assume Ford Motor company purchases a robot that can do the welding work of ten union workers. If the robot is a perfect substitute for labor what can we be sure is true about the annual cost of using and maintaining one robot?

Question 9

What is measured by marginal revenue product?

Question 10

What is the marginal product of labor?

Question 11

A firm producing cotton fabric reports the following production information:
Does this production function exhibit diminishing returns? Explain.

Question 12

Why is the demand for an input considered a derived demand?

Question 13

The American Pencil company produces pencils in a purely competitive market. The price of pencils is 10 cents. Hourly output varies with the amount of labor hired as follows:
Fill in the columns for marginal product of labor and marginal revenue product.

Question 14

Using Figure 10.1 above is it possible to determine the price that this product is selling for if it is being sold in a competitive market? If so what is that price?

Question 15

Assume that a traffic ticket attorney is no more productive today than he was 10 years ago but he is now earning 50% more in salary. How do you explain this apparent paradox?

Question 16

Use Table 10.1 to answer the following question. Construct a marginal revenue product table from the information listed in the table assuming that the firm can sell its product in a purely competitive market at value added price of $.50.

Question 17

Fred's Pizza Palace sells pizzas in a competitive market. The price of the pizzas is $1.25 each. Hourly output varies with the amount of labor hired as follows:
Fill in the columns for marginal product of labor and marginal revenue product.

Question 18

A firm producing hard drives for the Apple IPhone reports the following production information:
Does this production function exhibit diminishing returns? Explain. If so, at which worker is this taking place?

Question 19

What determines how much labor a household will supply?

Question 20

Using Figure 10.2 determine the number of workers that a representative firm would wish to hire. Explain your answer.

Question 21

Frank's Burgers employs workers in a competitive market. It currently has 15 employees. The marginal revenue product of the 15th worker hired is $8.50 per hour. The market equilibrium wage is $10 per hour. Is this firm maximizing profit? Explain.

Question 22

Assume that you start by hiring one worker at a time. Each time you hire an additional worker the average productivity remains the same. What does this imply about the marginal productivity of each worker that you hire? What will the marginal productivity function look like when graphed?

Question 23

A firm purchasing labor in a competitive market has the following marginal revenue product curve: How many workers should the firm hire if the wage is $15? What if the wage falls to $12? Explain.

Question 24

What does it mean when an economist says that a firm is buying labor in a competitive market?

Question 25

Graphically illustrate and explain the effect of an increase in the wage rate on the demand curve for labor.

Question 26

A firm producing three-ring binders reports the following production information:
The binders sell in a competitive market at a price of $0.15 each. The firm hires workers in a competitive labor market at a wage of $10 per hour. The firm is currently hiring two workers and is considering hiring a third worker. What would you recommend the firm do? Why?

Question 27

How is a competitive firm's demand for labor derived when labor is the firm's only variable factor of production in the short run?

Question 28

A firm purchasing labor in a competitive market has the following marginal revenue product curve: The current equilibrium wage is $10 and the firm is currently hiring 6 workers. The manager tells you that he is considering hiring another worker and asks your advice. Should he? Explain.

Question 29

If the firm is using only one variable input, explain why the condition W = MRPL is the same condition as P = MC.

Question 30

What is the price of a unit of labor in a competitive labor market?

Question 31

Using Table 10.2 above calculate the unit cost of production for each type of technology assuming that the price of capital and labor are both $1 each per unit of input. Which technology would the firm use and why?

Question 32

People often complain bitterly when they learn that CEOs of non-profit companies like the United Way or the Red Cross earn salaries commensurate to what could be earned in by CEOs employed by for-profit companies? Is this complaint valid? Explain.

Question 33

If a dot com start-up company hires a Web designer at a salary of $100,000 per year, and the company sells no additional Web designs during the year and does not increase the price it charges for its Web designs, what is the marginal revenue product of this Web designer? What type of returns to scale does this example illustrate?

