1. Optimal choice of capital

Rosa makes sweaters in her home. Starting with just some knitting needles and yarn, she was able to knit 60 sweaters per year. Now some local stores have expressed interest in her designs and offered to buy her sweaters for $10 each. This makes it worthwhile for her to invest in some capital; in particular, she could produce many more sweaters if she invested in one or more looms, as shown in the following table. Assume that Rosa’s sweater business is a perfectly competitive firm.

Complete the following table by calculating the marginal physical product (MPP) of each loom and the

marginal revenue product (MRP) of each loom.

Quantity of Input OutputMPP of Each

LoomMRP of Each

Loom(Looms) (Sweaters per year) (Sweaters) (Dollars)

0 60

1 110

2 150

3 184

4 213

5 238If the rental price of a loom is $270 per year, Rosa should use_______ (a.one loom b. two looms c. three looms d. four looms e. 5 looms).

Suppose the demand for sweaters is very elastic, while the demand for cigarettes is very inelastic.

Suppose that looms are used exclusively in the production of sweaters and that tobacco is used exclusively in the production of cigarettes. Which of the following might we expect?

The supply of tobacco would be less elastic than the supply of looms.

The demand for tobacco would be more elastic than the demand for looms.

The supply of tobacco would be more elastic than the supply of looms.

The demand for tobacco would be less elastic than the demand for looms.

2. Profit maximization

A profit-maximizing firm will use more of a factor of production when:

The extra cost of using an additional factor unit is less than the marginal physical product of the additional factor unit.

The marginal physical product of the additional factor unit is less than the marginal revenue product of the additional factor unit.

The extra cost of using an additional factor unit is less than the marginal revenue product of the additional factor unit.

The marginal physical product of the additional factor unit is greater than the marginal revenue product (MRP) of the additional factor unit.

Apply your answer as an argument to the labor market—when the wage rate is below the MRP, the firm should hire _______ (a. fewer b. more) workers.

Therefore, what is the relationship between a perfectly competitive firm's MRP curve for an input and that firm's demand curve for that input?

They are unrelated.

They are identical except for the units (and scale) of their vertical axes.

The firm's demand curve for an input is the downward-sloping portion of the MRP curve.

3. Understanding the least-cost rule

Andrew runs a surfing school on the North Shore of Oahu. He has two inputs: surfboards, which he rents from a local shop for $15 per day, and surfing instructors, whom he hires for $50 per day. Andrew has figured out that the marginal physical product (MPP) of the last instructor hired is 5 lessons, and the MPP of the last board used is 3 lessons.

Which of the following statements is correct?

Andrew currently employs a cost-minimizing combination of surfboards and instructors.

Any of these answers may be right, depending on the price of a lesson.

Andrew could lower his costs without reducing his output if he employed more instructors and used fewer surfboards.

Andrew could lower his costs without reducing his output if he employed fewer instructors and used more surfboards.

4. Least-cost rule versus profit maximization

Marvin’s Milk Farm produces milk and sells it in a perfectly competitive market at $4 per bottle. The following table shows Marvin's weekly total and marginal product schedules, using labor and capital.

Assume that labor and capital may be used independently; that is, one is not needed for the other factor to be productive. Therefore, the total amount of milk that Marvin's produces is obtained by adding together the amount of milk produced by labor and the amount of milk produced by capital. The table also shows total revenue and marginal revenue products (MRP) of labor and capital. Finally, assume that Marvin's Milk Farm is a factor price taker in the labor and capital in markets. Labor costs $48 per week, and capital costs $84 per week.

LaborTotal

ProductMarginal Product

Total Revenue

MRP of Labor

(Number of workers)

(Bottles) (Bottles) (Dollars) (Dollars)

0 0

1 24 24 96 96

2 42 18 168 72

3 54 12 216 48

4 62 8 248 32

Capital

Total Product

Marginal Product

Total Revenue

MRP of Labor

(Bottles) (Bottles) (Dollars) (Dollars)

0 0

1 21 21 84 84

2 39 18 156 72

3 51 12 204 48

4 57 6 228 24

If Marvin’s Milk Farm wants to produce 75 bottles of milk per week, the least-cost combination of labor and capital is _______ (a. 1 unit b. 2 units c. 3 units d. 4 units) of labor and __________ (a. 1 unit b. 2 units c. 3 units d. 4 units) of capital.

