Download CHAPTER #25 FREE RESPONSE SOLUTIONS

CHAPTER #25 FREE RESPONSE SOLUTIONS
1. The four reasons it is important to study resource prices is that; a) resources prices are; a)
important in determining household incomes, b) play a role in cost minimization for firms,
c)prices of resources play a great role in their allocation to firms and industries, d) play a role in
policy issues; minimum wage debate for example.
2. The demand for a resource is different than the demand for a product in that resource demand
is derived demand. That is the demand for a resource is directly related to the demand of the
product into which it goes.
3. The productivity of the resource, and the product price into which the resource goes determine
the strength of the demand for the resource.
4. Firms maximize their profits using the MRP=MRC rule because as long as a resource is
generating more income (MRP) than its cost (MRC) it should be used because it generates a
profit to the firm. The firm should continue to use additional resources up until the last
resource’s price is equal to its MRC.
5. In a purely competitive market since the product price is constant, the resource demand curve
is linear and downward sloping due to declining marginal product due to the law of diminishing
returns. In a market which is imperfectly competitive, a firm has to drop the price in order to
sell more products. This a more severe decline in MRP due to diminishing marginal product, and
thus a steeper demand (MRP) curve.
6. In an imperfectly competitive market the demand schedule for a resource is less elastic since
the firm has to lower its price to sell more goods. Because of this MRP of the resource decreases
at a more rapid rate than in a purely competitive market, thus making the demand for a
resource less elastic. The decline in MRP is due to the law of diminishing returns.
7. The market demand for a resource is derived by summing the MRP curves (demand) of all of the
firms in the market or industry.
8. The three factors that can cause the demand for a resource to increase or decrease are; changes
in product demand where resource is used, changes in the productivity of the resource, and
changes in the price of other resources. Examples are found on 493-494.
9. The difference between the substitution effect refers to the fact that resources can and often
substituted for each other based on cost. A cheaper resource will be substituted for a more
expensive one. Cheaper resources lower costs, resulting in greater output; which is referred to
as the output effect.
10. If the price of capital falls and it is a substitute for labor; the demand for capital will increase and
the demand for labor will decrease. When the substitution effect outweighs the output effect
that means the demand for the substituted input will drop(substitution effect), and when
output increases due to the substitution the demand for the substituted resource will increase
(output effect), but the increase will be much less then the loss of demand due to the
substitution. If the output effect outweighs the substitution effect the opposite will occur.
11. If the price of a complementary resource(to labor) changes, the demand for labor will change in
the opposite direction of the price change for the resource. For example; if the price of the
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resource increases its demand decreases along with that of the complement (labor). Price and
the demand for the complement move in opposite directions.
Read pages 495-496.
The three factors which determine the elasticity of demand for a resource are; the demand for
the product it is used in, the substitutability of the resource, and the ratio of the cost of the
resource to the price of the product it is used in.
If a resource has a high degree of substitutability as its price goes up it will be highly substituted,
and used in much greater quantities if its price goes down. For this reason, a highly substitutable
resource has very elastic demand.
Of resources
The firm in a purely competitive market can produce using resources in a least costly fashion if
the ratio of the marginal product/resource price for each resource used are equal to one
another. Algebraically; MPL = MPC
PL
PC
Minimizing cost is not enough for maximizing profit, as a least cost combination of resources
could be found for any level of output. However there is only one level of output at which
profits are maximized!
The profit maximizing combination of resources is when the MRP to price ratio of each resource
employed is equal to each other, and equal to one. This equation is found on p. 499.
The marginal productivity theory of income distribution states that income goes to those whose
MRP is greatest. Your MRP is higher than someone else, and you will earn more!
Critics of the marginal productivity theory of income distribution argue that it generates income
inequality in part because productive resources are unevenly distributed, and that some simply
can’t compete due to disabilities etc, or lack of opportunity (can’t afford college).
CHAPTER #26 FREE RESPONSE SOLUTIONS
1. Wage refers to the hourly price for labor in chapter #26. Nominal wage refers to what the wage
actually is, and real wages refer to the purchasing power of the wage as adjusted to price level
changes.
2. Wage rates in the U.S. compare favorably with that of other nations in that they are fairly high.
European wages tend to be higher though. One must consider cost of living and tax rates when
actually comparing wage rates.
3. The reason for the increase in U.S. productivity in the recent past is due to plentiful capital to
combine with labor, access to abundant natural resources, advanced technology, and high labor
quality.
4. The level of real wages in the U.S. has continued to increase even though the labor supply has
increased because the demand for labor has increased at a greater rate than the supply. This is
mostly due to the increased productivity of U.S. labor.
