ECON 2001.01 Lecture Notes - Lecture 18: Perfect Competition, W. M. Keck Observatory, Marginal Product

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orchidmanatee705

8 Nov 2016

School

Ohio State University

Department

Economics

Course

ECON 2001.01

Professor

William White

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ECON 2001.01 Full Course Notes

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Assumptions about labor market: firm"s goal is to maximize pro t, market for labor is competitive, rm is in perfect competition in its product or service market, so, rm is a price takes in the wage market. It must pay each worker in the market wage: firms choose the quantity of labor to employ. Must be enough to produce its desired quantity of output. Value of the marginal product of labor (vmpl: marginal product of labor times price of the output, also called marginal revenue product. Additional revenue from increasing output by one unit: decrease as output increases, since price is constant and mpl is decreasing, once the vmpl falls below the wage, there is no need to hire an additional worker. Technology change and labor demand: ex. 1: firm develops technology that reduces raw material usage & increases productivity. Mpl increases as each worker is more productive. Labor demand will likely shift out: ex.

Related Questions

A competitive firmâs short-run demand for labor will rise when the price of its product rises.

	True
	False

As the wage rate rises, the marginal revenue product of labor increases.

	True
	False

A competitive firmâs demand for labor always slopes down in the short-run, but may slope upwards or downwards in the long run.

	True
	False

When labor an capital are complements in production, a higher wage will cause a firm to use more capital in the long run.

	True
	False

If labor is a regressive factor, then a firmâs long-run demand for labor may or may not be downward sloping.

	True
	False

The short-run demand curve for labor for a firm in any type of market for its output coincides with

	the upward-sloping portion of the marginal revenue product curve.
	the downward-sloping portion of the marginal revenue product curve.

	the downward-sloping portion of the marginal product curve.
	the marginal labor cost curve.

An increase in the price of labor will, in the short run, cause a competitive firmâs

	marginal cost to increase, the quantity it sells to decrease, and therefore reduce the quantity of labor demanded.
	price of its output to increase, leaving the quantity of labor demanded unchanged.

	marginal revenue product of labor to decrease, and therefore reduce demand for labor.
	marginal revenue product of labor to increase, and therefore increase demand for labor.

Which of the following would cause the firmâs short-run demand curve for labor to shift to the right?

	A decrease in the wage rate.
	An increase in the price of the firmâs product.

	An increase in the rental rate paid to capital.
	A decrease in the amount of complementary capital available.

If increased capital usage reduces the firmâs short-run demand for labor, then

	labor is a regressive factor.
	labor and capital are complements in production.

	labor and capital are substitutes in production.
	labor is a Giffen factor.

When is the law of demand violated for labor? That is, with regards to the law of labor demand, when does an increase in the wage not lead to a reduction in the quantity of labor demanded?

	Never.
	When the substitution and scale effects are in opposition, with the scale effect being the larger.

	When labor is a regressive factor.
	When labor earns zero economic rent.

If the wage rate rises, then the firmâs long-run marginal costs change, which in turn affects the firmâs output level and its employment of labor. This phenomenon is known as

	the substitution effect.
	the scale effect.

	the regressive-factor effect.
	the factor-price effect.

When will the scale effect of a wage increase cause a reduction in the quantity of labor demanded?

	Always.
	When labor is not a regressive factor.

	When labor and capital are substitutes in production.
	When labor and capital are complements in production.

Consider the usual case where a higher wage rate increases a firmsâ marginal costs. In this case, the industryâs demand curve for labor

	is more wage inelastic than the individual firmsâ demand curves would indicate.
	coincides with the horizontal sum of individual firmsâ demand curves.

	contains only substitution effects but no scale effects.
	is horizontal at the going wage rate.

To maximize profits, a monopolist will hire the quantity of labor at which marginal revenue product of labor

	is downward sloping and equal to the market wage rate.
	is downward sloping and equal to marginal labor cost.

	minus marginal labor cost is maximized.
	is maximized.

A firmâs revenue minus its factor payments equals

	zero.
	the profits or losses earned by the firm.

	the quasi-rents earned by the factors of production.
	the firmâs total revenue.