The profit-maximizing combination of resources is ________ (a. 1 unit b. 2 units c. 3 units d. 4 units) of labor and _________ (a. 1 unit b. 2 units c. 3 units d. 4 units) of capital.

The profit-maximizing combination contains __________ (a. the same amounts of labor and capital as b. more units of labor and capital than c. fewer units of labor and capital than) the least-cost combination to produce 75 bottles of milk.

5. Labor market definitions

Complete the following table by selecting the term that matches each definition on the left. Assume a

perfectly competitive firm.

Definition

Market Labor

Demand Curve

Market Labor Supply Curve

Marginal Product of

Labor

Value of the Marginal

Product of Labor

The graphical representation of the relationship between the wage rate and the quantity of labor firms are willing to hire in a market

The additional revenue the firm receives from selling the output produced from an additional unit of labor

The graphical representation of the relationship between the wage rate and the quantity of labor workers are willing to provide in a market

The increase in the amount of output from an additional unit of labor

Which of the following events may decrease the value of the marginal physical product of labor? Check all that apply.

A decrease in the wage rate

An increase in the marginal physical product of labor

Bad weather that causes a decrease in supply and a rise in price for one of the inputs used to make the good

A decrease in the output price

6. Computing labor productivity and its relationship to the demand for labor

Gopher Excavators produces shovels in a small factory and sells the shovels in a competitive market. The following table shows the company's production function:

Labor Output(Number of workers) (Shovels)

0 0

1 100

2 195

3 275

4 340

5 380

Calculate the marginal product of labor (MPL) of each worker, and then plot the MPL curve on the

following graph using the blue points (circle symbol).

Note: Remember to plot each point halfway between two integers. For example, when the number of workers increases from 0 to 1, the MPL of the first worker should be plotted with a horizontal coordinate of 0.5, the value halfway between 0 and 1. Line segments will automatically connect the points.

The following graph shows the demand for labor for three different prices per shovel:

Given the company’s marginal product of labor curve shown on the initial graph, line ________ (a. M, b. N, c. O) on the previous graph shows Gopher's demand for labor when the price of a shovel is $1.00, and line _______ (a. M, b. N, c. O) shows Gopher's demand for labor when the price of a shovel is $1.50.

7. How changes in the goods market affect the demand for labor

In this question, you'll explore the effect of a good weather season in Vermont on the price of blueberries in the United States, as well as on the daily wages of blueberry pickers in Florida. Assume that blueberry buyers don't care whether their blueberries come from Vermont or Florida.

On the following graph, show the effect the good weather season in Vermont has on the market for

blueberries in the United States by shifting either the demand curve, the supply curve, or both.

Based on the graph for the market for blueberries in the United States, the good season has caused the price of blueberries in the United States to ________ (a. fall b. rise)

The following graph shows the daily market for blueberry pickers in Florida.

Show the effect of the change in the price of blueberries in the United States on the market for

blueberry pickers in Florida by shifting either the demand curve, the supply curve, or both.

As a result of the change in the price of blueberries, the wage level for blueberry pickers in Florida _________ (a. decreases b. increases)

8. Effect of substitutes on the demand for labor

The year is 2033. In many occupations, robots are replacing humans. As it turns out, robots make very good house cleaners, but very poor guidance counselors.

Assuming the other determinants of demand for the two services are roughly similar, you would expect the demand for human guidance counselors to be _________ (a. derived from b. less elastic than c. equal in elasticity to d. more elastic than) the demand for human house cleaners.

One factor that affects the elasticity of demand for labor is its share of total production costs

The smaller labor's share of production costs, the___________ (a. smaller b. greater) the elasticity of demand for labor.

9. Plotting the supply of labor

In Houston, 135 people are willing to work an hour as hostesses if the wage is $20 per hour. For each additional $5 that the wage rises above $20, an additional 45 people are willing to work an hour.

