Intermediate Microeconomics Lecture 8 Quiz

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Questions and Answers

What does marginal revenue product (MRPL) represent?

  • Total revenue generated from all units produced.
  • Additional labor needed for production.
  • Additional profit gained from selling one more unit.
  • Additional revenue from the sale of output created by one more unit of input. (correct)

How is MRPL calculated in a competitive output market?

  • MRPL = MPL + P
  • MRPL = P ÷ MPL
  • MRPL = MPL × P (correct)
  • MRPL = MR - MPL

What will happen if the MRPL is greater than the wage rate?

  • The firm will decrease output.
  • The firm will maintain the current number of workers.
  • The firm will hire more workers. (correct)
  • The firm will hire fewer workers.

What is the effect of diminishing marginal product on MRPL in a competitive market?

<p>MRPL will decrease. (A)</p> Signup and view all the answers

In a monopolistic output market, what two factors cause a decrease in MRPL?

<p>Diminishing marginal product and decreasing marginal revenue. (B)</p> Signup and view all the answers

What happens to the demand for labor when MRPL is below the wage rate?

<p>The firm will reduce the number of workers. (C)</p> Signup and view all the answers

If the market price for a product is $5, what is the MRPL for a worker that produces 10 units of product?

<p>$50 (B)</p> Signup and view all the answers

Which of the following is true about the MRPL curve in a competitive factor market?

<p>The MRPL curve slopes downwards. (D)</p> Signup and view all the answers

What is the primary characteristic of a monopsony in the labor market?

<p>It is a single buyer of labor. (B)</p> Signup and view all the answers

What happens to the wage level when a monopsonist hires more labor?

<p>It increases for all employees. (B)</p> Signup and view all the answers

How does a labor union behave in the labor market compared to a monopoly in an output market?

<p>It has the power to set wage levels. (D)</p> Signup and view all the answers

What is a likely effect of a union demanding a higher wage than the competitive rate?

<p>Unemployment among non-unionized workers. (A)</p> Signup and view all the answers

Which outcome is likely when a monopolistic union raises wages?

<p>Employment in the unionized sector decreases. (D)</p> Signup and view all the answers

What characterizes a perfectly competitive factor market?

<p>Many sellers and many buyers (C)</p> Signup and view all the answers

What happens to wages in the nonunionized sector when a monopolistic union raises wages in the unionized sector?

<p>They fall to maintain total labor supply. (C)</p> Signup and view all the answers

What is the result of a labor union limiting its membership while increasing wage demands?

<p>Better outcomes only for union members, rest may become unemployed. (A)</p> Signup and view all the answers

What does derived demand refer to in the context of factor markets?

<p>Demand for an input based on the firm's output and input costs (A)</p> Signup and view all the answers

How does the wage rate affect a firm's demand for labor?

<p>Higher wages decrease demand for labor (A)</p> Signup and view all the answers

How is the wage in a monopsony compared to the competitive wage level?

<p>It is lower than the competitive wage. (B)</p> Signup and view all the answers

What best describes monopsony power in factor markets?

<p>A single buyer controlling the market for labor or inputs (D)</p> Signup and view all the answers

What does a downward sloping demand curve for factor inputs indicate?

<p>Lower prices lead to higher demand for inputs (D)</p> Signup and view all the answers

Why might a firm consider hiring an additional worker?

<p>If additional labor generates revenue greater than its costs (D)</p> Signup and view all the answers

What distinguishes a competitive output market from a competitive input market?

<p>Output markets involve final products, input markets involve production factors (A)</p> Signup and view all the answers

What relationship exists between a firm's production levels and its demand for labor?

<p>Positive correlation; higher production typically leads to higher demand for labor (D)</p> Signup and view all the answers

What is indicated by the marginal revenue product of labor when it decreases as more workers are added?

<p>The efficiency of each additional worker is decreasing. (B)</p> Signup and view all the answers

How does a firm determine the quantity of input purchased in a competitive factor market?

<p>Through the intersection of the input demand and supply curves. (D)</p> Signup and view all the answers

What condition must be satisfied for profit maximization in the context of marginal revenue product?

