Exam 10: Input Demand: the Labor and Land Markets

Suppose that a hurricane destroys part of the tobacco crop in North Carolina. What will happen to the price of tobacco? What will happen to the marginal product of tobacco field workers as a result of the hurricane? Can we tell what will happen to the demand for tobacco field workers? Explain.

What happens when a firm encounters diminishing returns? What causes diminishing returns?

Using Figure 10.2 determine the number of workers that a representative firm would wish to hire. Explain your answer.

Graphically illustrate and explain the effect of an increase in the wage rate on the demand curve for labor.

Explain the output effect of a factor price increase.

Comment on the following statement: "A firm's demand for labor can be affected by the availability of other inputs."

Explain the output and factor substitution effects of an increase in the price of capital on the Demand for labor by a firm that produces output using both capital and labor.

Bobby's Barber Shop sells haircuts in a competitive market. The price of a haircut is $10.00 each. Daily output varies with the amount of labor hired as follows: Fill in the columns for total revenue and marginal revenue product. If the wage for a barber is $50 per day, how many barbers should the barbershop employ? Explain.

Using Table 10.2 above calculate the unit cost of production for each type of technology assuming that the price of capital is $1 per unit and the price of labor is $2 per unit. Which technology would the firm use and why?

What does the productivity of an input measure?

Suppose that the price of capital falls. Does this necessarily imply that the demand for labor will fall? Explain.

The American Pencil company produces pencils in a purely competitive market. The price of pencils is 10 cents. Hourly output varies with the amount of labor hired as follows: Fill in the columns for marginal product of labor and marginal revenue product.

Assume Ford Motor company purchases a robot that can do the welding work of ten union workers. If the robot is a perfect substitute for labor what can we be sure is true about the annual cost of using and maintaining one robot?

Using Table 10.2 above calculate the unit cost of production for each type of technology assuming that the price of capital and labor are both $1 each per unit of input. Which technology would the firm use and why?

What is technological change?

What is the marginal product of labor?

A firm purchasing labor in a competitive market has the following marginal revenue product curve: The current equilibrium wage is $10 and the firm is currently hiring 6 workers. The manager tells you that he is considering hiring another worker and asks your advice. Should he? Explain.

Mike's Pretzels employs labor at a wage rate of $8 per hour and rents capital for $20 per hour. At its current level of labor and capital, the marginal product of labor is 24 and the marginal product of capital is 55. Is the firm currently maximizing profit? Explain.

If the firm is using only one variable input, explain why the condition W = MRPL is the same condition as P = MC.

Frank's Burgers employs workers in a competitive market. It currently has 15 employees. The marginal revenue product of the 15th worker hired is $8.50 per hour. The market equilibrium wage is $10 per hour. Is this firm maximizing profit? Explain.