For wages of $20, $25, $30, $35, and $40 per hour, plot the daily labor supply curve for hostesses on

the following graph.

What is one explanation for why this labor supply curve is upward sloping?

The opportunity cost of leisure increases as wages increase.

Wages have to increase to accommodate union pressure.

Labor production functions exhibit diminishing marginal returns.

People prefer to spend time doing leisure activities rather than working.

10. Shifts in labor supply

Assume that the information technology and consulting industries employ people with similar skills. Suppose an increase in the demand for consultants leads to a rise in their wages, while the demand for computer analysts remains the same.

The following graph shows the labor market for computer analysts in the United States.

Show the effect of the rise in demand for consultants on the U.S. labor market for computer analysts

by shifting the labor demand curve, the labor supply curve, or both.

11. How price changes impact the labor market

Consider the labor market for the fast-food industry, which consists mainly of high school and college students. Assume that all fast-food restaurants are profit maximizing. The following calculator shows the market demand curve (blue curve) and market supply curve (orange curve) for student workers, who are responsible for making hamburgers.

At any time in this problem, you can click the Reset to Initial Values button to return the elements in the calculator to their original positions. You will not be graded on any changes to the calculator; it's just here to help you answer the following questions.

Tool tip: Use your mouse to drag the horizontal green line on the graph. The values in the boxes on the right side of the calculator will change accordingly. You also can directly change the values in the boxes with the white background by clicking in the box and typing. The graph and any related values will change accordingly.

When the price of a hamburger is $3, the equilibrium wage in the fast-food labor market is

per hour. Suppose that the demand for hamburgers increases enough so that the price of a hamburger rises to $6. Ordinarily, this would result in a new equilibrium employment level and wage in the labor market for young people who work in fast-food restaurants.However, restaurants claim they can only afford to pay the initial equilibrium wage. In this labor market, if the price of hamburgers increases, but restaurants continue to pay the equilibrium wage that prevailed before the increase in demand for hamburgers, there will be a labor ________ (a.

shortage b. surplus) of  workers.

12. Identical wages

Which of the following is required for all workers to earn identical wages? Check all that apply.

All workers are protected by a union.

Workers cannot have a college degree.

Workers can move from one labor market to another at zero cost.

All workers have equal ability and can be trained to do different types of employment at minimum cost.

13. Information in labor markets

The marginal productivity theory states that if a firm operates in a perfectly competitive factor market, it pays each factor of production its marginal revenue product. However, this theory may fail to hold if factor markets are not competitive.

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One circumstance under which factor markets may fail to be competitive is if there is imperfect information. Which of the following are ways in which firms seek to overcome information problems? Check all that apply.

Promoting workers from within the company who have shown themselves to be productive, rather than hiring from outside

Always hiring from the outside to avoid being accused of discrimination

Hiring only workers who have earned good grades in college

1. Maximizing the total wage bill

On the following graph, the blue line represents a certain industry's annual labor demand curve. There are 300 workers in this industry, and they all belong to the industry labor union. The union is trying to decide what wage to ask for in upcoming negotiations with firms in this industry.

Complete the following table by calculating the total wage bill under each contract.

ContractWage Bill

(Thousands of dollars)

Contract A

Contract B

Contract CWhich contract maximizes the total wage bill (that is, the total amount paid to all workers in the industry per year)?

Contract A

Contract C

Contract B

Which contract ensures employment for all 300 members of the union?

Contract B

Contract C

Contract A

2. Labor union strategies

Consider the demand for labor in an industry in which workers are represented by a strong, inclusive union. Assume the union has all of the bargaining power during wage negotiations. Specifically, assume the union determines the wage in the market, and then firms choose how many workers to hire given the labor demand curve.

The following graph shows the labor demand curve in this market—that is, the number of workers firms are willing to hire before the union undertakes any wage negotiations.

Use the following graph to answer the questions that follow. Your work with the graph will not be

graded.

Assume that for all the wages shown next, the number of workers willing to work is at least as great as the number of workers firms are willing to hire.

