Name:______Due Date:______
Unit 4 Review Problems
1. Patty’s Pizza Parlor has the production function per hour shown in the accompanying table. The hourly wage rate for each worker is $10. Each pizza sells for $2.
Quantity of Labor (workers) / Quantity of Pizzas0 / 0
1 / 9
2 / 15
3 / 19
4 / 22
5 / 24
a. Calculate the marginal product of labor for each worker and the value of the marginal product of labor per worker.
b. Draw the value of marginal product of labor curve. Use your diagram to determine how many workers Patty should employ.
c. Now the price of pizza increases to $4. Calculate the value of the marginal product of labor per worker, and draw the new value of the marginal product of labor curve in your diagram. Use your diagram to determine how many workers Patty should employ now.
2. The production function for Patty’s Pizza Parlor is given in the table in Problem #1. The price of pizza is $2, but the hourly wage rate rises from $10 to $15. Use a diagram to determine how Patty’s demand for workers responds as a result of this wage rate increase.
3. Patty’s Pizza Parlor initially had the production function given in the table in Problem #1. A worker’s hourly wage rate was $10, and pizza sold for $2. Now Patty buys a new high tech pizza oven that allows her workers to become twice as productive as before. That is, the first worker now produces 18 pizzas per hour instead of 9, and so on.
a. Calculate the new marginal product of labor and the new value of marginal product of labor.
b. Use a diagram to determine how Patty’s hiring decision responds to this increase in the productivity of her workforce.
4. Imagine a firm that hires two types of workers – some with computer skills and some without. If technology advances so that computers become more useful to the firm, what happens to the marginal product of the two types? What happens to equilibrium wages? Explain, using appropriate diagrams.
5. Suppose the country of Yemen is experiencing a coffee revival where the government is allocating more land to coffee production. However, the global Arabica coffee prices stood at 101 cents a pound, after touching about 250 cents a pound the year before. The fall was primarily attributed to a bumper crop in Brazil.
a. Explain what happens to the marginal product of coffee pickers in Yemen as a result of the policy change. Can you say what happens to the demand for coffee pickers? Why or why not?
b. Suppose the price of coffee triples and the marginal product falls by 60%. What happens to the equilibrium wage of coffee pickers?
c. Suppose the price of oranges rises by 30% and the marginal product falls by 55%. What happens to the equilibrium wage of orange pickers?
6. From the 1980 to 2000, the United States experienced a significant desire and inflow of capital by businesses from other countries. For example, Toyota, BMW, and other foreign car companies built auto plants in the United States.
a. Using a diagram of the US capital market, show the effect of this inflow on the rental price of capital in the United States and on the quantity of capital in use.
b. Using a diagram of the US labor market, show the effect of the capital inflow on the average wage paid to US workers. (Labor and Capital have a complement relationship)
Wage
$8
$6
$4
3,000 4,000 5,000 Quantity
7. The figure above shows the market for tomato pickers in southern California.
a. What is the equilibrium wage rate of tomato pickers and what is the equilibrium quantity of tomato pickers employed?
b. Is the market for tomato pickers efficient?
c. If California introduces a minimum wage for tomato pickers of $4 an hour, how many tomato pickers are employed and how many are unemployed?
d. If California introduces a minimum wage for tomato pickers of $8 an hour, how many tomato pickers are employed and how many are unemployed?
e. Is the minimum wage of $8 an hour efficient? Is it fair?
f. Who gains and who loses from the minimum wage of $8 an hour?
8. Bonus: In each of the following four cases, MRPl and MRPk refer to the marginal revenue products of labor and capital, respectively, and Pl and Pk refer to their prices. Indicate in each case whether the conditions are consistent with maximum profits for the firm. If not, state which resource(s) should be used in larger amounts and which resource(s) should be used in smaller amounts.
a. MRPl = $8; Pl = $4; MRPk = $8; Pk = $4
b. MRPl = $10; Pl = $12; MRPk = $14; Pk = $9
c. MRPl = $6; Pl = $6; MRPk = $12; Pk = $12
d. MRPl = $22; Pl = $26; MRPk = $16; Pk = $19