As the amount of labor used in production increases, total product

	increases at low levels of labor and decreases at higher levels of labor.
	increases at high levels of labor and decreases at low levels of labor.

	always increases.
	always decreases.

A profit-maximizing price taker will produce at a level where

	the wage equals the marginal product of labor.
	the marginal revenue product of labor equals the price of their output.

	the wage rate equals the price of their output.
	the marginal revenue product of labor equals the wage rate.

If the wage rate is $10 per hour and one worker can produce 2 units of output per hour, then the marginal cost of production is

	$5.
	$10.

	$20.
	The answer cannot be determined from the information given.

A firmâs long-run demand for labor is more wage-elastic than its short-run demand for labor.

	True
	False

A monopsonistâs short-run demand curve for labor coincides with its marginal revenue product of labor curve.

	True
	False

Workers will receive higher wages when an employer faces an upward-sloping supply curve for labor.

	True
	False

The profit an owner receives is equivalent to the rent received for her entrepreneurial services.

	True
	False

When high levels of labor are employed, total production tends to increase at a decreasing rate.

	True
	False

The substitution effect on labor always decreases the quantity of labor demanded when the wage rate increases.

	True
	False

A firmâs marginal revenue product of labor equals the marginal product of labor multiplied by the per-unit cost of labor.

	True
	False

Tastes and preferences are relevant to individual choices for consumption but not relevant to choices for supplying labor.

	True
	False

A higher wage will always cause a worker to increase the quantity of labor supplied.

	True
	False

The substitution and income effects of a wage increase both cause consumption to rise.

	True
	False

A workerâs labor supply may either rise or fall when nonlabor income increases, depending on whether the substitution effect or the income effect dominates.

	True
	False

When an increase in marginal productivity increases workersâ nonlabor income, the effect on the quantity of labor supplied is ambiguous/uncertain.

	True
	False

A technological improvement that is permanent is more likely to raise employment than one that is temporary.

	True
	False

Other factors being constant, firms that provide on-the-job training to workers will tend to pay higher wages.

	True
	False

If there is discrimination, employers engage in it a cost.

	True
	False

Human capital tends to increase over the course of a personâs life.

	True
	False

In the indifference curve budget line model of labor supply,

	labor is measured along the horizontal axis and leisure is measured along the vertical axis.
	labor is measured along the horizontal axis and consumption is measured along the vertical axis.

	consumption is measured along the horizontal axis and labor is measured along the vertical axis.
	consumption is measured along the horizontal axis and leisure is measured along the vertical axis.

In the indifference curve budget line model of labor supply, the slope of the indifference curve is used to measure

	the wage rate.
	laborâs marginal product.

	the workerâs nonlabor income.
	the marginal value of leisure.

If a worker has chosen a quantity of labor where the marginal value of leisure exceeds the wage rate, she would be better off by

	choosing less leisure.
	providing fewer hours of labor.

	providing more hours of labor.
	staying at this combination of labor and consumption.

When there is an increase in the wage rate there will be

	both a substitution effect and an income effect.
	only a substitution effect.

	only a substitution effect.
	either a substitution effect or an income effect.

When the wage rate rises, the substitution effect leads a worker to

	increase consumption while the income effect leads to a decrease in consumption.
	decrease consumption while the income effect leads to an increase in consumption.

	increase consumption, as does the income effect.
	substitution sleep for other leisure.

Consider the indifference curve budget line model of labor supply, and assume consumption and leisure are both normal goods. A higher wage rate would result in

	more consumption and less leisure.
	a reduction in the workerâs marginal value of leisure.

	reduced consumption if the income effect is larger than the substitution effect.
	increased labor only if the substitution effect outweighs the income effect.

When the wage rate rises, a worker chooses to replace some leisure hours with work hours, even if he would remain equally well off. This phenomenon is known as

	compensating differential.
	the income effect.

	the substitution effect.
	intertemporal substitution.

Which of the following will shift a workerâs labor supply curve to the left?

	Higher nonlabor income.
	A lower wage rate, assuming the substitution effect dominates the income effect.

	New machinery that substitutes for labor and lowers its marginal product.
	A decrease in the marginal value of leisure.