Fill in the following table with the number of workers hired and the total wage income received by

union workers. If the demand for labor at the middle wage of $12 is close to unit elastic, is the demand

for labor elastic or inelastic at wages of $4 and $16? Fill in the last column of the table with your

results.

Hourly Wage Rate

Quantity of Labor Total Wage Income per Hour

Elasticity of Demand

(Thousands of workers)

(Thousands of dollars)

4 Multiple Choice

(a.5 b.2.5 c.10)   

 a. Inelastic/b. elastic

12 Multiple Choice

(a.5 b.2.5 c.10)   

Unit elastic

16 Multiple Choice

(a.5 b.2.5 c.10)   

 a. Inelastic/b. elastic

Suppose the union's goal is to maximize the total wage income received by union workers—namely, the average union wage times the number of union workers employed. In this case, if labor demand is elastic, the union should _________ (a. decrease b. increase) the union wage rate, and if labor demand is inelastic, the union should __________ (a. decrease b. increase) the union wage rate. (Hint: Use your results from the previous question.)

3. Excess supply with union wages

Consider the housing construction industry. Assume that the industry is perfectly competitive in both input and output markets. Suppose that, through collective bargaining, a labor union negotiates an industry-wide wage for various kinds of labor (electricians, plumbers, and so on). In particular, it succeeds in negotiating a wage increase for carpenters from $9 to $12 per hour.

The following graph shows the labor demand of an individual firm.

On the following graph, show what happens at the firm level as a result of the union negotiations.

Now consider the effects of the wage change on the entire industry.

Use the graph input tool to help you answer the following questions. You will not be graded on any

changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

The union's wage increase from $9 to $12 per hour causes an excess supply of

workers. (Note: Be sure to enter your answer in thousands of workers.) Suppose that the union, in order to mitigate the unemployment caused by the wage increase, bolsters demand by

rolling out a "Buy Union" advertising campaign. If the union spends $3 million on the campaign, the

excess supply of labor will be workers. (Note: Be sure to enter your answer in thousands of workers.)

4. Union vocabulary

A workplace where workers must be union members before they can join is known as _________ (a. a closed shop b. a union shop c. an agency shop d. a craft union).

5. What kind of union is it?

Many employees of Bay Area Rapid Transit (BART), a rail service in the vicinity of San Francisco, CA, belong to a union called the Service Employees International Union.

BART is only allowed to hire train operators who are members of this union. This is an example of a_________ (a. union shop b. closed shop c. labor strike)

Which of the following is an example of a labor strike?

People who want to work for BART must be members of the Service Employees International Union before seeking employment.

BART can charge consumers higher prices because there are no alternative forms of public transportation.

BART management refused union demands, which included annual raises of between 2-4% over three years. This led BART workers to refuse to work during the following week.

6. Do unions raise wages?

Consider a tropical island economy with only two sectors: souvenir manufacturing and hospitality (hotels). Both sectors are perfectly competitive, and workers are equally able and willing to work in either industry. Only foreign tourists demand souvenirs and hotel stays, so changes in the domestic labor market do not affect the product demand curve in either sector.

Suppose a union forms in the souvenir manufacturing industry. The union limits its membership to less than the number of workers employed before the union formed and forces all employers in the industry to hire only union workers.

Show the effect of unionization in the souvenir industry on the labor market for souvenir

manufacturers.

Now show the effect of unionization in the souvenir industry on the labor market for hospitality

workers.

Summarize your findings in the following table.

WagesSouvenir Industry Hospitality Sector(Dollars per hour) (Dollars per hour)

Before Unionization

6 6

WagesSouvenir Industry Hospitality Sector(Dollars per hour) (Dollars per hour)

After Unionization7. Unions and productivity

In some industries, the labor productivity of union workers exceeds the labor productivity of nonunion workers.

Which of the following might help explain the higher productivity of union workers? Check all that

apply.

Unions may provide information to companies about how to improve operations and eliminate problems in the work environment.

Because union wages exceed nonunion wages, union workers are less likely to quit, which leads to a more experienced work force.

Because union wages exceed nonunion wages, employees may be encouraged to work harder.

Higher union wage rates allow companies to attract more low-skilled workers.