Question 34

According to the text, what economic principle justifies the high salaries of some
Professional athletes?

Question 35

Affiliated Plastics Corporation sells bubble wrap for shipping in a competitive market. The price of the bubble wrap is $3 each. Hourly output varies with the amount of labor hired as follows:
Fill in the columns for marginal product of labor and marginal revenue product.

Question 36

Explain the three fundamental decisions that firms in perfectly competitive markets must make. Explain how these decisions are interrelated.

Question 37

Bobby's Barber Shop sells haircuts in a competitive market. The price of a haircut is $10.00 each. Daily output varies with the amount of labor hired as follows:
Fill in the columns for total revenue and marginal revenue product. If the wage for a barber is $50 per day, how many barbers should the barbershop employ? Explain.

Question 38

XYZ Corporation sells boxes in a competitive market. The price of the boxes is $2 each. Hourly output varies with the amount of labor hired as follows:
Fill in the columns for marginal product of labor and marginal revenue product.

Question 39

The profit-maximizing rule for a perfectly competitive firm when choosing its level of output is to produce where price is equal to marginal cost. The profit-maximizing rule for a firm hiring labor in a perfectly competitive labor market is to hire workers up to the point where the marginal revenue product equal to the market wage. How are these two rules related to one another?

Question 40

Niko's Sandwich Shop sells sandwiches in a competitive market. The price of the sandwiches is $0.50 each. Hourly output varies with the amount of labor hired as follows:
Fill in the columns for total revenue and marginal revenue product.

Question 41

What does it mean for two inputs to be complements? Give an example that describes how
labor and capital can be complementary inputs.

Question 42

The manager of a baseball team wants to hire a new pitcher for $4 million per year. Under what circumstances would it make sense for the team to do so?

Question 43

What is the factor substitution effect?

Question 44

Using Table 10.2 above calculate the unit cost of production for each type of technology assuming that the price of capital is $1 per unit and the price of labor is $2 per unit. Which technology would the firm use and why?

Question 45

Why is it more difficult for a firm to calculate the marginal revenue product of a player in the industry of professional sports versus that of a worker in a competitive manufacturing industry?

Question 46

A firm producing compact discs reports the following production information:
The compact discs sell in a competitive market at a price of $0.20 per box. The firm hires workers in a competitive labor market at a wage of $12 per hour. The firm is currently hiring four workers and is considering hiring a fifth worker. What would you recommend the firm do? Why?

Question 47

Comment on the following statement: "As the market wage rises, the firm is likely to hire less labor."

Question 48

Explain the output and factor substitution effects of an increase in the price of capital on the Demand for labor by a firm that produces output using both capital and labor.

Question 49

Comment on the following statement: "The output effect and the factor substitution effect work in opposite directions, so it is possible that a decrease in the wage rate can lead to a decrease in the amount of labor hired."

Question 50

A firm producing bottled water reports the following production information:
The bottled water sells in a competitive market at a price of 10 cents per gallon. The firm hires workers in a competitive labor market at a wage of $7 per hour. The firm is currently hiring 20 workers and is considering hiring another 10. What would you recommend the firm do? Why?

Question 51

Explain the output effect of a factor price increase.

Question 52

A firm purchasing labor in a competitive market has the following marginal revenue product curve: The market equilibrium wage is $14 and the firm currently employs 12 workers. Is the firm maximizing profit? Explain.

Question 53

Assume that an employer discovers that the marginal revenue product of the last two workers that he has hired is less than the wage rate that he is paying them. He is operating in a purely competitive market in both the output that he sells and the labor that he hires. What would you advise this employer to do and why?

Question 54

Script Pro produces robots that are sold to retail pharmacies. Among other things the robots print and apply the prescription and auxiliary labels and delivers uncapped vials for final inspection using on-screen drug image verification. The manager of the pharmacy is trying to calm his workers' fear that their jobs are in jeopardy if he starts using these robots. What economic explanation could the manager use to assuage the fears of his employees that their jobs are in jeopardy.

