Deck 8: Factor Markets: Pricing and Productivity

Question 1

Explain in terms of MRC = MRP analysis how we would expect a competitive firm (one that is presently operating at a "least-cost" and "profit-maximizing" situation in its hiring of productive resources) to respond to a general rise in wage rates which, as the outcome of demographic shifts within the population, is the result of a decline in numbers of potential workers.

Answer 1

In terms of MRC = MRP analysis, a competitive firm that is presently operating at a "least-cost" and "profit-maximizing" situation in its hiring of productive resources would respond to a general rise in wage rates, resulting from a decline in numbers of potential workers due to demographic shifts within the population, in the following ways:

1. Substitution Effect: The firm would first consider the substitution effect, which means that as the wage rates rise, the firm may look for alternative, more cost-effective ways to produce its goods or services. This could involve investing in new technology or machinery that can replace some of the labor previously used.

2. Diminishing Marginal Returns: The firm would also consider the diminishing marginal returns of labor. As the wage rates rise, the firm may find that the additional cost of hiring more workers outweighs the additional output they can produce. This may lead the firm to reduce its overall workforce and focus on maximizing the productivity of its existing employees.

3. Marginal Revenue Product (MRP): The firm would analyze the marginal revenue product of labor, which measures the additional revenue generated by each additional unit of labor. If the rise in wage rates leads to a decrease in the marginal revenue product of labor, the firm may adjust its hiring practices accordingly, potentially reducing the number of workers employed.

Overall, the firm would respond to the rise in wage rates by re-evaluating its labor utilization and potentially making changes to its production processes in order to maintain its "least-cost" and "profit-maximizing" situation. This could involve a combination of reducing the overall workforce, investing in technology, and optimizing the productivity of its existing employees.

Question 2

Explain in economic terms the probable effects, ceteris paribus, of the following developments on U.S. wage rates:
a. a declining number of workers in the 20-45 age category
b. the ebbing of union power and influence
c. the increased participation rate of women in the general labor force
d. an increase in American productivity rates
e. a world-wide recession
f. a general improvement in the technology and output-creating capacity of capital investment

Answer 2

a. A declining number of workers in the 20-45 age category would likely lead to an increase in wage rates, ceteris paribus. This is because a smaller pool of workers in this age group would result in increased competition among employers for their services, leading to higher wages.

b. The ebbing of union power and influence would likely lead to a decrease in wage rates, ceteris paribus. Unions often negotiate higher wages and better working conditions for their members, so a decline in their power would result in less upward pressure on wages.

c. The increased participation rate of women in the general labor force would likely have a mixed effect on wage rates, ceteris paribus. On one hand, an increase in the labor supply could put downward pressure on wages. On the other hand, if the increased participation leads to a more efficient allocation of labor and higher productivity, it could lead to higher wages.

d. An increase in American productivity rates would likely lead to an increase in wage rates, ceteris paribus. Higher productivity means that workers are able to produce more goods and services in the same amount of time, leading to higher wages as employers seek to retain and attract skilled workers.

e. A world-wide recession would likely lead to a decrease in wage rates, ceteris paribus. During a recession, there is typically a decrease in demand for goods and services, leading to higher unemployment and downward pressure on wages.

f. A general improvement in the technology and output-creating capacity of capital investment would likely lead to an increase in wage rates, ceteris paribus. Improved technology and capital investment can lead to higher productivity and increased demand for skilled workers, leading to higher wages.

Question 3

How do you account for the ebbing of labor unions' economic and political power in the United States?

Answer 3

There are several factors that account for the ebbing of labor unions' economic and political power in the United States. One major factor is the decline of manufacturing and the rise of service-based industries. As the economy has shifted away from manufacturing, which was traditionally heavily unionized, to service-based industries, the potential membership base for unions has decreased.

Additionally, globalization and the outsourcing of jobs to countries with lower labor costs have also contributed to the decline of labor unions' power. This has made it more difficult for unions to negotiate for higher wages and better working conditions when companies can easily move their operations to countries with cheaper labor.

Furthermore, anti-union legislation and court decisions have weakened the ability of unions to organize and collectively bargain. Right-to-work laws, which allow employees to opt out of paying union dues even if they benefit from union negotiations, have also undermined unions' financial resources and bargaining power.

