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© 2013 Pearson
Markets for Factors
of Production
19
CHECKPOINTS
© 2013 Pearson
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Checkpoint 19.1
Checkpoint 19.2
Checkpoint 19.3
Problem 1
Problem 1
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Problem 1
Problem 2
Problem 2
Clicker
version
Problem 2
Problem 3
Problem 3
Clicker
version
Problem 4
Problem 4
In the news
In the news
© 2013 Pearson
Clicker
version
In the news 1
In the news 2
CHECKPOINT 19.1
Practice Problem 1
Kaiser’s Ice Cream Parlour
hires workers to produce
smoothies.
The market for smoothies is
perfectly competitive, and the
price is $4.00 a smoothie.
The labor market is competitive,
and the wage rate is $40 a day.
What is the marginal product
and the value of the marginal
product of the fourth worker?
© 2013 Pearson
The table shows the workers’
total product schedule.
CHECKPOINT 19.1
Solution
The MP of hiring the fourth
worker equals the TP of 4
workers (43 smoothies) minus the
TP of 3 workers (33 smoothies),
which is 10 smoothies.
The VMP if the fourth worker
equals the MP of the fourth
worker (10 smoothies) multiplied
by the price of a smoothie ($4),
which is $40.
© 2013 Pearson
The table shows the workers’
total product schedule.
CHECKPOINT 19.1
Practice Problem 2
Kaiser’s Ice Cream Parlour hires
workers to produce smoothies.
The market for smoothies is
perfectly competitive, and the
price is $4.00 a smoothie.
The labor market is competitive,
and the wage rate is $40 a day.
How many workers will Kaiser’s
hire to maximize its profit and
how many smoothies a day will
Kaiser’s produce?
© 2013 Pearson
The table shows the workers’
total product schedule.
CHECKPOINT 19.1
Solution
Kaiser’s maximizes profit by
hiring the number of workers
that makes VMP equal to the
wage rate ($40 a day).
The VMP if the fourth worker
equals the MP of the fourth
worker (10 smoothies) multiplied
by the price of a smoothie ($4),
which is $40.
Kaiser’s hires 4 workers, and
they produce 43 smoothies.
© 2013 Pearson
The table shows the workers’
total product schedule.
CHECKPOINT 19.1
Practice Problem 3
Kaiser’s Ice Cream Parlour hires
workers to produce smoothies.
The market for smoothies is
perfectly competitive, and the
price is $4.00 a smoothie.
The labor market is competitive,
and the wage rate is $40 a day.
If the price rises to $5 a
smoothie, how many workers will
Kaiser’s hire?
© 2013 Pearson
The table shows the workers’
total product schedule.
CHECKPOINT 19.1
Solution
Kaiser’s maximizes its profit by
hiring 5 workers.
When Kaiser’s hires 5 workers
a day, the MP of the 5th worker
is 8 smoothies.
The price of a smoothie is $5,
so VMP is $40 a day equal to
the wage rate.
© 2013 Pearson
The table shows the workers’
total product schedule.
CHECKPOINT 19.1
Practice Problem 4
Kaiser’s Ice Cream Parlour hires
workers to produce smoothies.
The market for smoothies is
perfectly competitive, and the
price is $4.00 a smoothie.
The labor market is competitive,
and the wage rate is $40 a day.
Kaiser’s installs a new machine
that increases the productivity of
workers by 50 percent.
© 2013 Pearson
The table shows the workers’
total product schedule.
CHECKPOINT 19.1
Kaiser’s installs a new
machine that increases the
productivity of workers by
50 percent.
If the price remains at $4 a
smoothie and the wage
rises to $48 a day, how
many workers does
Kaiser’s hire?
© 2013 Pearson
The table shows the workers’
total product schedule.
CHECKPOINT 19.1
Solution
Kaiser’s maximizes its profit
by hiring 5 workers.
When Kaiser’s hires 5
workers, the MP of the 5th
worker is 12 smoothies.
The price of a smoothie is
$4, so VMP is $48 a day,
equal to the wage rate.
© 2013 Pearson
The table shows the workers’
total product schedule.
CHECKPOINT 19.1
In the news
Where have America’s jobs gone?
U.S. companies offer many reasons for their lack of robust
hiring, including weak consumer spending. Over the past
year, there has been an increase in manufacturing,
transportation, and health-care jobs, but not in sectors
related to homes and housing.