<p>Marginal expenditure must equal marginal revenue product. (C)</p> Signup and view all the answers

What happens to hours of work supplied as wages increase in a backward-bending labor supply curve?

<p>They may initially increase but can eventually decrease. (B)</p> Signup and view all the answers

What does the marginal expenditure curve describe in a competitive factor market?

<p>The additional cost of purchasing one additional unit of a factor. (A)</p> Signup and view all the answers

In terms of input pricing in a competitive factor market, what does ME = w indicate?

<p>The price paid for input matches the marginal expenditure. (C)</p> Signup and view all the answers

Which statement best describes the marginal revenue product of labor as represented in the table?

<p>It reflects diminishing returns after a certain number of workers. (C)</p> Signup and view all the answers

What likely occurs to the supply of labor when wages rise significantly?

<p>Leisure becomes more desirable, potentially decreasing labor supply. (D)</p> Signup and view all the answers

What represents the point where a profit-maximizing firm will hire labor units in a competitive market?

<p>Where marginal revenue product of labor is equal to the wage rate (D)</p> Signup and view all the answers

In a competitive labor market, what does the firm's demand for labor depend on?

<p>Marginal revenue product of labor (D)</p> Signup and view all the answers

What leads to a backward-bending supply of labor curve?

<p>The income effect outweighing the substitution effect (A)</p> Signup and view all the answers

When the wage rate decreases, what happens to a firm's demand for labor, assuming it shifts from S1 to S2?

<p>The firm increases the amount of labor hired up to the new wage level (B)</p> Signup and view all the answers

What does the firm's demand for one input depend on when multiple inputs are variable?

<p>The marginal revenue products of all inputs (A)</p> Signup and view all the answers

In a competitive labor market, how is the equilibrium wage determined?

<p>At the intersection of the demand for labor and the supply of labor curve (C)</p> Signup and view all the answers

How does a decrease in the wage rate from $15 to $10 affect the product price according to the content provided?

<p>The product price decreases (A)</p> Signup and view all the answers

What is economic rent in the context of labor?

<p>The difference between actual wages and minimum wages necessary to hire workers (A)</p> Signup and view all the answers

When demand increases in a perfectly inelastic land supply market, what happens to economic rent?

<p>It increases as rent per acre rises (C)</p> Signup and view all the answers

What happens to the demand curve of the industry when the wage rate decreases?

<p>It shifts downward and becomes more inelastic (A)</p> Signup and view all the answers

What characterizes a firm with monopsony power?

<p>It can influence the price of labor by its purchasing power (D)</p> Signup and view all the answers

What is indicated by the points A and C on the firm's demand for labor curve?

<p>Both represent points on the demand for labor curve at specific wage rates (C)</p> Signup and view all the answers

What occurs when the marginal product of capital rises due to a decrease in the wage rate?

<p>The firm will hire more labor and rent more machinery (A)</p> Signup and view all the answers

Which of the following best explains the marginal value of a worker (vM) in a monopoly situation?

<p>It is greater than the wage wM firms pay (C)</p> Signup and view all the answers

What generally happens in a labor market when the income effect is larger than the substitution effect?

<p>Workers reduce their working hours despite available jobs (C)</p> Signup and view all the answers

How is economic rent represented in a graphical model of labor supply and demand?

<p>As the area above the equilibrium wage line (C)</p> Signup and view all the answers

Flashcards

Perfectly Competitive Market

A market where many sellers and buyers are present. Each buyer and seller has a negligible effect on the market price.

Monopsony

A market where there is only one buyer of a production factor. This buyer has significant influence on the market price.

Monopoly

A market where there is only one seller of a production factor. This seller has significant influence on the market price.

Derived Demand

Demand for a factor of production (like labor) that depends on the demand for the final product it helps to produce.

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Marginal Revenue Product of Labor (MRPL)

The additional revenue earned by a firm from hiring one more worker.

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Marginal Resource Cost (MRC)

The cost of hiring one more worker. Usually the wage rate.

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Profit Maximization in Factor Markets

The point where a firm will maximize its profits. This occurs when the marginal revenue product of labor (MRPL) equals the marginal resource cost (MRC).

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Demand for Labor

The relationship between the quantity of labor demanded by a firm and the wage rate. Downward sloping because as the wage rate increases, the firm will demand less labor.

