Economics (McConnell), AP Edition, 20th Edition Chapter (10).docx

Chapter 14: The Demand for Resources Multiple-Choice Questions 1. Which of the following situations illustrates the concept of derived demand? (A) If the price of orange juice increases, the demand for apple juice increases. (B) If the demand for shoes increases, the demand for shoelaces increases. (C) If the price of cars increases, the demand for gas decreases. (D) If the demand for taxi rides increases, the demand for taxi drivers increases. (E) If the supply of hot dogs increases, the demand for hot dog buns increases. (D) The concept of derived demand is that if the demand for a product increases, the demand for workers to make that product will increase, as well. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Microeconomics: Derived Factor Demand Book Section: Resource Demand as a Derived Demand 2. Each worker hired adds less to total output than the worker before, according to the (A) Law of Demand (B) Law of Diminishing Returns (C) Law of Diminishing Marginal Utility (D) Least-Cost Rule (E) Principle of Derived Demand (B) In diminishing returns, each additional worker adds to production, but specialization has worn off, and additional workers begin to overwhelm the fixed capital. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Marginal Product and Diminishing Returns Book Section: Marginal Revenue Product 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 (E) The marginal revenue product is the marginal product added by one more worker multiplied by the price those additional products can be sold for in the product market. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Marginal Revenue Product Book Section: Marginal Revenue Product 4. In order to maximize profit, the firm should hire the number of workers where the (A) marginal cost equals the marginal revenue (B) marginal revenue product equals the marginal cost (C) wage equals the product price (D) marginal resource cost equals the marginal revenue product (E) marginal revenue equals the marginal resource cost (D) The firm maximizes profit where the additional cost to hire one more worker equals the revenue brought into the firm as a result of hiring that worker. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Rule for Employing Resources: MRP=MRC Use the table below to answer questions 5-7. The table shows the daily total product of a firm operating in perfectly competitive product and labor markets. Number of Workers Total Product 1 25 2 45 3 60 4 70 5 75 5. What is the marginal product of the third worker? (A) 15 products (B) 60 products (C) 35 products (D) 20 products (E) 30 products (A) Marginal product is the increase in total product as a result of hiring one more worker. The third worker increased production from 45 to 60 units, an increase of 15 products. Difficulty: Easy Style: Applied AP Economics Curricular Requirement Microeconomics: Marginal Product and Diminishing Returns Book Section: Marginal Revenue Product 6. If the firm sells its products for $10 each, and the firm must pay workers a wage of $100 per day, how many workers should the firm hire to maximize profit? (A) 1 worker (B) 2 workers (C) 3 workers (D) 4 workers (E) 5 workers (D) The marginal product of the fourth worker is 10 units. Each of these units can be sold for $10, so that worker's marginal revenue product is $100. If the wage is $100, the firm's profit-maximizing output of MRC = MRP is achieved with the fourth worker. Difficulty: Medium Style: Applied AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Rule for Employing Resources: MRP=MRC 7. If the firm sells its products for $10 each, and the firm must pay workers a wage of $300 per day, how many workers should the firm hire to maximize profit? (A) 0 workers (B) 1 worker (C) 2 workers (D) 3 workers (E) 4 workers (A) The firm should shut down because its marginal revenue product ($250) cannot cover the variable cost of even its first worker ($300). Difficulty: Medium Style: Applied AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Rule for Employing Resources: MRP=MRC 8. 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 price of 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) consumers prefer not to buy from monopolies, so demand falls (E) workers tend to earn higher wages in monopoly firms (C) Imperfectly competitive firms must lower their prices in order to sell more products, so the marginal revenue to the firm falls much more quickly than it does for perfectly competitive firms. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Marginal Revenue Product Book Section: Resource Demand under Imperfect Product Market Competition 9. The demand for labor at Tyrone's auto repair shop would increase if (A) the cost of complementary capital fell significantly (B) the cost of substitute capital fell significantly (C) wages of auto repair workers significantly increased (D) mild weather resulted in fewer car crashes this winter (E) productivity of workers at the auto repair shop decreased (A) If the price of the complementary capital (a paint sprayer) were to fall, the marginal resource cost (MRC) for the worker and capital combined will be lower, so the firm would hire additional units of labor. