Unit 6: Market Failures

Problem Set #6 Points Distribution

FRQ#1

6 Points

FRQ#2

8 Points

FRQ#3

11 Points

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

(a) 1 PointIdentifying negative externality because the social cost is higher than the private cost.

Question #1Real World Application of

Key Concepts5 Points EACH2 Points Definition3 Points Clear Example

1. Derived DemandDefinition (2 points): • Demand for resources is derived by the demand for the product in which they make.

If demand for product goes up, the demand for the resource goes up and vice versa.Example• 3 Points: Clear example• If demand for surfboards increases, the demand for shapers (the resource used to make surfboards) also

increases.• 2 Points: Some confusion/Unclear • The demand for surfboards changes the demand for shapers• 1 Point: Major confusion• If the demand for shapers up, the demand for surfboards goes up.

2. MRP and MRCDefinition (2 points): • MRP is the additional revenue generated by an additional resource. It is the

marginal product of the worker times the price of the products they make• MRC is the additional cost of hiring an additional resource. MRC equals the

wage in perfect competition.Example: (Must show BOTH)• 3 Points: Clear example• 2 Points: Some confusion • 1 Point: Major confusion

3. MonopsonyDefinition (2 points): • A monopoly for labor.• An imperfectly competitive labor market that is characterized by one

firm that does all the hiring. • The firm is a wage maker. Example: • 3 Points: Clear example• 2 Points: Some confusion • 1 Point: Major confusion

Question #3How Wages are Determined

in a Competitive Labor Markets

12 Points

There are 16 questions, but only 12 will be worth points. Grade only the answers in BLUE.

1 point for each answer (Must be full sentence)1. Two factors that affect demand for labor?• MRP (additional revenue generated)• Productivity of the worker• Price of related resources (subs and comp)2. How does MRP affect demand for labor?• MRP equals the demand for labor. The MRP of a worker reveals how much

they are worth to the firm. The greater the MRP the greater the demand. 3. Why is demand curve downward sloping?• Each worker is less productive and is worth less than the previous worker due

to dim. marginal returns.• As wage falls, the quantity that of workers that firms will hire will increase. 4. What determines supply of labor?• Quantity of qualified workers/Government licensing • Societal attitude toward leisure and work

1 point for each answer (Must be full sentence)5.Why is supply upward sloping?• To increase the amount of workers that are willing to work, the

wage must increase. • Each worker values leisure activities more than the previous worker.6. $3.00 (1/2 point)7. 500 workers (1/2 point)8. 800 workers supplied9. 300 workers demanded10. 200 workers laid off11. 300 workers enter12. Fewer workers would lose their job13. Unskilled will lose their jobs

1 point for each answer (Must be full sentence)

14. Who benefits?• Workers who don’t get fired and are now get a higher wage15. Who is hurt by minimum wage?• Workers that are fired because the quantity demand by

firms fall due to the increase in wage • Firms that must pay higher labor costs16. Do you favor higher minimum wage? Why?• Full points if their opinion is supported by an clear

explanation.

FRQ#1

8 Points

FRQ#2

13 Points

This FRQ has parts from units 3, 4, and 5.

S1

S1