Download FRQ Walkthrough #2 Perfectly Competitive Labor Market

FRQ Walkthrough #2
Perfectly Competitive
Factor Market
2010 Perfectly Competitive Factor Market
2010 Perfectly Competitive Factor Market
There is a lot of information here in the prompt. Notice that it says “perfectly
competitive” market. At the same time, Lamb’s employees will not change,
but that the quantity of hours from the machine will not change. This is telling
you that on the market side, we’re talking about perfect competition, a simple
supply and demand graph. Additionally, on the firm side, we’re talking about
perfect competition, which in the factor market means a perfectly elastic
supply curve, and the demand curve defined as “marginal revenue product.”
2010 Perfectly Competitive Factor Market
To set up the side
by side graphs,
technically, it
doesn’t matter
which one goes
where, but
traditionally, market
goes first then firm.
2010 Perfectly Competitive Factor Market
For the market
graph, draw a
simple supply and
demand graph, and
then rent on the yaxis and quantity on
the x-axis.
Remember, this is
the factor market,
so your y-axis will
always be rent
(land, capital) or
wage (labor).
2010 Perfectly Competitive Factor Market
For the firm graph,
the trick is to draw
the supply curve at
the same level as
equilibrium in the
market graph.
Same axes as the
market graph, but
the curves
themselves will
change. For the
demand curve, label
this as MRP.
2010 Perfectly Competitive Factor Market
MRP is marginal
revenue product. It’s
the additional revenue
you get when you
make just one more.
In the product market,
this is equivalent to
MC. However, in the
factor market, it’s
flipped. It’s not about
the additional cost to
make it, it’s about how
much additional
revenue I get in to
cover the costs.
2010 Perfectly Competitive Factor Market
S is going to be
horizontal. I wrote S =
MFC, but if you write
one or the other, it
should be clear from
context to the reader.
Again, in the factor
market, perfect
competition is flipped.
S/MFC is perfectly
elastic, not D. In PC,
MR didn’t change
because the revenue
stayed the same no
matter how many
products were sold.
2010 Perfectly Competitive Factor Market
Here, S/MFC is going
to the same because
no matter how many
widgets are produced,
the cost to make each
widget is the same.
The rest of this is
correctly labelling PR
and QL.
2010 Perfectly Competitive Factor Market
This first point is hard to get. You need to figure out the relationship between the
marginal product curve and the firm’s supply curve.
The second point is easier, if you get the graphs correct. That being said,
students did get this point even without the graphs.
2010 Perfectly Competitive Factor Market
(i) Remember that the marginal
product curve shows the relationship
between marginal product given
changes in variable inputs. Fixed
inputs are locked in. This
demonstrates the law of diminishing
marginal returns. Every time I set up
a set of variable inputs to a set of
fixed inputs, I’m going to get less
product and higher cost.
2010 Perfectly Competitive Factor Market
Thing is, my firm’s supply (in terms of
how many machine hours it takes to
make one additional product) is going
to stay the same, no matter what
happens to price. Because there’s no
change in the amount of machine
hours to make an additional product,
no change in marginal product.
2010 Perfectly Competitive Factor Market
(ii) This one’s a little more easier. If
you draw a little side graph like I did,
you’ll see that MRP has to decrease.
Similarly, if you reason your way
through it, you’ll come to the same
conclusion.
2010 Perfectly Competitive Factor Market
If the popularity of widgets decreases,
then demand for widgets will also
decrease. If demand for widgets
decreases, then prices will decrease.
If prices decrease, then the amount of
marginal revenue I get when I sell an
additional product will have to
decrease. As such, the MRP curve
has to decrease.
2010 Perfectly Competitive Factor Market
If you go through my answer, you’ll
see that I stuck in the word
“marginal”. I think if I’d have just left it
as revenue, I would have gotten it
wrong. Total revenue could increase
as marginal revenue decreases (think
elastic).
2010 Perfectly Competitive Factor Market
2010 Perfectly Competitive Factor Market
Time to get your math on. This right here is why I want you to at
least try. You can get at least one point on every FRQ.
MPL/w = MPK/r
28/14 = 60/r
2 = 60/r
2r = 60r/r
2r = 60
r = 60/2
r = $30
2009B Open Market Operations
2009B Open Market Operations
There’s quite a bit of information in this prompt. What does it tell you?
2009B Open Market Operations
1. RRR = 10%. This means that the money multiplier is 1/0.1 = 10.
2. Bank reserves decrease by $50 million (not MS). This comes out of excess
reserves initially. MS will decrease.
3. Selling $50 million worth of government securities with the money multiplier
will ultimately take $50 million x 10 = $500 million out of the economy.
4. Open market operation sale means contractionary monetary policy. Interest
rates will go up as MS decreases. Consumer spending will decrease as they
save more money. Investment spending will decrease as it becomes more
expensive to borrow money. As a result, AD will decrease. If AD decreases,
inflation will decrease, but unemployment will increase.
5. Country Z has an inflation problem.
2009B Open Market Operations
Hi. Pretty sure we just answered this.
2009B Open Market Operations
(i) $50 million. The money gets taken from excess reserves, not the required
reserve.
(ii) $500 million. Notice that all this question is asking for is the maximum
possible change in the MS. It is not asking for whether it’s a decrease or
increase.
2009B Open Market Operations
• Please label your axes correctly. For the
Money Market graph, that’s nominal interest
rate.
• Open market sales cause the MS to
decrease. Nominal interest rate increases.
• Draw arrows and ant trails when in doubt.
2009B Open Market Operations
What graph is this ultimately asking about?
2009B Open Market Operations
If you said AD-AS graph, you win! When in doubt, draw it out. I drew a
little mini-graph to get it working in my head.
If the nominal interest rate increases, then consumers will put their
money back into banks to earn interest, and stop spending.
Businesses won’t borrow because it costs them more to do so. As
such, AD decreases. If AD decreases, APL and real GDP decreases.
“Equilibrium price level will decrease.”
2009B Open Market Operations
The first part of this is easy.
The second, depends on how you phrase it.
2009B Open Market Operations
People on fixed incomes would be better off if price levels drop. It means
that their purchasing power would ultimately increase. Alternatively, you
could state that it raises real income (which is the same thing as saying
that their purchasing power would increase).
I wrote that people would be better off because the lower price level would
allow them to buy more goods. I should get the point, but I’m a little
worried that the AP readers are looking specifically for the words
“purchasing power.” Probably not though.