Unit V: Factor Markets

Problem Set #5 Points Distribution

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 using numbers/chart• 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

2. Perfectly Competitive Resource Market

2 Points-Chart (Correct numbers for MP and MRP)

a. Law of Diminishing Marginal Returns• 2 Point- Identifies correct stages

– Stage I: Increasing Returns- 1st and 2nd workers, – Stage II: Decreasing Returns- 3rd through the 8th

worker– Stage III: Negative Returns- 9th worker

• 1 Point- Increasing Returns is the result of specialization

• 1 Point- Decreasing Returns is the result of LIMITED FIXED RESOURCES (not overcrowding!!!)

• 1 Point- Negative Returns is the result of workers getting in the way

b. How many workers?

• 2 Points- States profit maximizing rule for labor MRP=MRC

• 1 Point- 4 workers should be hired

• 1 Point- Explains that they calculated MRP by multiplying P x MP or change in TR

• 1 Point-Explains that the MRC is the wage $25

c. Change in price

• 1 Point- States that more workers will be hired

• 1 Point- 5 workers should be hired

• 2 Point- Explains that MRP increased because price increased

• 1 Point- Explains that the firm is now willing to hire the 5th worker because he generates more revenue

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