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Determinants of Resource Demand 10. When the wage increases 5 percent, the quantity of workers hired falls 1 percent, indicating that labor demand is (A) perfectly inelastic (B) relatively inelastic (C) unitary elastic (D) relatively elastic (E) perfectly elastic (B) When a percentage change in wages causes a relatively smaller percentage change in the quantity of workers hired, demand is relatively inelastic (% change in quantity < % change in wages). This inequality indicates that the firm is not very responsive to the change in wage. Difficulty: Hard Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Elasticity of Resource Demand 11. A profit-maximizing firm that specializes in preparing frozen chicken and noodle dinners is considering replacing workers with an efficient noodle-making machine. The marginal product of the last worker hired is two pounds of noodles per hour, at a wage of $8 per hour. The marginal product of adding the noodle-making machine is eight pounds of noodles per hour, at a cost of $40 per hour. Which of the following statements is true? (A) The firm should continue using workers, but should not use the additional machine because the marginal product per dollar is lower for labor than for the machine. (B) Add the machine and replace workers, because the marginal product of the machine is four times as high as the marginal product of the last worker hired. (C) The firm has achieved least-cost production. (D) The firm is maximizing its profit if it buys the machine. (E) The firm cannot achieve a profit given these production costs. (A) Least-cost production occurs where the marginal product per dollar of labor equals the marginal product per dollar of capital. In this case, the MP/$ of labor is 0.25 pounds of noodles, and the MP/$ of capital is 0.20 pounds of noodles. Because the firm gets a greater marginal product for the cost from labor, the company should continue to use labor rather than buying the machine. Difficulty: Hard Style: Conceptual AP Economics Curricular Requirement Microeconomics: Cost-Minimizing Input Combination and Productive Efficiency Book Section: The Least-Cost Rule 12. According to the profit-maximizing rule for hiring resources, a 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 of each (E) The firm maximizes profit when it employs both the labor and capital to the point where the marginal revenue product generated by acquiring the next unit exactly equals the marginal resource cost of acquiring it. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: The Profit-Maximizing Rule 13. Resource pricing is important because I. the price of resources is a major factor in determining household income II. knowledge of resource prices allows firms to minimize their costs III. analysis of resource pricing contributes to efficient use of resources (A) I only (B) II only (C) III only (D) I and II only (E) I, II, and III (E) Firms minimize their costs and increase efficiency by analyzing resource prices. Because households earn their incomes in the resource market, hiring decisions affect household income. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Microeconomics: Market Distribution of Income Book Section: Significance of Resource Pricing 14. A significant increase in demand for health care workers in the United States is a direct result of I. the aging of the U.S. population II. an increase in the amount of do-it-yourself test kits and over-the-counter medications III. an increasing number of insurance consumers who can afford health care (A) I only (B) II only (C) I and III only (D) II and III only (E) I, II, and III (C) An older population requires more health care services, and increasing use of insurance allows consumers to afford health care. Both create a derived demand for health care workers. Do-it-yourself test kits and over-the-counter medications allow consumers to provide self-care and require less use of health care workers. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Economics: Derived Factor Demand Book Section: Resource Demand as a Derived Demand 15. A profit-maximizing firm competes in both perfectly competitive product and factor markets. This firm finds that its marginal resource cost for the last unit of labor hired is greater than the marginal revenue product. This firm should (A) produce more of the product and keep the number of workers constant (B) produce less of the product and reduce the number of workers to reduce the marginal resource cost (C) produce more of the product due and hire more workers (D) produce less of the product and reduce the number of workers, even though the marginal resource cost will remain constant (E) produce the same amount of the product and keep the number of workers constant (D) MRC>MRP, so the firm is not maximizing profit where MRC=MRP. The marginal revenue product (MRP) will increase when production decreases. MRC will remain constant even though total labor costs are reduced because the firm is a wage taker. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Rule for Employing Resources: MRP=MRC Use the graph below to answer questions 16-17. 