factor markets aka resource markets… aka input markets

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Factor Markets aka Resource Marketsaka Input Markets

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Factor Markets

aka Resource Markets…

aka Input Markets

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question: Factors of Production

• If you decide to open a pizza shop in Millersville, what factors of production will you need? Labor Land Capital (Physical & Human)

• If demand increases for your pizza, how will that affect your demand for any of these factors??

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

The Factor Market

• The following terms describe the PRICE paid by firms to hire each type of factor/resource:

• Labor - WAGES

• Land - RENT

• Capital - INTEREST

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

The Labor Market

• **The AP Exam will usually use Labor in their examples, so we will often use labor as well. But know that these ideas would be the same for hiring Capital or Land as well.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

The Labor Market

• When firms decide what combination of resources to use to create their product, they must “hire” these resources from a factor market.

• One big difference between the labor market and the product market is, in the LABOR MARKET:

households are the ‘sellers’ firms are the ‘buyers’

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Labor Market Graph

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Adjusting for Inflation

• Wage – The price of labor defined as currency per unit of labor worked. NOMINAL Wage – The price of

labor not adjusted for inflation. REAL wage – The price of labor

adjusted for inflation; Economists use the CPI to adjust numbers from prices/wages from different times into a consistent unit of measure (ie. “2010 dollars”)

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Average Wage (1964-2006)

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Wage Trends

Other US labor market trends:

1) Workers with higher skills are paid more than unskilled workers. This gap is increasing.

2) College graduates earn more than high school graduates and the gap has been increasing.

3) Women, on average, are paid lower than men, although the gap has become more narrow over the years.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Derived Factor Demand

• The factor market is a DERIVED MARKET. This means that the demand for the product determines the demand for the factor (ie. labor).

• For example: If consumers demand more pizza, firms will demand more labor, ovens, etc. to produce the pizza.

• However, if consumers demand less pizza, firms will demand less labor, ovens, etc. to produce the pizza.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Draw: Market & Factor Graphs

Product Market for Pizzas

Factor Market for ________________

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

MRP = MRC Rule

• MRP (Marginal Revenue Product) MRP = ∆ TR / ∆ Q of Factor MRP = MP x MR (or MP x P … in Perf.

Competitive Labor Market) Definition: Additional REVENUE created by

hiring one additional unit of a resource (land, LABOR, capital)

• MFC (Marginal Factor Cost) [aka MRC] MFC = ∆ TC of that factor / ∆ Q of Factor

• Also: MFC = Wage (W) of additional worker when dealing with LABOR.

Definition: The cost of hiring an additional unit of a resource. (WAGE, interest, …)

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Optimal Employment Rule

• When only ONE resource is variable AP Exam will use *LABOR* most often.

• Firms will ALWAYS profit-maximize when it hires until MRP = MFC (or as close as they can get).

• But never when MFC is greater than MRP

In other words, firms will continue to hire labor as long as the MFC is not greater than its MRP.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Least-Cost Rule

• A firm is always minimizing its cost at a specific output when the last dollar spent on one factor and the last dollar spent on another factor both result in the same Marginal product. For example, using Labor (L) & Capital (K)

MPL/PL = MPK/PK

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Practice Question

Taken from 2000 Exam:

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Individual Labor Supply Curve(backward bending)

• Shows trade-off between income and leisure.• Why does it bend backwards when wage is

above W2?

• For you… what do you think your W2 is?

S

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

MRP (Marginal Revenue Product)• As a firm increases the # of workers per day, it can

produce more widgets per day. Assume that the fixed cost = $10, and labor is the only Variable Cost. Selling Price = $2/widget, and each worker is paid $100/day.

#workers (Q) TP MP TR MRP

0 0

1 80

2 180

3 250

4 310

5 350

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

MRP (Marginal Revenue Product)• As a firm increases the # of workers per day, it can

produce more widgets per day. Assume that the fixed cost = $10, and labor is the only Variable Cost. Selling Price = $2/widget, and each worker is paid $100/day.

#workers (Q) TP MP TR MRP

0 0 --

1 80 80

2 180 100

3 250 70

4 310 60

5 350 40

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

MRP (Marginal Revenue Product)• As a firm increases the # of workers per day, it can

produce more widgets per day. Assume that the fixed cost = $10, and labor is the only Variable Cost. Selling Price = $2/widget, and each worker is paid $100/day.

#workers (Q) TP MP TR MRP

0 0 -- 0

1 80 80 160

2 180 100 360

3 250 70 500

4 310 60 620

5 350 40 700

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

MRP (Marginal Revenue Product)• As a firm increases the # of workers per day, it can

produce more widgets per day. Assume that the fixed cost = $10, and labor is the only Variable Cost. Selling Price = $2/widget, and each worker is paid $100/day.

#workers (Q) TP MP TR MRP

0 0 -- 0 0

1 80 80 160 160

2 180 100 360 200

3 250 70 500 140

4 310 60 620 120

5 350 40 700 80

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

MRP (Marginal Revenue Product)• Now, assume that the selling price remains at $2/widget, but the

wage for each worker increases to $125 per day.• How many workers should this profit-maximizing firm hire?

#workers (Q) TP MP TR MRP

0 0 --

1 80 80

2 180 100

3 250 70

4 310 60

5 350 40

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Labor Market: Perfectly Competitive

Product Market Factor Market

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Labor Market: Monopsony

Product Market Factor Market

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #1

Which of the following situations illustrates the concept of derived demand?

