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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
CHAPTER TWELVE
Answers to Test Your Understanding Questions
1. a) See table below:
Hours of Labour
Total Product
Marginal Product
0
1
2
3
4
5
6
7
8
0
3
7
13
18
22
25
27
28
/
3
4
6
5
4
3
2
1
Marginal Revenue
Product
/
$9
12
18
15
12
9
6
3
b) 6 hours of labour (where MRPL = the wage rate = $9) and 25 units of output.
2. a) 220 hours since the equilibrium wage rate is $16.
b) The firm would hire 40 more hours of labour (for a total of 260) since the
equilibrium wage rate falls to $14.
3. a) See completed table:
(1)
(2)
(3)
(4)
(5)
Number of workers Hourly Total Wage Marginal Wage Marginal Revenue
Wage
Cost
Cost
Product (= Demand)
1
$16
$16
$16
$28
2
17
34
18
27
3
18
54
20
26
4
19
76
22
25
5
20
100
24
24
6
21
126
26
23
7
22
154
28
22
8
23
184
30
21
b) 5 workers (where the MWC = MRP at $24); Hourly wage = $20
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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
4. a) b) and c)
See figure below:
d) Higher.
e) The new quantity, Q2, could be higher, lower or exactly equal to Q1 depending on
the magnitudes of the shifts in D2 and S2.
f) The demand for labour could increase because labour productivity rises or because
total output for the economy increase while the decrease in the supply of labour
could be caused by a decrease in population or in the labour force participation rate.
5. See figure below:
Since the supply of labour curve is perfectly inelastic, all of the pay that labour receives
is economic rent.
6. It was not a wise decision. The income we derived from the oil is $52.50 ($50 invested
at 5% interest). If instead we had not extracted it till this year we would receive an
income of $54.
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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
7. a) 9 units of the resource. ( If P = 0, then the quantity is where the demand intersects
the P of 0.)
b) See completed figure.
8. Since the MPK
PK
=
60
100
and
MPL =
PL
10
25
we have 0.60 > 0.40 and capital should be substituted for labour.
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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
Answers to Connect Study Problems
1.
See the following table:
Table 12.5 (Completed)
Quantity of
Labour
Total product
Marginal
product
Price
Total revenue
Marginal
revenue
product
1
10
10
$6
$60
$60
2
28
18
6
168
108
3
45
17
6
270
102
4
60
15
6
360
90
5
70
10
6
420
60
6
78
8
6
468
48
2.
a)
b)
c)
d)
2
4
5
6
(In all cases, firms will hire up to the point that the wage rate is equal to the MRP.)
3.
a)
$15 ($18/1.2);
b) $16.50 ($19.8/1.2) c) $13.64 ($18/1.32)
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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
4.
a) See the following table:
Table 12.7 (Completed)
(1)
Units of Labour
1
2
3
4
5
6
(2)
MPL
10
9
8
7
5
3
(3)
MRP1
240
216
192
168
120
72
(4)
MRP2
270
243
216
189
135
81
b) Situation A: 2 workers; Situation B: 3 workers (In both cases, it’s where
the wage equals the MRP.)
c) The demand for labour has increased and the demand curve has shifted right.
5. a) wage rate: $12 (Where demand equals supply in Graph A.); quantity of workers
hired: 120 (The number of workers hired at a wage of $12 in Graph B.)
b) surplus: 1200 workers (1600 workers hired in market, 2800 workers wanting
work; quantity of workers hired: 80 (quantity of labour at $16 in Graph B.)
6.
a) See the following table:
TABLE 12.8 (Completed)
Number of
Workers
1
2
3
4
5
6
7
8
Total Production
Marginal product
5
12
18
23
26
28
29
29
5
7
6
5
3
2
1
0
Marginal Revenue
Product
$20
28
24
20
12
8
4
0
b) 5 workers. (The firm will hire workers up to the point where the wage rate ($12) is
equal to the MRP.)
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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
7.
a) See following figure:
Figure 12.18 (Completed)
b) $4000. (200 x $20)
c) Transfer earnings: $2000 (The triangle below the supply curve which has an
area of ½ x $20 x 200.);
economic rent:
$2000 (The triangle above the
supply curve and below the price line which also has an area of ½ x $20 x 200).
d) decrease. (If the supply increases, the wage rate will drop. Say S increases by
100, so wage drops to $15. Total earnings would be $3750 (250 x $15)).