Question 55

Explain why an employer in a perfectly competitive market will hire more workers when the marginal revenue product is greater than the wage.

Question 56

Assume that workers in a purely competitive industry are earning a wage rate of $15 and the price of the product they are producing is also $15 what does this imply about the marginal productivity of these workers?

Question 57

Explain why input demand curves slope downward using the concepts of the factor
substitution effect and the output effect.

Question 58

A bakery producing bread reports the following production information:
The bread sells in a competitive market at a price of $0.30 each. The firm hires workers in a competitive labor market at a wage of $7 per hour. How many workers should the firm hire? Explain your answer.

Question 59

A firm producing ink pens reports the following production information:
The pens sell in a competitive market at a price of $0.50 per box. The firm hires workers in a competitive labor market at a wage of $9 per hour. How many workers should the firm hire? Explain your answer.

Question 60

Suppose that the price of capital falls. Does this necessarily imply that the demand for labor will fall? Explain.

Question 61

Many cities in California have severe land-use laws and ordinances, which effectively take off the market large amounts of land for residential or commercial construction. If the demand for housing increases in these cities without any increase in the stock of housing or commercial buildings then what is the likely impact that this will have on home prices and commercial structures? How might this affect where corporations choose to locate factories?

Question 62

List four things that can shift the demand for an input.

Question 63

Use a supply and demand graph to explain why the rent on land is demand determined.

Question 64

Using a supply and demand curve show what economists mean when they say that land is "demand determined." Explain your answer.

Question 65

What does it mean for a good to have a demand-determined price?

Question 66

Alan's Roast House sells roasted peanuts in a competitive market. The firm employs labor at a wage rate of $6 per hour and rents capital for $15 per hour. At its current level of labor and capital, the marginal product of labor is 12 and the marginal product of capital is 40. Is the firm currently maximizing profit? Explain.

Question 67

HK Sweaters, Incorporated employs labor at a wage rate of $12 per hour and rents capital for $30 per hour. At its current level of labor and capital, the marginal product of labor is 24 and the marginal product of capital is 60. Is the firm currently maximizing profit? Explain.

Question 68

Mike's Pretzels employs labor at a wage rate of $8 per hour and rents capital for $20 per hour. At its current level of labor and capital, the marginal product of labor is 24 and the marginal product of capital is 55. Is the firm currently maximizing profit? Explain.

Question 69

What is the profit-maximizing condition for a firm when trying to decide how much land to use for production?

Question 70

XYZ Corporation operates in perfectly competitive input markets and employs labor, capital, land in its production process. What three conditions must be met for the firm to be maximizing profit?

Question 71

In what way does land differ from other inputs such as labor and capital?

Question 72

What is pure rent?

Question 73

Why might an automobile labor union lobby Congress to place tariffs on labor-saving
devices like automated welding and riveting machines? Why might this be a mistake?

Question 74

The oldest hamburger chain in the United States is White Castle, which was founded in 1921. Most of their restaurants in the early days were located in urban areas. In the 1950s they lost much of their business to McDonalds and Burger King. They were slow to respond in building restaurants on highways and in suburbs. How did the advent of the highway system in the 1950s alter residential location patterns and how might this have affected the marginal revenue product of burger chains in both urban and suburban areas. Why did sales drop off in the urban areas where White Castle had earned its initial success?

Question 75

What is technological change?

Question 76

Suppose that a hurricane destroys part of the tobacco crop in North Carolina. What will happen to the price of tobacco? What will happen to the marginal product of tobacco field workers as a result of the hurricane? Can we tell what will happen to the demand for tobacco field workers? Explain.

Question 77

Comment on the following statement: "Even though the supply of land is perfectly inelastic, the supply of land in a given use may not be fixed."