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What is Marginal Revenue Product (MRPL)?

The additional revenue earned by a firm from selling the output produced by one additional unit of input.

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How is MRPL calculated?

MRPL is calculated by multiplying the marginal revenue (MR) by the marginal product of labor (MPL).

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How does MRPL relate to the price of the product in a competitive market?

In a competitive output market, where a firm can sell all its output at the market price, the MRPL is equal to the MPL multiplied by the price of the product.

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How does MRPL guide hiring decisions?

A firm will hire additional labor as long as the MRPL exceeds the wage rate. Conversely, if the MRPL is less than the wage rate, the firm will lay off workers.

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How is the MRPL curve used to determine input demand in a competitive factor market?

In a perfectly competitive factor market, where the firm is a price taker, the demand curve for an input is represented by the MRPL curve.

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Why does the MRPL curve slope downwards?

The MRPL curve slopes downward due to the law of diminishing marginal product. This means the extra output generated by each additional unit of input decreases as more input is used.

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How does MRPL differ in a monopolistic output market?

In a monopolistic output market, the marginal revenue product curve decreases due to both diminishing marginal product and decreasing marginal revenue. This is because the monopolist must lower the price of their product to sell more units.

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Why is MRPL important for firms?

The MRPL provides a valuable tool for firms to make optimal hiring and resource allocation decisions based on the relationship between input costs and the revenue generated from employing those inputs.

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Profit-maximizing condition in labor market

The condition in which the marginal revenue product of labor (MRPL) is equal to the wage rate (w). This condition represents the point where a firm will maximize its profits by hiring the optimal amount of labor.

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Perfectly Elastic Supply of Labor

In a perfectly competitive labor market, firms can hire as many workers as they want at a given wage rate. Thus, the supply of labor is perfectly elastic for the firm.

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Firm's Demand for Labor

The demand for labor by a firm is determined by its marginal revenue product of labor (MRPL). The firm will hire labor up to the point where the MRPL equals the wage rate.

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Shift in Supply of Labor

A shift in the supply of labor can lead to changes in the wage rate and the quantity of labor employed. A decrease in supply will cause the wage rate to increase, leading to a decrease in the quantity of labor hired.

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Firm's Demand for Labor with Variable Inputs

The firm's demand for labor is derived from the MRPL of all factors of production. When multiple inputs are variable, the firm's demand for one input depends on the MRPL of all inputs, leading to a more complex relationship between the wage rate and the quantity of labor demanded.

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Industry Demand for Labor

The industry demand for labor is derived from the sum of the individual firms' demands for labor. However, as the wage rate falls, the product price may also fall, leading to a more inelastic industry demand curve.

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Industry Demand vs. Firm Demand

The industry demand for labor is more inelastic than the demand for labor by a single firm. This is because the industry demand curve takes into account the effect of changes in the wage rate on the product price.

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Marginal Expenditure (ME)

The additional cost of purchasing one more unit of a factor of production, like labor. In competitive markets, this is usually the wage rate.

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Average Expenditure Curve

The supply curve representing the price per unit that a firm pays for a factor of production.

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Marginal Expenditure Curve

The curve illustrating the additional cost of purchasing one more unit of a factor.

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Competitive Factor Market Supply

The supply curve representing the price per unit that a firm pays for a factor of production. This is also called the average expenditure curve.

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Backward-Bending Supply of Labor

The supply of labor can initially increase as wages rise. But, if wages keep getting higher, workers may prefer more leisure and work less. This leads to a backward-bending supply curve.

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Economic Rent

The difference between the payments made to a factor of production and the minimum amount that could be spent to obtain the use of that factor.

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Economic Rent in Labor Markets

A worker's wage is higher than the minimum amount they'd accept for the job. This difference represents the worker's economic rent.

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Land Rent

When the supply of land is fixed, the land's entire value is economic rent because the supply doesn't increase even if the price goes up.

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Monopsony Power

When a buyer (usually a firm) has significant power to influence the price of a factor like labor. Example: A single firm hiring most of the workers in an area.

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Effects of Monopsony Power

A firm with monopsony power can buy large quantities of a factor at lower prices than smaller buyers. This is due to their bargaining strength.