8. a) 4:2. (The firm would employ whichever unit of capital or labour is the more
productive. This would mean employing 4 units of capital and 2 units of labour.)
b) See the following table:
TABLE 12.9 (Completed)
Units
MPK1
MPL
MPL2
1
20
14
7
2
18
12
6
3
16
10
5
4
12
8
4
5
8
6
3
6
6
4
2
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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
c) 5:1. (The firm would employ whichever unit of capital or labour is the more
productive per dollar, i.e. comparing columns 2 and 4.. This would mean
employing 5 units of capital and 1 unit of labour.)
9. a) Less than $26.46. (If the oil was extracted now and the money invested at 5 percent
it would then be worth $26.46.)
b) They should not extract now; they will delay it to later. (If the price in two years
time is expected to be greater than $26.46, extraction should be left till then. If the
price is expected to be less than $26.46, than it should be extracted now.)
10.
a) See the following table:
Table 12.10 (Completed)
Quantity of Daily
Labour
1
2
3
4
5
6
7
8
Wage Rate
MRP
Total Wage Cost
$60
70
80
90
100
110
120
130
$160
170
160
150
140
120
90
50
$60
140
240
360
500
660
840
1040
Marginal Wage
Cost
$60
80
100
120
140
160
180
200
b) Quantity employed: 5 (The monopsonist will recruit labour up to the point at
which the additional cost of employing them (the marginal wage cost) is equal to
the extra revenue they produce (MRP).);
wage rate: $100
11. a)
Economic rent: $180 000 000 (Area of the triangle between the supply curve
and the price line = ½ x $60 000 x 6 000.)
Transfer earnings: $180 000 000. (Area under the supply curve. Same
amount as the economic rent.)
b) Economic rent: $90 000 000 (Area of the triangle between the supply curve
and the price line = ½ x $30 000 x 6 000.)
Transfer earnings: $270 000 000. (Area of triangle area under the supply
curve. Same amount as the economic rent. In addition, the area of the
rectangle under that triangle = $30 000 x 6000). Alternatively, the total
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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
revenue at $60 000 is $360 000 000 ($60 000 x 6000). Since economic rent is
$90 000 000, the difference of $270 000 000 must be transfer earnings.
c) S1 is more inelastic.
12. a) See the following figure
Figure 12.20 (Completed)
b) Daily wage: $180;
supply curves)
c)
Number of workers: 7 (The intersection of the demand and
See the following table:
Table 12.11 (Completed)
(1) Number of
Workers
(2) Daily Wage
(3) Total Wage Cost
(4) Marginal Wage
Cost
1
$150
$150
$150
2
155
310
160
3
160
480
170
4
165
660
180
5
170
850
190
6
175
1050
200
7
180
1260
210
8
185
1480
220
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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
d)
See Figure 12.20 (Completed)
e)
Daily wage: $170;
Number of workers: 5 (The quantity is found at the
intersection of the MWC curve and the demand curve. The daily wage is found by
taking an (imaginary) line from 5 up to the supply curve.
Answer to Comprehensive Problem
a) See the following table:
TABLE 12.12 (Completed)
Quantity of
Labour
Daily
Output
Marginal
Product
Total
Revenue 1
Marginal
Revenue
Product 1
Total
Revenue 2
Marginal
Revenue
Product 2
0
0
/
/
/
/
/
1
40
40
$200
$200
$280
$280
2
76
36
380
180
532
252
3
108
32
540
160
756
224
4
136
28
680
140
952
196
5
160
24
800
120
1120
168
6
180
20
900
100
1260
140
b) 5 workers
(With the cost of labour at $120 per day the firm should employ this number because
the marginal revenue product of the 5th worker is also $120.)
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Answer Key, Principles of Microeconomics, 8th Edition – Chapter 12
c) See the following figure:
Figure 12.21 (Completed)
d) 4 workers should be hired.
(With the increase in the cost of labour to $140, the firm should reduce the number of
to 4 since the marginal revenue product of the 4th worker is also $140.
e) See Figure 12.21 (Completed)
f) See Table 12.12 (Completed).
g) 6 workers should be hired
(With the increase in the price of soap, the firm will hire workers to the point where the
wage per worker of $140 is equal to the new marginal revenue product. )
h) See Figure 12.21 (Completed). The increase in the price of soap shifts the demand
curve for labour to the right from D1 to D2.
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