5. In the competitive model, the market demand for labor is the sum of all of the MRP’s of labor
for each individual firm. The wage rate in the market is determined where the market demand
and the market supply for labor curves intersect. The supply situation for firms is that all firms
can hire as much labor as they like at the market wage. They are wage takers as each hires little
labor in relation to the overall market supply. The supply curve for the market is upward sloping,
while that of the firm is perfectly elastic at the going wage.
6. In the monopsony model, the monopsonist hires labor where the vertical line gong through
MRC =MRP intersects the labor supply curve. The horizontal line from the point of intersection
of the supply curve to the vertical axis (price) determines the wage. Refer diagram p.509.
7. A worker is exploited by a monoponist in that they a paid a wage that is lower than that it would
be in a competitive market, where the worker is rewarded with a wage equal to industry
equilibrium of labor supply and demand. Monopsonists restrict employment because their MRC
is greater than the wage.
8. When supply is less than perfectly elastic (upward sloping), MRC is greater than wage rate
because in order to hire an additional worker, the firm must offer a higher wage, but in doing so
that higher wage must be offered to all previously hired workers, making MRC greater than the
wage.
9. Basic methods employed by unions to increase wages include increasing demand for the
products the union workers make, reducing labor supply through craft unionism, and increasing
wage by unionizing all workers. With the exception of increasing demand the other methods
tend to reduce employment.
10. To increase demand for labor unions might advertize for products they produce hoping t o
increase demand for the products, and thus demand for labor making it. They may lobby
government for spending in areas which union employees are working; education, highways,
construction, or they may try and get management to acquire capital that makes their workers
more productive, or to alter the prices of other inputs.
11. When trying to restrict labor supply to increase rates, unions have used occupational licensing,
immigration restrictions, child labor laws, compulsory retirement, shorter work weeks, and
compulsory retirement. Licensing, or certification requirements limit the supply of a particular
type of labor.
12. Industrial unions attempt to increase wages by unionizing all labor within an industry,
attempting to provide a perfectly elastic labor supply at the wage rate desired by the union. See
figure on p.514. Since they controlled supply puts pressure on firms, the union may have success
at raising wages, at the expense of jobs though, as the higher wage leads to employers hiring
fewer workers.
13. Craft and industrial unions may temper wage demands as higher wages generally lead to
reduced employment. The factors which determine whether they will or will not reduce
demands for higher wages are growth in the economy and the elasticity of demand for labor. If
the economy is growing unions probably aim for higher wages, as they would if the demand for
their labor was inelastic.
14. A bilateral monopoly is a situation where there a monopsonist hiring labor, and an inclusive
union controlling the labor supply. Wage is determined through the bargaining between the
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monopsonist and the union and will more than likely end up somewhere between what the
monopsonist desires and what the unions want. This may be fairly close to what the wage would
be in a competitive labor market!
In a purely competitive wage market the graph would look something like that in fig 26.7, p.514,
where Wu is the minimum wage. As you can see employment is reduced from where it would
normally be at Wc. When considering the monopsonist market, fig 26.8 on p. 515 would apply.
We could assume that the minimum wage might be set at Wu or Wc, which although represent
higher levels of output, but result in lower employment.
Regarding the minimum wage controversy, economists do think that at some point as minimum
wage increases employment will drop. Evidence is scant though in the 80’s there was a weak
correlation; which doesn’t seem to hold with later data. As an antipoverty measure it is not very
effective because many who work at minimum wage are not in antipoverty households.
The term noncompeting groups refers occupations or jobs which since they are very different do
not influence one another regarding wage determination. For example the supply and demand
for professional baseball players would have no effect on that of heart surgeons.
Wage are often used to equalize differences in characteristics of jobs ; which is called
compensating differences. For example a coal miner because of the danger to health and body
would be paid much greater than say a store clerk at Kohl’s whose environment is clean, and
safe, and poses no health risk.
The four type sof imperfections in labor markets are ; lack of job information, geographic
immobility, unions/govt restraints, and discrimination. For examples of each read p. 520.
The principal agent problem relates to the fact that the principal (company) hires you (the
agent) to best meet the needs and goals of the company. The problem lies in that the agent may
not do this and look after his/her own needs. For example; avoiding work (shirking), taking
company property, etc. To avoid this problem principals can use incentive pay, bonuses,
commissions, or piece work to give the agent more incentive to meet needs/goals of principal
and not to shirk. Efficiency wages are thought to force the employer to better utilize employees
since they have to pay them more. Employers will then use these higher paid employees more
efficiently.