Source: The Wall Street Journal, July 12, 2011
Use the competitive goods and labor markets to explain
why jobs in some sectors have grown but not in others.
© 2013 Pearson
CHECKPOINT 19.1
Solution
A profit-maximizing firm hires the quantity of labor at
which the VMP of labor equals the market wage rate.
VMP of labor equals MP multiplied by the price of the
good.
If the price of the good or MP increases, firms offer more
jobs.
If the price of the good or MP is unchanged, firm don’t
offer more jobs.
© 2013 Pearson
CHECKPOINT 19.2
Practice Problem 1
In Greenville, where fast-food outlets hire teenagers
and seniors, the following events occur one at a time
and other things remain the same.
Explain the influence of the following event on the
market for fast food workers.
Seniors flock to Greenville and make it their home.
© 2013 Pearson
CHECKPOINT 19.2
Solution
An increase in the number
of seniors increases the
supply of fast-food labor.
The supply curve shifts
rightward from S0 to S2.
The wage rate falls, and the
number of fast-food workers
employed increases.
© 2013 Pearson
CHECKPOINT 19.2
Study Plan Problem
In Greenville, fast-food outlets hire teenagers and
seniors. Seniors flock to Greenville and make it their
home. The _____ labor in the fast-food market
______, the wage rate _____, and the number of
fast-food workers employed ____.
A.
B.
C.
D.
E.
supply of; increases; falls; increases
supply of; decreases; rises; decreases
supply of; increases; falls; increases
demand for; increases; rises; decreases
demand for; decreases; rises; increases
© 2013 Pearson
CHECKPOINT 19.2
Practice Problem 2
In Greenville, where fast-food outlets hire teenagers and
seniors, the following events occur one at a time and other
things remain the same.
Explain the influence of the following event on the market
for fast food workers.
Greenville becomes a major tourist center attracting
thousands of additional visitors every day.
© 2013 Pearson
CHECKPOINT 19.2
Solution
A boost in visitor numbers
increases the demand for fast
food, which in turn increases
the demand for fast-food
workers.
The demand curve shifts
rightward from D0 to D1.
The wage rate rises, and the
number of fast-food workers
employed increases.
© 2013 Pearson
CHECKPOINT 19.2
Study Plan Problem
In Greenville, fast-food outlets hire teenagers and seniors.
Greenville becomes a major tourist center, attracting
thousands of additional visitors every day. The ______ labor
in the fast-food market ______, the wage rate _____ ,and
the number of fast-food workers employed _____.
A.
B.
C.
D.
E.
demand for; decreases; falls; decreases
supply of; decreases; rises; decreases
supply of; decreases; rises; increases
demand for; increases; rises; increases
demand for; increases; falls; increases
© 2013 Pearson
CHECKPOINT 19.2
Practice Problem 3
In Greenville, where fast-food outlets hire teenagers and
seniors, the following events occur one at a time and other
things remain the same.
Explain the influence of the following event on the market
for fast food workers.
The price of fast food falls.
© 2013 Pearson
CHECKPOINT 19.2
Solution
A fall in the price of fast food
decrease the demand for fast-food
workers.
The demand curve shifts leftward
from D0 to D2.
The wage rage falls, and the
number of fast-food workers
employed decreases.
© 2013 Pearson
CHECKPOINT 19.2
Study Plan Problem
In Greenville, fast-food outlets hire teenagers and
seniors. The price of fast food falls. The ______ labor
in the fast-food market ______, the wage rate _____,
and the number of fast-food workers employed
_____.
A.
B.
C.
D.
E.
demand for; increases; rises; decreases
demand for; decreases; falls; decreases
supply of; decreases; rises; increases
demand for; decreases; rises; increases
supply of; increases; falls; increases
© 2013 Pearson
CHECKPOINT 19.2
Practice Problem 4
In Greenville, where fast-food outlets hire teenagers and
seniors, the following events occur one at a time and other
things remain the same.
Explain the influence of the following event on the market
for fast food workers.
A labor union organizes fast-food workers and gets a law
passed that raises the minimum age and lowers the
maximum age at which a person can work in the fast-food
industry.
© 2013 Pearson
CHECKPOINT 19.2
Solution
A rise in the minimum age and a
fall in the maximum age at
which a person can work in the
fast-food industry decreases the
supply of labor.