A. If P of orange juice increases, D for apple juice increases

B. If D for shoes increases, then D for shoelaces increases.

C. If P of cars increases, D for gasoline increases.

D. If D for taxi rides increases, D for taxi drivers increases.

E. If S of hot dogs increases, D for hot dog buns increases.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #2

Each worker hired adds less to total output than the worker before, according to the:

A. Law of DemandB. Law of Diminishing ReturnsC. Law of Diminishing Marginal UtilityD. Least-Cost RuleE. Principle of Derived Demand

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #3

Marginal Revenue Product measures the additional:

A. Output produced from hiring one more worker.

B. Income to the firm from producing one more product.

C. Cost to the firm for producing one more product.

D. Wage required to hire one more worker.E. Income to the firm from hiring one more

worker.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #4

In order to maximize profit, the firm should hire the number of workers where the:

A. Marginal cost equals the marginal revenueB. Marginal revenue product equals the

marginal costC. Wage equals the product priceD. Marginal factor cost equals the marginal

revenue productE. Marginal revenue equals the marginal

factor cost.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #5

What is the marginal product of the third worker?

A. 15 unitsB. 60 unitsC. 35 unitsD. 20 unitsE. 30 units

# of workers

TP

1 25

2 45

3 60

4 70

5 75

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #6

If the firm sells its products for $10 each, and the wage per worker is $100/day, how many workers should the firm hire to maximize profits?

# of workers

TP

1 25

2 45

3 60

4 70

5 75

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #7

A firm selling products in a monopoly product market finds its marginal revenue product falling much more quickly than a firm selling in a perfectly competitive product market, because in addition to diminishing returns,

A. The government is required to regulate the product.

B. The firm becomes inefficient by trying to sell too many units of output.

C. The firm must lower the price of all products in order to sell more units.

D. Workers tend to earn higher wages in monopoly product firms.

E. Consumers prefer not to buy from monopolies.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #8

The demand for Tyrone’s auto repair shop would increase if:

A. The cost of capital for a complementary good significantly fell.

B. The cost of capital for a substitute good significantly fell.

C. Wages of auto repair workers significantly fell.

D. Mild weather resulted in fewer car crashes this winter.

E. Workers at the auto repair shop became less productive.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #9

When the wage increases 5 percent, the quantity of workers hired falls 1 percent. This indicates that the demand for labor is

A. Perfectly inelasticB. Relatively inelasticC. Unit elasticD. Relatively elasticE. Perfectly elastic

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #10

According to the profit-maximizing rule for hiring resources, the firm should hire labor and capital until the marginal revenue product for each equals the:

A. Market price of the product.B. Quantity of labor and capital hired.C. Price ceiling for the product.D. Profit per unit for each.E. Marginal Resource Cost

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #1

Which of the following situations illustrates the concept of derived demand?

A. If P of orange juice increases, D for apple juice increases

B. If D for shoes increases, then D for shoelaces increases.

C. If P of cars increases, D for gasoline increases.

D. If D for taxi rides increases, D for taxi drivers increases.

E. If S of hot dogs increases, D for hot dog buns increases.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #2

Each worker hired adds less to total output than the worker before, according to the:

A. Law of DemandB. Law of Diminishing ReturnsC. Law of Diminishing Marginal UtilityD. Least-Cost RuleE. Principle of Derived Demand

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #3

Marginal Revenue Product measures the additional:

A. Output produced from hiring one more worker.

B. Revenue to the firm from producing one more product.

C. Cost to the firm for producing one more product.

D. Wage required to hire one more worker.E. Revenue to the firm from hiring one

more worker.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #4

In order to maximize profit, the firm should hire the number of workers where the:

A. Marginal cost equals the marginal revenueB. Marginal revenue product equals the

marginal costC. Wage equals the product priceD. Marginal factor cost equals the marginal

revenue productE. Marginal factor equals the marginal

resource cost.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #5

What is the marginal product of the third worker?

A. 15 unitsB. 60 unitsC. 35 unitsD. 20 unitsE. 30 units

# of workers

TP

1 25

2 45

3 60

4 70

5 75

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #6

If the firm sells its products for $10 each, and the wage per worker is $100/day, how many workers should the firm hire to maximize profits?

4 WorkersBecause…MRP= 10 X $10MFC = $100

# of workers

TP

1 25

2 45

3 60

4 70

5 75

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #7

A firm selling products in a monopoly product market finds its marginal revenue product falling much more quickly than a firm selling in a perfectly competitive product market, because in addition to diminishing returns,

A. The government is required to regulate the product.

B. The firm becomes inefficient by trying to sell too many units of output.

C. The firm must lower the price of all products in order to sell more units.

D. Workers tend to earn higher wages in monopoly product firms.

E. Consumers prefer not to buy from monopolies.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #8

The demand for Tyrone’s auto repair shop would increase if:

A. The cost of capital for a complementary good significantly fell.

B. The cost of capital for a substitute good significantly fell.

C. Wages of auto repair workers significantly fell.

D. Mild weather resulted in fewer car crashes this winter.

E. Workers at the auto repair shop became less productive.

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #9

When the wage increases 5 percent, the quantity of workers hired falls 1 percent. This indicates that the demand for labor is

A. Perfectly inelasticB. Relatively inelasticC. Unit elasticD. Relatively elasticE. Perfectly elastic

Factor Markets:

KEY CONCEPTS

1. Factor Demand is Derived from Product Demand

2. MRP = Marginal Revenue Product

MFC = Marginal Factor Cost

3. Optimal Employment Rule:

Hire until MRP=MRC

4. Least Cost Rule

(MP/P)L = (MP/P)K…

5. Indiv. Labor Supply

6. Perfectly Competitive Labor Market vs. Monopsony

Question #10

According to the profit-maximizing rule for hiring resources, the firm should hire labor and capital until the marginal revenue product for each equals the:

A. Market price of the product.B. Quantity of labor and capital hired.C. Price ceiling for the product.D. Profit per unit for each.E. Marginal Factor Cost