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Labor Market Equilibrium

The equilibrium wage in a competitive labor market is where the supply and demand curves intersect. This point determines the wage and quantity of labor.

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Monopoly Labor Market

In a monopoly labor market, the marginal value of a worker is higher than the wage paid, leading to underemployment. The firm hires fewer workers than in a competitive market.

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Monopoly Power in Factor Markets

A situation where a single seller dominates a market, controlling the price of a good or service. In the context of labor markets, it's a labor union with significant power to set wages.

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Effect of Union Wage Demands

If a union demands a higher wage than the competitive market rate, some workers will be unemployed. The union members benefit, but those outside the union lose out.

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Monopsonistic Wage Effect

If a monopsony firm hires more workers, the wage rate for ALL workers increases. This is because they have to pay higher wages to attract new workers, which also applies to the existing ones.

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Monopsony Wage Level

The wage a monopsony firm chooses to pay is lower than what would exist in a perfectly competitive market. This is because the monopsony has the power to drive wages down to maximize its own profits.

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Study Notes

Intermediate Economics Semester 1, 2024

  • Westminster International University in Tashkent
  • Accredited institution of the University of Westminster (UK)

Lecture 8: Markets for Factor Inputs

  • Topic: Markets for factor inputs
  • Course: 5ECON010C-n Intermediate Microeconomics
  • Lecture Outline:
    • Competitive Factor Markets
    • Equilibrium in a Competitive Factor Market
    • Factor Markets with Monopsony Power
    • Factor Markets with Monopoly Power

Factor Market Structures

  • Perfectly competitive market: many sellers and many buyers
  • Monopsony: single buyer of a production factor
  • Monopoly: single seller of a production factor

Competitive Output vs. Input Markets

  • Competitive output market: competitive market for final goods. Many firms use labor and capital to produce and supply goods and services.
  • Competitive input (factor) market: competitive market for the supply of factors of production (e.g., labor, raw materials). Many people are ready to work and/or many suppliers of raw materials or inputs.

Demand for Labor

  • Factors affecting labor demand:
    • Wage rate (cost of labor)
    • Quantity produced (output level)
    • The more a firm wants to produce, the more labor it needs (positive correlation).
    • Higher cost of labor leads to less hiring (negative correlation)
  • Demand for labor is derived from the demand for a firm's product.

Factor Demand

  • Factor demand curves are downward sloping
  • Factor demand is derived demand
  • Derived demand depends on firm output level and input cost

Competitive Factor Markets (Single Variable Input)

  • To hire additional workers:
    • Marginal revenue product (MRP): additional revenue from the output of a worker's labor
    • Profitable to hire if MRP is greater than the cost
  • MRP₁= (MR)(MPL): (Marginal revenue × Marginal product of labor)

Marginal Revenue Product

  • Marginal product of labor: extra quantity produced with one additional unit of labor
  • Marginal revenue: extra revenue obtained by selling one additional unit of output
  • How to calculate MRPL: (Marginal revenue × Marginal product of labor)

Competitive Factor Market Measurement of MRP

  • MRP = (MR) × (MPL), where MR and MPL are marginal revenue and marginal product of labor, respectively
  • In a competitive output market, MR = price (P)
  • Therefore, MRP = P × MPL

Marginal Revenue Product (Example)

  • Example provided with a table showing the relationship between the number of workers, units produced, MPL, and MRP at a market price of $5

Marginal Revenue Product (Competitive Factor Market)

  • In a competitive factor market, the buyer's demand for an input is given by the MRP curve. The MRP curve falls due to diminishing MP. The price is given by the market and MR is constant.

Competitive Factor Markets (Profit Maximization)

  • Profit maximization: MRP₁ = wage (w)
  • Firms hire additional labor as long as MRP is higher than the wage rate, and lay off workers when MRP falls below the wage rate.

Competitive Factor Markets (Graphical Representation)

  • Graph showing the demand for labor (MRP) and supply of labor and calculating the quantity of labor hired at the equilibrium wage.

Competitive Factor Markets (Shift in Labor Supply)

  • Shifts in the labor supply curve (e.g., S₁ to S₂) affect the equilibrium wage rate and quantity of labor hired (e.g., L₁ to L₂) for competitive factor markets.