The supply curve shifts leftward
from S0 to S1.
The wage rate rises, and the
number of fast-food workers
decreases.
© 2013 Pearson
CHECKPOINT 19.2
Study Plan Problem
In Greenville, fast-food outlets hire teenagers and seniors. A
law raises the minimum age and lowers the maximum age of
a fast-food workers. The ______ labor in the fast-food market
______, the wage rate _____ ,and the number of fast-food
workers employed _____.
A.
B.
C.
D.
E.
supply of; decreases; falls; increases
demand for; decreases; rises; increases
supply of; decreases; rises; decreases
demand for; decreases; rises; decreases
demand for; increases; rises; decreases
© 2013 Pearson
CHECKPOINT 19.2
In the news
VW exec knows of no talk to unionize Tennessee plant
Volkswagen opened the $1 billion plant in Chattanooga in
May and hired its 2,000th employee there in July. Our
hourly wage starts at $14.50 per hour, which is very
competitive and we have great benefits.
Source: The New York Times, August 1, 2011
If this plant’s workers join the union, explain how the wage
rate will change?
© 2013 Pearson
CHECKPOINT 19.2
Solution
A union will try to raise the wage rates of its members and
to improve the conditions of employment.
If the union can increase the value of marginal product of
its members, then wage rates will rise.
But if the union tries to increase wage rates without an
increase in the value of marginal product, the plant will
cut the number of workers.
© 2013 Pearson
CHECKPOINT 19.3
Practice Problem 1
Which of the following items are nonrenewable natural
resources, which are renewable natural resources, and
which are not natural resources? Explain your answers.
• Beaches in Florida
• Lake Powell
• The Empire State Building
• Silver mines in Arizona
© 2013 Pearson
• The Great Lakes
• National Parks
• Redwood forests
• The Statue of Liberty
CHECKPOINT 19.3
Solution
Natural resources include all the gifts of nature.
A nonrenewable natural resource is one that once used
cannot be used again.
A renewable natural resource is one that can be used
repeatedly.
Nonrenewable natural resources include silver mines in
Arizona.
© 2013 Pearson
CHECKPOINT 19.3
Renewable natural resources include beaches in Florida,
Lake Powell, the Great Lakes, national parks, and redwood
forests.
The Empire State Building and the Statue of Liberty are
national landmarks, but they are not natural resources.
Labor and capital were used to build the Empire State
Building.
The Statue of Liberty was a gift from France and not a gift of
nature.
© 2013 Pearson
CHECKPOINT 19.3
Practice Problem 2
In the market for a nonrenewable natural resources,
explain what determines the equilibrium price and
equilibrium quantity.
© 2013 Pearson
CHECKPOINT 19.3
Solution
In a nonrenewable natural resource market, the
equilibrium price is the price that gives suppliers an
expected profit equal to the interest rate.
The equilibrium quantity is the quantity demanded at that
price.
© 2013 Pearson
CHECKPOINT 19.3
In the news
Farmland more valuable than ever
Growing demand for grain for food, fuel, and export has
doubled the average price of farmland since 2000. The
prices of farmland in Iowa, Nebraska, South Dakota, and
Wyoming rose by more than 20 percent in 2007.
Source: USA Today, February 5, 2008
1. Explain how the growing demand for grain affects the
market for farmland.
© 2013 Pearson
CHECKPOINT 19.3
Solution
As the demand for grain grows with no change in grain
output, the price of grain rises.
Farmland is a renewable resource—a factor of
production.
The demand for a factor of production is a derived
demand, which is determined by the factor’s value of
marginal product (VMP).
An increase in the price of grain increases the farmland’s
VMP and increases the demand for farmland.
The price of farmland rises.
© 2013 Pearson
CHECKPOINT 19.3
In the news
Farmland more valuable than ever
Growing demand for grain for food, fuel, and export has
doubled the average price of farmland since 2000. The
prices of farmland in Iowa, Nebraska, South Dakota, and
Wyoming rose by more than 20 percent in 2007.
Source: USA Today, February 5, 2008
2. How might farmers meet the growing demand for farm
products without having to use a greater quantity of land?
© 2013 Pearson
CHECKPOINT 19.3
Solution
To increase farm output without using more land, farms
will have to become more productive.
That is, they will have to use a better technology.
With better technology, the marginal product of the land
will increase, which will increase the land’s VMP.
© 2013 Pearson