Lastly, changing attitudes towards unions and a decline in public support have also played a role in the decline of labor unions' power. Negative perceptions of unions as being corrupt or inefficient have made it more difficult for them to attract new members and maintain their influence in the political and economic spheres.

Overall, a combination of economic, legislative, and social factors have contributed to the ebbing of labor unions' economic and political power in the United States.

Question 4

Use graphs to illustrate how the price of an economic resource is determined in a competitive market and dictated to the individual firm as its marginal resource cost to employ the resource. Why does the firm not have to pay more than the market price? What would happen if the firm tried to pay less?

Question 5

Use a graph to illustrate the determination land rent. What occurs if the demand for land rises? Define an economic rent.

Question 6

Use a graph to show the wage-raising tactics of an exclusive or craft union. Use a graph to show how this is different from the approach of an industrial union.

Question 7

Explain the circumstances under which bilateral monopoly might arise. Use a graph to show why it might be difficult to discern the outcome when bilateral monopoly exists.

Question 8

Table 1 contains the total product and product price for a firm in the short run with a fixed amount of capital.
a. Complete the table.
b. Explain why the marginal revenue product schedule declines.
c. How many workers will the firm hire at a wage rate of $75?

Question 9

Table 2 contains the total product and product price for a monopoly firm in the short run with a fixed amount of capital.
a. Complete the table.
b. Explain why the marginal revenue product schedule declines.
c. How many workers will the firm hire at a wage rate of $75?
a.

Question 10

Marginal Resource Cost (MRC) refers to the cost of hiring an additional unit(s) of a productive factor.

Question 11

A decrease in demand for American autoworkers would be the expected result of a decline in U.S. auto sales.

Question 12

A firm should continue to hire both labor and capital so long as the MRP of these factors is greater than zero.

Question 13

Marginal product refers to the increase in output resulting from hiring the last resource unit.

Question 14

If a factor's productivity falls, ceteris paribus, a firm should buy more of this factor.

Question 15

The demand curve for lendable funds, like the demand curve for labor, is determined by capital's MRP.

Question 16

The supply curve (MRC) for capital is downsloping to the right, thus reflecting the fact of a direct relationship between interest rates and savers' willingness to save.

Question 17

Hiring an additional unit of a resource will always lead to some increase in output.

Question 18

The supply curve for land on Manhattan Island is perfectly elastic.

Question 19

The least-cost rule, if followed, is not necessarily going to produce the maximum
profits to a firm.

Question 20

If wage increases exceed productivity increases and firms make no adjustments in their hiring of productive factors, it is reasonable to expect that firms will have to
raise final goods prices or suffer a decline in profits.

Question 21

Economic rent is any payment to a resource supplier that exceeds the opportunity cost of selling that resource.

Question 22

Studies have found that since 2001 the outsourcing of U.S. jobs to foreign countries is a substantial relative to the size of the U.S. labor market

Question 23

Studies have found that immigration puts a comparatively small downward pressure the wages of native workers.

Question 24

A labor market with only one employer is a monopsonist.

Question 25

Coercive labor markets account for at least 600,000 to 800,000 people forced into human trafficking.

Question 26

An exclusive or craft union tries to raise wages by restricting labor supply through certification, licensure, and apprenticeships.

Question 27

The Marginal Resource Cost (MRC) of a factor input:

A) always equals MRP
B) will decline if additional units of that factor are hired
C) is determined by the factor's productivity
D) all of the above
E) none of the above

Question 28

The demand for any factor of production is related to:

A) demand for final goods produced by that factor
B) the productivity of the factor
C) the price of other substitutable factors
D) all of the above
E) none of the above

Question 29

The supply of a particular factor of production is to some extent determined by:

A) its productivity
B) its opportunity cost
C) the price of the final goods that factor will be hired to produce
D) all of the above
E) none of the above

Question 30

A firm is best served in hiring productive factors where:

A) MRC = MRP
B) MRC is lowest
C) MRP is highest
D) the difference between MRC and MRP is greatest

Question 31

Because of a decline in world demand for automobiles due to continued world
Wide recession, General Motors announced a sizeable layoff of production workers. This is an example of:

A) the effect of changes in productivity
B) derived demand
C) the law of increasing cost
D) factor interchangeability

Question 32

A decline in the Marginal Revenue Product of workers employed in an auto factory could be the result of:

A) a rise in the price of autos
B) a decline in worker productivity
C) a rise in wages as the result of a newly negotiated union contract
D) all of the above
E) none of the above

Question 33

A firm should hire a resource:

A) so long as that resource's marginal product continues to rise
B) until MRP = 0
C) until that resource's MRP equals its MRC
D) as long as it is low priced

Question 34

Which of the following may cause the MRP of a resource to rise?