Competitive Factor Markets (Multiple Variable Inputs)

  • Firm's demand curve for labor (when several inputs are variable):
    • Depends on marginal revenue product of both inputs.
    • Changes in wage rates can cause shifts in MRP curves.

Determining Industry Demand (Competitive Factor Markets)

  • Industry demand curve is more inelastic than if price were to stay the same

Marginal Revenue Product (Example Continued)

  • Another example with a table showing the relationship between number of workers, units produced, MPL, and MRP at a price of $5

Industry Demand for Labor

  • Graphical representation of industry demand for labor curves. Also shows horizontal summation of individual MRP curves

Competitive Factor Markets (Supply of Inputs to a Firm)

  • Average expenditure curve: supply curve showing the price per unit a firm pays for a production factor
  • Marginal expenditure curve: curve detailing the additional cost of purchasing one additional unit of a factor
  • Profit maximization: ME=MRP
  • In competitive factor market, the price of input equals marginal expenditure, ME = w

Competitive Factor Markets (Firm's Input Supply in a Competitive Factor Market)

  • In a competitive factor market, a firm faces a perfectly elastic supply curve for the input

Competitive Factor Markets (Backward-Bending Labor Supply Curve)

  • Backward-bending labor supply curve: initial increase in working hours with wage increases, but eventually decreases as income effect outweighs the substitution effect.

Competitive Factor Markets (Substitution and Income Effects of a Wage Increase)

  • Wage increases:
    • Substitution effect: encourage more work
    • Income effect: encourage more leisure
  • Income effect often outweighs the substitution effect at higher wage levels, causing a backward-bending supply curve.

Labor Market Equilibrium

  • Competitive vs. monopolistic output markets
  • Competitive output market: equilibrium wage is at the intersection of the demand and supply curves.
  • Monopoly output markets: Marginal value of a worker (VM) is greater than the wage, leading to fewer workers employed

Economic Rent

  • Economic rent: difference between payments made to a factor of production and the minimum to obtain the use of that factor.
  • If the price of a factor is higher than the minimum amount someone is willing to supply it. The surplus is economic rent
  • Example: land rent

Economic Rent - Land Rent

  • Perfectly inelastic supply of land: market price is determined where demand curve intersects the supply curve. The entire value of the land is economic rent. When demand increases, economic rent increases as well

Factor Markets with Monopsony Power

  • Monopsony: single buyer of a factor of production
  • Monopsony power: buyers affects prices
  • Happens when one firm is a monopsony buyer or when there are few buyers (each firm has some monopsony power)
  • Firms with monopsony power can negotiate lower prices for large quantities. Example: automobile companies buying parts.

Monopsony Power (Measurement)

  • Wage levels for all employees increase with each extra unit of labor. Profit maximization: ME = MRP (Marginal expenditure = Marginal revenue product). Wage levels in this case are less than competitive wage levels where AE = MRP.

Monopoly Power in Factor Market

  • Labor unions are seen as a monopoly in labor markets. This occurs because a labor union is selling a factor of production
  • Labor unions have the power to change wages. In competitive markets, the equilibrium wage rate is established at the intersection of labor supply and demand. However, if a monopoly exists in the market, the wage is a result of the intersection of its Marginal Revenue curve and the marginal supply for union workers.

Monopoly Power in Factor Market (Union Decision)

  • Union decides to demand a higher wage than the competitive rate (W₁).
  • This leads to employment being limited to L₁ and achieving a higher wage

Factor Markets with Monopoly Power (Wage Discrimination)

  • Monopolistic union raises wages in the unionized sector. This leads employment in that sector falling.
  • Total labor supply (S₁) remains constant. The wage in the non-union sector must fall from w* to WNU to remain unchanged. This is shown by the movement along the demand curve (DNU)

Reading List

  • Mandatory reading: Pindyck & Rubinfeld (2015), "Microeconomics," 8th edition, Chapter 14
  • Optional readings:
    • https://www.tandfonline.com/doi/pdf/10.3402/nstep.v2.31165
    • https://www.vox.com/policy-and-politics/2017/4/17/15290674/union-labor-movement-europe-bargaining-fight-15-ghent

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