16. Which of the following statements best explains why the perfectly competitive firm’s demand for labor (D1) differs from the imperfectly competitive firm’s demand for labor (D2)? I. D1 reflects a constant product price but diminishing marginal product as output and employment rise. II. D1 reflects a decreasing product price and diminishing marginal product as output and employment rise. III. D2 reflects a constant product price but a diminishing marginal resource cost as output and employment rise. IV. D2 reflects a decreasing product price and diminishing marginal product as output and employment rise. (A) I and III only (B) II and IV only (C) II and III only (D) I and IV only (E) I, II, III, and IV (D) D1 shows a demand curve for labor in which only the marginal product decreases while final product price for the competitive firm remains constant. D2 shows a demand curve for labor in which both the final product price and the marginal product for labor decrease as output and employment increase. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Marginal Revenue Product Book Section: Resource Demand under Imperfect Product Market Competition 17. A profit-maximizing firm competes in a perfectly competitive factor market but an imperfectly competitive final market. This firm finds that its marginal resource cost for the last unit hired of labor is less than the marginal revenue product. This firm should produce (A) more of the product and keep the number of workers constant (B) less of the product and reduce the number of workers to reduce marginal resource costs (C) more of the product and hire more workers (D) less of the product and reduce the number of workers, even though marginal resource costs will remain constant (E) the same amount of the product and keep the number of workers constant (C) MRP>MRC, so the firm is not maximizing profit by hiring where MRP=MRC. So if the firm produces more of the product, the marginal revenue product (MRP) will decrease. Because the firm is hiring in a perfectly competitive labor market, MRC will remain constant. By hiring more workers and increasing production, the firm maximizes profit where MRP=MRC. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Rule for Employing Resources: MRP=MRC 18. Within a range of prices, if the coefficient of elasticity of resource demand is greater than one, the resource demand in that range is (A) inelastic (B) elastic (C) unit elastic (D) elastic or unit elastic (E) unit elastic or inelastic (B) If the elasticity of resource demand (Erd = % ? in resource quantity/ %? in resource price) is greater than one, then by definition the resource demand is elastic. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Elasticity of Resource Demand 19. Which of the following factors is a major determinant of the elasticity of resource demand? I. Time II. Ease and availability of resource substitution III. Elasticity of final product demand IV. Ratio of resource cost to total cost (A) I only (B) II only (C) I and II only (D) I, II, and III only (E) I, II, III, and IV (E) As the amount of time increases, as the ease and availability of resource substitutions increase, as the elasticity of demand for the final product grows larger, and as the ratio of resource cost to total cost increases, the elasticity of resource demand increases. Difficulty: Hard Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Elasticity of Resource Demand 20. Assume that a farm has only two factor inputs, labor and land, and that resource prices remain constant. This firm finds that the marginal product of labor for the last worker hired, when divided by the price paid for that additional worker, exceeds the marginal product of land for the last acre acquired when divided by the price paid for that last acre. To achieve least-cost while maintaining the same level of output, this firm must utilize (A) more labor (B) less labor (C) more acreage (D) less labor and more acreage (E) more labor and less acreage (E) In this case the MP of labor/MRC of labor exceeds MP of land/MRC of land. By utilizing more labor, the MP of labor will fall, and by reducing acreage, the MP of land will increase. If the MRC of labor and land are fixed, then this action will move the firm to least-cost operation that happens when MR of labor / MRC of labor = MP of land / MRC of land. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Rule for Employing Resources: MRP=MRC 21. Assume that a profit-maximizing firm which competes in a purely competitive product industry has only two factor inputs, labor and capital, and that resource prices remain constant. This firm finds that the marginal revenue product of labor (MRP) when divided by the price for labor (MRC) is less than one. The firm also finds that the marginal revenue product for capital (MRP) when divided by the price (MRC) is greater than one. If this firm wishes to produce the same amount of output with these two resources, this firm must employ (A) less labor (B) more capital (C) more labor and less capital (D) less labor and more capital (E) more labor and capital (D) The profit-maximizing rule holds that MRPland/MRCland = MRPcapital/MRCcapital = 1. In this case with MRPland/MRCland < 1, this firm must employ less labor, increasing the MRP of land so that the MRPland/MRCland =1. Further, with MRPcapital/MRCcapital > 1, this firm needs to employ more capital, in order to reduce the MRP of capital so that the MRPcapital/MRCcapital = 1. Having made both of those adjustments, the profit maximizing rule has been achieved with MRPland/MRCland = MRPcapital/MRCcapital = 1. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Cost-Minimizing Input Combination and Productive Efficiency Book Section: The Least-Cost Rule 22. In a perfectly competitive labor market, the marginal resource cost remains constant for the firm, regardless of the number of workers hired, because (A) the firm seeks to pay the lowest possible wage for its workers (B) the firm seeks to pay the highest possible wage for its workers (C) the firm hires such a small percentage of the labor supply that it cannot affect wages (D) the government has established a minimum wage (E) changes in supply and demand for workers in the industry do not affect wages (C) Firms hiring in a perfectly competitive labor market are wage takers and must accept the wage determined by supply and demand in the industry. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: MRP as Resource Demand Schedule 23. Market demand for labor will increase as a result of (A) a decrease in demand for the product produced by the labor (B) a decrease in the price of the product produced by the labor (C) a decrease in the productivity of labor (D) a decrease in the wage paid for labor (E) an increase in the productivity of labor (E) As labor productivity increases, the marginal revenue product increases, so firms hire additional workers if MRP>MRC. A decrease in the wage would increase the quantity of labor demanded, rather than causing a shift of the demand curve. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Determinants of Resource Demand 24. Assume that the price of capital equipment, which can be used as a substitute for labor, decreases, and the substitution effect exceeds the output effect. Which of the following effects would the declining price of capital have in a perfectly competitive labor market? I. The demand for labor would decrease. II. The industry wage would decrease. III. The cost of production would increase. IV. The price of the product would increase. (A) I only (B) III only (C) I and II only (D) III and IV only (E) I, II, III, and IV (C) At a lower price, the firm will increase demand for capital and reduce demand for the substitute labor, causing a decrease in the industry wage. The lower cost of production from the use of capital would lead the firm to increase output and reduce the product price. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Changes in the Prices of Other Resources 25. A firm determines that it can hire one more worker at a wage of $80 per day, and its MRP would increase by $100 for the day. The firm also determines that it can rent one more piece of capital equipment at a cost of $200 per day, and its MRP would increase by $250 for the day. In order to maximize profit, the firm should (A) hire one more worker but not rent a piece of equipment (B) hire one more worker and also rent a piece of equipment (C) rent one piece of equipment but not hire a worker (D) reduce the number of workers and rent more equipment (E) reduce the amount of equipment and hire more workers (B) The firm maximizes profit when the MRPL/PL = MRPC/PC = 1. In this case, the firm’s MRP is greater than the price for both labor and capital, so the firm would move toward profit maximization by both hiring a worker and renting equipment. Difficulty: Medium Style: Application AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: The Profit-Maximizing Rule Free-Response Question Assume that a firm can hire all of the workers it wants at a wage of $60 per day, and that the firm can sell all of its products at a price of $10. The firm's production schedule is below. Number of Workers Total Product 0 0 1 10 2 19 3 27 4 34 5 40 6 45 7 49 (a) In what kind of market structure does this firm sell its product? Explain. (b) In what kind of market structure does this firm hire its workers? Explain. (c) Calculate the marginal revenue product of the fourth worker. (d) How many workers should this firm hire to maximize its profit? Explain. (e) If the wage fell to $55 per day, how many workers should this firm hire in order to maximize its profit? Explain. Free-Response Explanation 9 points (2 + 2 + 1 + 2 + 2) (a) 2 points: 1 point is earned for stating that the firm sells its product in a perfectly competitive market. 1 point is earned for explaining that the firm does not have to lower its price to sell more units, a characteristic that only occurs in perfectly competitive markets. (b) 2 points: 1 point is earned for stating that the firm hires its workers in a perfectly competitive labor market. 1 point is earned for explaining that the firm hires all of its labor for the same wage and does not have to raise its wage to attract more workers. (c) 1 point: 1 point is earned for stating that the marginal revenue product of the fourth worker is $70 (the marginal product of 7 units—the increase from 27 to 34—multiplied by the $10 product price). (d) 2 points: 1 point is earned for stating that this firm should hire five workers. 1 point is earned for stating that the fifth worker's MRP = MRC. (e) 2 points: 1 point is earned for stating that the firm still should hire five workers at the lower wage. 1 point is earned for explaining that the marginal revenue product of the sixth worker is only $50, so the wage would have to fall to $50 before the firm would hire the sixth worker. Difficulty: Medium Style: Applied AP Economics Curricular Requirement Microeconomics: Hiring Decisions in the Markets for Labor and Capital Book Section: Rule for Employing Resources: MRP=MRC