Which of the following would cause a rightward shift in the labor demand curve?

	Manna from heaven.
	A rise in the wage rate.

	A rise in workersâ marginal productivity.
	A decline in workersâ nonlabor incomes.

When some jobs are inherently more risky or unpleasant than other jobs, different workers will be paid different wages because of

	differences in human capital.
	differing access to capital.

	compensating differentials
	discrimination.

Discrimination is difficult to measure empirically because

	it is hard to measure and control for differences in marginal productivity.
	data on racial and gender differences is rarely available.

	discrimination is practiced by very few employers.
	economists find no significant wage differentials due to gender or race.

Intertemporal substitution dictates that

	people will work less in periods of high productivity.
	people will spend more in periods of high productivity.

	people will work more in periods of high productivity.
	people will spend less in periods of high productivity.

A decrease in the wage rate causes the budget line to

	become flatter.
	become steeper.

	shift upward.
	shift downward.

An increase in the marginal productivity of labor will tend to

	shift the labor supply curve rightward if the change is temporary.
	result in an increase in employment if the change is temporary.

	result in an increase in employment if the change is permanent.
	all of the above.

A downward shift in a workerâs budget line is a result of

	an increase in the wage rate.
	a decrease in the wage rate.

	an increase in nonlabor income.
	a decrease in nonlabor income

One deficiency of the labor-leisure indifference curve analysis is that because indifference curves are always tangent to the workerâs budget line, the model cannot explain why some people choose not to work.

	True
	False

pinkcheetah77

1. Suppose that a 10% increase in the wage results in a 5% reduction in employment. In this case, labor demand is said to be:

A. elastic

B. inelastic

C. unit elastic

2. Which of the following best explains why elasticity varies along a linear demand curve?

A. As the quantity of labor demanded rises, the percentage change in quantity demanded declines (for a given change in labor use) while the percentage change in wage increases.

B. As the quantity of labor demanded rises, the percentage change in quantity demanded rises (for a given change in labor use) as does the percentage change in the wage.

C. As the quantity of labor demanded rises, the percentage change in quantity demanded declines (for a given change in labor use) as does the percentage change in the wage.

D. As the quantity of labor demanded rises, the percentage change in quantity demanded declines (for a given change in labor use) while the percentage change in wage decreases

3. Labor demand is more elastic when:

A. the substitution effect resulting from a wage change is larger

B. the scale effect resulting from a wage change is larger

C. both are correct

D. none of the above

4. The scale effect associated with a change in the wage is larger when:

A. the demand for the final product is more elastic

B. labor costs are a smaller share of total costs

C. there are many close substitutes for this category of labor

D. economics of scale are present in the production of the good

5. The price elasticity of demand for the final products affects the own-wage elasticity of demand for labor by affecting the magnitude of:

A. the substitution effect that occurs in the labor market

B. the scale effect that occurs in the labor market

C. both substitution and scale effects

D. neither substitution nor scale effects

6. Unions are expected to attempt to:

A. make it more difficult to replace labor with other resources

B. reduce the elasticity of demand for the final product

C. support laws that reduce the elasticity of supply of other resources

D. all of the above.

E. none of the above

7. Unions are likely to be less successful in negotiating higher wages in those labor markets in which:

A. the demand for the final product is more elastic

B. there are few close substitutes for union workers

C. the price elasticity of supply for other factors of production is relatively high

D. labor costs comprise a small share of total costs

browncoyote590

(1)

Which of the following employment situations would most closely approximate a monopsony?

	a steel mill in Yokahama, Japan.
	a fast food restaurant in a big city.
	a farmer hiring seasonal workers.
	a large factory in a small town.

(2)

If a monopsonist hires labor, it will choose to hire that quantity at which ___________ and pay a wage rate that is _______________.

	MR = MC; equal to the MRP curve.
	the supply curve intersect the MRP; less than MFC
	MRP = MFC; less than MRP
	the supply curve intersect the MRP; equal to MRP

(3)

Suppose a firm employs both labor and capital. If the ratio of marginal product to price of labor is 50/$10 and the ratio of marginal product of capital to price of capital is 60/$12, the firm should

	maintain the current combination capital and labor.
	buy more labor and less capital because labor is cheaper.
	buy more capital and less labor because capital is cheaper.
	buy more capital because it is more productive than labor.

(4)

Derived demand for labor means that when a firm hires labor, it has to derive its demand

	mathematically.
	based on the labor supply.
	from the demand for the product that the labor produces.
	based on the minimum wage.

(5)

For a firm in perfect competition, the value of the marginal product is

	the value of an additional unit of output measured in terms of additional cost.
	the total value of the total output output divided by the total output.
	additional revenue minus additional cost as a result of an increase in output.
	the price of the product multiplied by the additional output resulting from an additional unit employed.

(6)

A firm that is perfectly competitive will hire labor as long as which of the following is true?

	VMP < W.
	VMP > W.
	MC > MR.
	VMP < MRP.

(7)

The VMP curve slopes downward at some point because

	congestion in the work place lowers marginal product.
	teamwork in the work place increases marginal product.
	the firm hires less labor as the wage rate rises.
	labor supplies less amounts of labor as the wage rate falls.

(8)

Which of the following would not be considered capital in a business?

	The employees
	The factory
	A machine
	Tools

(9)

The increase in the value of a firmâs capital as it increases in age and use is depreciation.

	true
	false

(10)

On a labor market graph, a firmâs demand for labor is

	the wage rate.
	the marginal revenue product curve.
	the marginal product curve.
	indeterminant.

(11)

Why may a householdâs labor supply curve bend backwards at some wage rate?

	The household substitutes labor for leisure.
	The household substitutes leisure for labor.
	Employers demand fewer employees at higher wage rates.
	Households want to supply more labor as the wage rate decreases to maintain incomes.

(12)

The substitution effect is usually stronger than the income effect, thus creating an upward sloping labor supply curve.

	true
	false

(13)

An inelastic demand for labor means that an increase in the wage rate causes a less than proportionate decrease in the quantity of labor demanded.

	true
	false

(14)

Marginal revenue product is

	marginal revenue divided by marginal product.
	marginal revenue times marginal product.
	marginal product minus marginal revenue.
	marginal product plus marginal revenue.

(15)

A firm obeys the least-cost rule by equating the ratios of ___________________ to the ________________ price.

	marginal product; product
	marginal product; factor
	marginal cost; product
	marginal revenue; product

(16)

Suppose the MP of the last unit of capital hired equals 12 and the MP of the last unit of labor hired equals 16.If the price of capital is $8 per unit and the price of labor is $8 per unit, then the firm

	is maximizing its costs with this combination of factors.
	is maximizing its profits with this combination of factors.
	should hire more labor and less capital in order to minimize its costs.
	should hire more capital and less labor in order to minimize its costs.

(17)

For a firm to minimize its costs with more than one factor of production, for every factor, the ratio of the

	marginal product to factor price must be equal.
	marginal revenue product to factor price must be equal.
	marginal revenue product to output must be equal.
	marginal cost to factor price must be equal.

(18)

A monopsony is a firm that, in a specific market, is the only

	seller of a product.
	buyer of a product.
	seller of a factor of production.
	buyer of a factor of production.

(19)

Which of the following businesses would most closely approximate a monopsonist?

	A steel mill in Pittsburgh
	A fast food franchise in a large city
	A large manufacturer in a rural county
	A rancher who hires ranch help

(20)

A firm has the opportunity to buy a machine that costs $2500. It has found the present value of the income generated by the machine to be $2487. It should purchase the machine.

	true
	false

(21)

An increase in the market rate of interest causes

	a leftward shift in the demand for capital curve.
	a rightward shift in the demand for capital curve.
	a movement up the demand for capital curve.
	a movement down the demand for capital curve.

(22)

The characteristic of capital that makes it different from labor is its

	high cost.
	durability.
	rotunda.
	relatively low cost compared to labor.

(23)

The present value of $1000 one year in the future at a 10 percent interest rate is approximately

	$870.
	$909.
	$1000.
	$1909.

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ECON 2001.01 Lecture Notes - Lecture 18: Perfect Competition, W. M. Keck Observatory, Marginal Product

ECON 2001.01 Full Course Notes

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