Unit IV Review

Question 1

• If the demand for “good A” decreases, then what will happen to the MRP of labor for workers who produce “good A?”

Answer 1

• It will decrease because the decrease in demand for good A will cause the market price to drop. Therefore, the MRP of each worker will decrease.

Question 2

• Provide two examples of something that could cause the demand for Buffalo Wild Wing’s waiters/waitresses to increase

Answer 2

• The NCAA men’s basketball tournament is beginning

• Customers are eating more and more wings• The productivity of the waiters and waitresses

increase• The store owner expands his restaurant• Etc…

Question 3

• How much control does a firm have over wage in a perfectly competitive labor market?

Answer 3

• No control, the firm faces a perfectly elastic supply curve.

Question 4

• 1 worker can produce 5 cupcakes. 2 workers can produce 11 cupcakes. 3 workers can produce 14 cupcakes. At which worker is the firm experiencing diminishing marginal product? Why?

Answer 4

• The 3rd worker. The first workers MPL is 5. The second workers MPL increases to 6. But the 3rd workers MPL is 3. The 3rd worker is the start of diminishing marginal product of labor.

Question 5

• 3 workers can produce 20 cupcakes. 4 workers can produce 50 cupcakes. Cupcakes sell for $2. What is the MRP of the 4th worker?

Answer 5

• $60. The MP of the 4th worker is 30. MRP of labor = MPL x Price. So, 30 multiplied by $2 = $60.

Question 6

• If the marginal product of labor is increasing, what is happening to the marginal revenue product of labor?

Answer 6

• It is also increasing. Each worker is becoming more productive, therefore their value increases.

Question 7

• In the 1940’s, thousands of American men went to go fight in Europe and the Pacific during WWII. During this event, what happened to the labor market for men in the United States?

Answer 7

• The supply of male workers in America decreased. This caused the wage for male American workers to increase and the quantity to decrease

• Also, this caused the demand for female workers in the US to increase. Therefore, the wage and quantity of female workers increased.

Question 8

• The firm’s demand for labor is also equal to the firm’s _________________?

Answer 8

• MRP of labor. This is because firms hire where wage = MRP of labor.

Question 9

• A decrease in physical capital will have what impact on MRP of labor?

Answer 9

• MRP of labor will decrease. Workers become less productive with less resources to work with, therefore their MRP decreases (they are less valuable).

Question 10

• If MRP of labor increases, what impact will that have on the labor market?

Answer 10

• The demand for labor will increase, which will cause wage and quantity to increase. This happens because workers are more valuable, therefore firms will hire more.

Question 11

• A firm is deciding the combination of inputs that would result in the lowest cost. Based on the information below, what would you recommend the firm does?– MPL = 100– Wage = $10– MPK = 20– Rent = $5

Answer 11• Hire more workers and use less capital. To find

this, you would have to find the least cost combination of labor and capital. To do this, divide the marginal product over the price. – The workers marginal product per dollar spent is 10.

This was determined when the MPL (100) was divided over the wage ($10)

– The capitals marginal product per dollar spent is 4. This was determined when the MPK (20) was divided over the price of capital which was the rent ($5).

– 10 is greater than 4. So we have to lower the marginal product per dollar of workers by hiring more workers (diminishing marginal product). Then, the opposite is true for capital.

Question 12

• The price that a firm must pay to temporarily use a factor of production is what?

Answer 12

• Rent

Question 13

• What happens to the quantity demanded for workers if the government enforces a binding minimum wage?

Answer 13

• The quantity demanded for workers will be less than the quantity supplied of workers.