A) an increase in demand for the final goods that resource is hired to produce
B) a rise in the price of the final goods the resource produces
C) an increase in the resource's productivity
D) all of the above
E) none of the above

Question 35

If wage rates rise, ceteris paribus:

A) the MRP of labor must rise
B) the MRC of labor will be reduced
C) more workers will find jobs
D) all of the above
E) none of the above

Question 36

The supply of land available for use on Manhattan Island (NY) is:

A) highly elastic
B) moderately elastic
C) perfectly inelastic
D) similar to the supply of any other factor of production

Question 37

Which is not an objective or an effect of inclusive unionism?

A) organizing all workers in a particular industry
B) creation of a wage higher than the market competitive wage
C) opposition to a federally mandated minimum wage
D) excluding non-union workers from employment in unionized firms

Question 38

Which of the following is not a determinant of the elasticity of resource demand?

A) rate of increase in the labor supply curve
B) elasticity of product demand
C) substitutability of other resources
D) ratio of resource cost to total production cost
E) time

Question 39

If MRP_C/P_C > MRP_L/P_L , the firm could increase its profits by using:

A) more L and less C
B) more of both C and L
C) less of both L and C
D) more of C and less of L

Question 40

Given a fixed amount of capital, a firm will employ additional units of labor when labor's:

A) marginal product exceeds the wage rate
B) marginal revenue product exceeds labor's marginal product
C) marginal revenue product exceeds the wage rate
D) marginal product exceeds capital's marginal product
E) union tells them to quit

Question 41

Beyond some point, marginal product declines because:

A) the law of diminishing returns
B) diseconomies of scale
C) the law of diminishing marginal utility
D) any of the above may cause marginal product to decline

Question 42

If the skills, motivation, and abilities of labor increased and the supply of labor is unchanged, then:

A) labor would receive a higher wage
B) the MRP schedule would shift to the left
C) more labor would be employed
D) the wage schedule would shift upward

Question 43

The industry's demand for a factor of production is:

A) is identical to the individual firm's demand for labor
B) always coincides with the market demand for the product
C) is necessarily horizontal at the going factor price
D) is a summation of the factor demand curves of the individual firms

Question 44

A firm with a monopoly over the product market has a demand for labor that is derived by:

A) multiplying the marginal product of labor by the product price
B) calculating the additional total revenue contributed by each additional labor input and plotting it over the units of labor input
C) dividing marginal product by the units of output
D) multiplying marginal product by the wage rate

Question 45

Assuming identical production and cost data:

A) a monopoly will have the same demand for labor as a competitive firm
B) the monopolist's demand for labor would lie above the labor demand of a competitive firm
C) the monopolist and competitive firm will hire the same number of workers
D) allows no generalizations to be made about factor markets for monopoly sellers or competitive sellers
E) the monopolist's demand for labor will reside below that of a competitive firm and decline more rapidly

Question 46

Answer the next three questions based upon the following diagram of monopsony in the labor market.


-A nondiscriminating, unregulated monopsonist will:

A) employ Q_M workers at a wage of W_M
B) employ Q_C workers at a wage of W_C
C) employ Q_M workers at a wage of W_U
D) employ Q_Z workers at a wage of W_M

Question 47

Answer the next three questions based upon the following diagram of monopsony in the labor market.


-Assume an inclusive union is able to completely counter the market power of the monopsonist. What will be the result?

A) employ Q_M workers at a wage of W_M
B) employ Q_C workers at a wage of W_C
C) employ Q_M workers at a wage of W_U
D) employ Q_Z workers at a wage of W_M

Question 48

Answer the next three questions based upon the following diagram of monopsony in the labor market.


-Suppose the market power of the monopsonist and the industrial union are symmetrical, cancelling one another's wage-making power and delivering allocative efficiency. The result is represented by:

A) employ Q_M workers at a wage of W_M
B) employ Q_C workers at a wage of W_C
C) employ Q_M workers at a wage of W_U
D) employ Q_Z workers at a wage of W_M