Download Microeconomics: Unit 3: The Nature and Function of Factor Markets

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Microeconomics: Unit 3: The Nature and Function of Factor Markets
Unit Exam Remediation
Directions:
1. Complete this remediation worksheet on your own to the best of your ability.
2. Come see me to approve your remediation worksheet and assign you a partner
3. Discuss your answers with your partner and make any changes or corrections as necessary based on your
discussion.
4. Come see me to approve your remediation worksheet again and assign you a new partner
5. Discuss your answers with your partner and make any changes or corrections as necessary based on your
discussion.
6. Hand in your completed worksheet.
7. You will receive HALF credit for each answer you missed on your Unit 3 Exam – Multiple Choice if you answer
80% of the questions below correctly
Questions:
1. In order to maximize profit, the firm should hire the number of workers where the:
Your answer:
Number of Workers
1
2
3
4
5
6
Marginal Revenue Product Per Day
$450
$500
$450
$400
$300
$100
2. The table above gives the short-run marginal revenue product of labor per day for a perfectly competitive firm.
The firm is currently selling its product at the market price of $5.
a. Calculate the marginal (physical) product of the third worker.
b. Define the law of diminishing marginal returns and explain why it occurs.
c. Diminishing marginal returns first occur with the hiring of which worker for the firm?
d. What is the highest daily wage that the firm is willing to pay to hire the fifth worker?
e. What will happen to the demand for labor if the market price of the product increases? Explain.
Your answer (must show all work!):
Number of Workers
0
1
2
3
4
5
6
7
8
Number of Shirts per Day
0
10
25
45
60
72
80
85
82
3. P & L is a profit-maximizing shirt-manufacturing firm. The firm can sell all the shirts it can produce to retailers
at a price of $20 each. P & L can hire all the workers It wants at a market wage of $120 per day per worker. The
table above sows the firm’s short-run production function.
a. In what kind of market structure does this firm sell its output? How can you tell?
b. In what kind of market structure does this firm hire its workers? How can you tell?
c. Calculate the marginal revenue product of the third worker. Show your work!
d. How many workers should the firm hire to maximize profit? Explain.
Your answer (must show all work!):
4. Assume that Company XYZ is a profit-maximizing firm that hires its labor in a perfectly competitive labor
market and sells its product in a perfectly competitive output market.
a. Define the marginal revenue product of labor (MRPL)
b. Using correctly labeled side-by-side graphs, show each of the following.
i. The equilibrium wage in the labor market
ii. The labor supply curve the firm faces
iii. The number of workers the firm will hire
c. Company XYZ develops a new technology that increases its labor productivity. Currently this
technology is not available to any other firm. For Company XYZ, explain how the increased productivity
will affect each of the following:
i. Wage rates
ii. Number of workers hired
Your answer:
5. Leadmill Company is a perfectly competitive pencil-manufacturing firm. Leadmill can sell all of the pencils it
produces at a market price of $2 per dozen and can hire all the workers it needs at a wage rate of $8 per hour. The
output (or total product) of the workers at Leadmill is given in the table below.
Number of Workers
0
1
2
3
4
5
6
7
8
a.
b.
c.
d.
Ouput (in dozens of pencils)
0
8
15
21
26
30
33
35
36
Using marginal analysis, state the condition for employing the profit-maximizing number of workers.
How many workers should Leadmill hire to maximize profit? Explain how you derived that number.
If the wage rate decreased to $6 per hour, how many workers would Leadmill employ?
If the wage rate was $6 per hour and the price of pencils decreased to $1 per dozen, how many
workers would Leadmill employ?
Your answers (show all work!):
6. Susan’s Taxi Service operates in a perfectly competitive market and hires drivers in a perfectly competitive labor
market. The industry wage for taxi drivers is $8 per hour.
a. Draw correctly labeled side by side labor market graphs for the taxi industry and for Susan’s Taxi
Service. Show each of the following:
i. The equilibrium wage and quantity of drivers hired in the industry
ii. The wage paid by Susan’s Taxi Service
iii. The quantity of drivers hired by Susan’s Taxi Service
b. Now assume the state imposes a minimum wage of $10 per hour.
i. What condition will this effective minimum wage create in the industry
ii. What will happen to the wage Susan pays her taxi drivers? Explain
iii. What will happen to the quantity of drivers Susan hires? Explain
Your answer:
Use the following information for questions 7 and 8
Suppose the productivity of labor and capital are shown in the accompanying table. The output of these resources sells in
a purely competitive market for $1 per unit. Both capital and labor are hired under purely competitive conditions at $3
and $1 respectively.
Units of Capital
1
2
3
4
5
6
7
8
MP of Capital
24
21
18
15
9
6
3
1
Units of Labor
1
2
3
4
5
6
7
8
MP of Labor
11
9
8
7
6
4
1
½
7. What is the least-cost combination of labor and capital to employ in producing 80 units of output? Explain.
Your answer:
8. What is the profit-maximizing combination of labor and capital the firm should use? Explain. What is the
resulting level of output? What is the economic profit? Is this the least costly way of producing the profitmaximizing output?
Your answer:
Use the following information to answer question 9:
Assume a firm is a monopsonist that can hire its first worker for $6 but must increase the wage rate by $3 to attract each
successive worker. Draw the firm’s labor supply and marginal resource cost curves and explain their relationship to one
another. On the same graph plot the labor demand date by completing the chart below. What are the profit-maximizing
wage rate and level of employment? What is the equilibrium wage rate and level of employment?
Units of Labor
Total Product
0
1
2
3
4
5
6
0
17
31
43
53
60
65
Marginal Product
Product Price
Total Revenue
Marginal
Revenue Product
$2
2
2
2
2
2
2
9. Your answer:
10. There is a link between marginal cost and marginal product of labor; in fact MC = W/MPL. We know that MRPL =
MPL * P. If DoughCrust Bakery’s marginal revenue product of labor is greater than the wage, it must be the case
that (finish the sentence using the formulas above):
Your answer: