ECON 202 Chapter Notes - Chapter 4: Marginal Product

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lilacmouse857

28 Jun 2018

School

University of Waterloo

Department

Economics

Course

ECON 202

Professor

Fiona T Rahman

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We can see how the wage rate and employment in each sector are determined given the

prices of food and cloth

○

From the left we show the value of the marginal product of labour in cloth which is MPLc x

Pc which Is the demand for labour in the cloth sector. Same for food measuring from the

right.

○

At point 1, the sum of labour demanded in cloth (L1c) and food (L1f) just equals the total

labour supply L.

○

•

The relationship between relative prices and output that emerges from this analysis of labour

allocation

•

The left side of 4

6 is the slope of the PPF at the actual production point

○

The right side is minus the relative price of cloth

○

This result shows that at the production point, the PPF must be tangent to a line whose

slope is minus the price of cloth divided by that of food. See figure 4-5

○

ECON 231 Page 5

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Document Summary

We can see how the wage rate and employment in each sector are determined given the prices of food and cloth. From the left we show the value of the marginal product of labour in cloth which is mplc x. Pc which is the demand for labour in the cloth sector. At point 1, the sum of labour demanded in cloth (l1c) and food (l1f) just equals the total labour supply l. The relationship between relative prices and output that emerges from this analysis of labour allocation. The left side of 4-6 is the slope of the ppf at the actual production point. The right side is minus the relative price of cloth. This result shows that at the production point, the ppf must be tangent to a line whose slope is minus the price of cloth divided by that of food. Econ 231 page 5 slope is minus the price of cloth divided by that of food.

Related Questions

Go back to the numberical example with no factor substitution that leads to the production possibility frontier in Figure 5-1. a. What is the range for the relative price of cloth such that the economy produces both cloth and food? Which good is produced if the relative price is outside of this range? For parts (b) through (f), assume that the price range is such that both goods are produced. b. Write down the unit cost of producing one yard of cloth and one calorie of food as a function of the price of one machine-hour, r, and one work-hour, w. In a competitive market, those costs will be equal to the prices of cloth and food. Solve for the factor prices r and w. c. What happens to those factor prices when the price of cloth rises? Who gains and who loses from this change in the price of cloth? Why? Do those changes conform to the changes described for the case with factor substitution? d. Now assume that the economy's supply of machine-hours increases from 3,000 to 4,000. Derive the new production possibility frontier. e. How much cloth and food will the economy produce after this increase in its capital supply? f. Describe how the allocation of machine-hours and work-hours between the cloth and food sectors changes. Do those changes conform with the changes described for the case with factor substitution?

You are given the information shown in the table about production relationship in Pugelovia and Pomerania below:

	Labor Hours Per Unit of Rice	Labor Hours Per Unit of Cloth
Pugelovia	75	100
Pomerania	50	50

You make several Ricardian assumptions: these are the only two commodities, the productivity of labor is constant for each product no matter how much is produced, and competition prevails in all markets.

1)Compute the productivity of each country for each product. Which country has an absolute advantage at producing rice? Which country has an absolute advantage at producing cloth?

2)Compute the relative prices of each product in each country without trade. Which country has a comparative advantage at producing rice? Which country has a comparative advantage at producing cloth?

3)According to the theory of comparative advantage, which country would export rice? Which country would export cloth?

4)If Pugelovia and Pomerania are allowed to trade, what would be the limits for the relative price of rice? What would be the limit for the relative price of cloth?

5)Assume that no trade is allowed between the countries and that Pugelovia has 10,000 hours of labor available to use. If people want to consume rice and cloth in equal amounts, how much rice and how much cloth would Pugelovia produce?

6)Plot the production possibility curve for Pugelovia if it has 10,000 hours of labor available. Label the economyâs production of rice and cloth from part e point A on the PPC.

cerisegiraffe33

1. The addition to the revenue obtained from firing an additional unit of labour is:

a. marginal revenue product

b. marginal physical product of labour

c.total product

d. marginal factor cost

2. The firm's demand curve for labour is:

a. the demand curve for the good produced divided by the price of the good

b.the marginal revenue product curve for labour

c.the marginal physical product curve for labour divided by the good

d. the marginal physical product curve for labour multiplied by the price of labour

3. If the price of the product is $1.50 and the marginal factor cost of an additional unit of input is $105, how many units of labour should be hired?

Labor input (workers/day)_______________________________-total physical product (output/day)

10 __________________________________________________500

11__________________________________________________600

12__________________________________________________690

13___________________________________________________760

14___________________________________________________800

a. 14

b.12

c.13

d.11

4. the price elasticity of demand for labour equals

a. the change in quantity demanded of labour divided by the change in the price of labour

b. the slope of the demand curve for labour

c. the percentage change in the price of labour divided by the percentage change in the supply of labour

d. the per cent change in the quantity demanded of labour divided by the percentage change in the price of labour

5. We would expect that a rise in labour supply will have a proportionately larger effect on the market wage rate when:

a. the supply for labour is elastic

b.the demand for labour is unitary elastic

c.the demand for labour is elastic

d.the demand for labour is inelastic

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ECON 202 Chapter Notes - Chapter 4: Marginal Product

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