Unit V: Factor Markets Problem Set #5 Points Distribution
Question #1 Real World Application of Key Concepts 5 Points EACH 2 Points Definition 3 Points Clear Example
1. Derived Demand Definition (2 points): Demand for resources is derived by the demand for the product in which they make. If demand for product goes up, the demand for the resource goes up and vice versa. Example 3 Points: Clear example If demand for surfboards increases, the demand for shapers (the resource used to make surfboards) also increases. 2 Points: Some confusion/unclear The demand for surfboards changes the demand for shapers 1 Point: Major confusion If the demand for shapers up, the demand for surfboards goes up.
2. MRP and MRC Definition (2 points): MRP is the additional revenue generated by an additional resource. It is the marginal product of the worker times the price of the products they make MRC is the additional cost of hiring an additional resource. MRC equals the wage in perfect competition. Example: (Must show BOTH) 3 Points: Clear example using numbers/chart 2 Points: Some confusion 1 Point: Major confusion
3. Monopsony Definition (2 points): A monopoly for labor. An imperfectly competitive labor market that is characterized by one firm that does all the hiring. The firm is a wage maker. Example: 3 Points: Clear example 2 Points: Some confusion 1 Point: Major confusion
2. Perfectly Competitive Resource Market 2 Points-Chart (Correct numbers for MP and MRP) Number of Workers Output (Quantity) Marginal Product Price of Yo-Yos Total Revenue Marginal Revenue Product 0 0 ----- $5 ---- ---- 1 15 15 $5 75 75 2 40 25 $5 200 125 3 70 30 $5 350 150 4 95 25 $5 475 125 5 115 20 $5 575 100 6 130 15 $5 650 75 7 140 10 $5 700 50 8 135-5 $5 675-25 9 130-5 $5 650-25
a. Law of Diminishing Marginal Returns 2 Point- Identifies correct stages Stage I: Increasing Returns- 1st 3rd workers Stage II: Decreasing Returns- 4 th - 7 th workers Stage III: Negative Returns- 8 th and 9 th workers 1 Point- Increasing Returns is the result of specialization 1 Point- Decreasing Returns is the result of LIMITED FIXED RESOURCES (not overcrowding!!!) 1 Point- Negative Returns is the result of workers getting in the way
b. How many workers? 2 Points- States profit maximizing rule for labor MRP=MRC 1 Point- 5 workers should be hired 1 Point- Explains that they calculated MRP by multiplying P x MP or change in TR 1 Point-Explains that the MRC is the wage $90
c. Change in price 1 Point- States that more workers will be hired 1 Point- 6 workers should be hired 2 Point- Explains that MRP increased because price increased 1 Point- Explains that the firm is now willing to hire the 6 th worker because he generates more revenue
12 Points Question #3 How Wages are Determined in a Competitive Labor Markets There are 16 questions, but only 12 will be worth points. Grade only the answers in BLUE.
1 point for each answer (Must be full sentence) 1. Two factors that affect demand for labor? MRP (additional revenue generated) Productivity of the worker Price of related resources (subs and comp) 2. How does MRP affect demand for labor? MRP equals the demand for labor. The MRP of a worker reveals how much they are worth to the firm. The greater the MRP the greater the demand. 3. Why is demand curve downward sloping? Each worker is less productive and is worth less than the previous worker due to dim. marginal returns. As wage falls, the quantity of workers that firm will hire will increase. 4. What determines supply of labor? Quantity of qualified workers/government licensing Societal attitude toward leisure and work
1 point for each answer (Must be full sentence) 5.Why is supply upward sloping? To increase the amount of workers that are willing to work, the wage must increase. Each worker values leisure activities more than the previous worker. 6. $3.00 (1/2 point) 7. 500 workers (1/2 point) 8. 800 workers supplied 9. 300 workers demanded 10. 200 workers laid off 11. 300 workers enter 12. Fewer workers would lose their job 13. Unskilled will lose their jobs
1 point for each answer (Must be full sentence) 14. Who benefits? Workers who don t get fired and are now get a higher wage 15. Who is hurt by minimum wage? Workers that are fired because the quantity demand by firms fall due to the increase in wage Firms that must pay higher labor costs 16. Do you favor higher minimum wage? Why? Full points if their opinion is supported by a clear explanation.