Mr. MaurerName: ______
AP Economics
Chapters 14 and 15 - Factor Markets (Resource Markets)
Problem Set #2
1. In a perfectly competitive labor market, what is the relationship between the wage rate and marginal factor cost?The wage rate and marginal factor cost are equal (they are the labor supply curve).
2. In a monopsonistic labor market, what is the relationship between the wage rate and marginal factor cost?Marginal factor cost is always greater than wage rate in a monopsonistic labor market.
3. How many workers will an employer with monopsony power choose to employ? What wage will the firm pay?The firm will hire the quantity of workers where marginal factor cost is equal to marginal revenue product. It will then pay the wage rate on the labor supply curve for that number of workers.
4. If the value of the marginal product of the last worker hired is less than the wage rate in a perfectly competitive labor market, what should the firm do?
The firm should cut back on its labor force, because the last worker hired is costing more than he or she is bringing in for the firm.
5. Explain the least-cost rule for combining resources.
The marginal product per dollar spent should be equal for all resources employed.
6. At its current employment level of labor and capital, a firm observes the following.
- Marginal product of labor = 30 units
- Marginal product of capital = 60 units
- Price of labor = $3 per unit
- Price of capital = $15 per unit
What should this firm do in order to achieve the least-cost combination of labor and capital and produce the same level of output?
The firm should hire more labor and less capital.
7. If the wage rate in a perfectly competitive labor market is $10/hour, and the marginal product of the last worker hired is 2 units per hour, what is the marginal cost of producing the last unit?
$5. If the last worker can make 2 baseballs and costs $10, that’s $5 per baseball.
8. A firm produces truffles by using labor and capital. The price of labor is $10/unit and the price of capital is $20/unit. At current output levels, the marginal product of labor is 40 truffles and the marginal product of capital is 60 truffles. To reduce the total cost of producing the current quantity of truffles, how should the firm change spending on labor and capital?
Increase labor and decrease capital because they are getting 4 truffles per dollar spent on labor, but only 3 truffles per dollar spent on capital, so the marginal product /last dollar spent is less for labor than for capital.
9. If the wage rate for labor in a perfectly competitive labor market is $20 and the marginal product of labor is 40 units, what would the price of the product have to be in order to make hiring the next worker profitable?
If the last worker costs $20 and can make 40 units, the price would have to be greater $0.50.
10. Assume that the last worker a firm hired produces 60 additional units of output per hour and the last machine rented produces 6,000 units of output per hour. A worker’s hourly wage rate is $12, and the rental cost of a machine is $1,000 per hour. In order to minimize the cost of tis current output, how should the firm adjust its use of labor and capital?
The firm should employ more capital and less labor because 6000 units/$1000 is less than 60 units/$12.
11. The graph at left shows the conditions that a monopsonist faces in a labor market. How many workers would this monopsonist hire and what wage rate would it pay?
10 workers (Q where MFC=MRC) @ $20 (wage rate on the labor supply curve at 10 workers). In other words, the firm would have to pay $20 in order to attract 10 workers to work for that rate.
12. The graph at left shows a monopsony labor market. In the absence of any regulations, How many workers will this monopsonist hire and what wage rate will it pay?
20 workers (Q where MFC = MRP) @ $20 (wage rate on the labor supply curve for a Q of 20.)
You should see that you find the quantity at the intersection of MFC and MRP and then drop a line down to the labor supply curve to find wage rate. It’s just the reverse of how a monopoly sets it quantity at the intersection of MC and MR and then sends a line up to the demand curve to find price at that output.