Mr. Maurer
AP Economics
Name:_______________________
Chapters 27 and 28 - Factor Markets (Resource Markets)
Problem Set 1 – Questions you should be able to answer right now.
Here is the only new information you may need for these problems:
* The terms “resource” and “factor” can and will be used interchangeably.
* The wage rate is the price of labor for the firm.
* The demand for resources is a derived demand, meaning that it comes from the demand for the
product that the resources can be used to produce. If the demand for the product increases,
demand for resources (labor or capital) used to make the product will also increase and vice
versa.
* And a few definitions:
- Marginal factor cost (or marginal resource cost): the cost of employing one more
unit of a resource (labor or capital).
- Marginal product (or marginal physical product): the actual amount of additional
product that can be produced by employing one more unit of a resource (labor or capital).
- Marginal revenue product: the revenue generated by employing one more unit of a
resource (labor or capital). The value of the additional output created by the last unit of a
resource employed.
OK. That’s all you need to know to answer this first set of problems. Let’s give it a try.
Number of
Workers
10
11
12
13
14
15
Hourly
Wage
$7.00
7.10
7.20
7.30
7.40
7.50
Marginal
Factor Cost
Marginal
Revenue Product
$8.10
8.30
8.50
8.70
8.90
$10.70
9.60
8.60
7.40
6.30
1. According to the information in the table above, by how much would the twelfth worker increase the
th
hourly profit?
$1.30 (Marginal revenue product of the 12 worker
minus marginal factor cost of the 12th worker.)
2. According to the information in the table, how many workers should the firm hire? Explain.
13 – this is the last worker for which MRP > MFC. Beginning
with the 14th worker, each worker costs the firm more than
they bring in in revenue.
Mr. Maurer
AP Economics
Name:_______________________
Questions 3 and 4 are based on the following table, which shows the relationship between the number
of workers and coal output (in tons per day).
Number of
Workers
0
1
2
3
4
5
Total Output
of Coal
0
25
44
60
70
75
Marginal
Factor Cost
Marginal
Revenue Product
$40
40
40
40
40
$125 (25 tons x $5 per ton)
95
80
50
25
3. What is the marginal physical product of the second worker?
19 tons of coal per day.
4. How many workers would the coal company want to hire if the price of coal were competitively priced
at $5 per ton and the wage rate were $40 per day?
Four
5. For a competitive labor market, an increase in which of the following will lead to an increase in the
demand for labor? (Circle one)
(A) The supply of labor
(B) The minimum wage
(C) The cost of medical benefits provided to the labor hired by firms
(D) Labor union dues
(E) The demand for the good that labor produces
6. In the current labor market, suppose that the wage rate for dentists is significantly higher than the wage
rate for hairdressers. In the long run, if you observed that the wage rate for hairdressers rose while the
wage rate for dentists fell, which of the following would best explain your observation.
(A) The supply of hairdressers must have increased, and the supply of dentists must have
decreased.
(B) The supply of hairdressers must have decreased, and
the supply of dentists must have increased.
(C) The demand for hairdressers must have increased, and the supply of dentists must have
decreased.
(D) The demand for hairdressers must have decreased, and the supply of dentists must have
increased.
(E) The demand for both hairdressers and dentists must have decreased.
7. Due to a shortage of highly trained chefs, salaries for chefs increased by 30% in the 2000s, as a result,
many more high school graduates began to enter culinary school in the 2010s. What can you expect to
Chef’s salaries will go down as
the new graduates from culinary school increase the supply of
chefs in the labor market.
happen to chefs’ salaries in the near future? Explain.
Mr. Maurer
AP Economics
Name:_______________________
8. Assume that the labor market for professional football players is competitive. As a result of the latest
information about the danger of concussions in football, fewer and fewer young people are playing the
sport. What can you expect to happen to professional football players’ salaries in the future? Explain.
Salaries for football players will go up because supply of
football players in the labor market will go down due to fewer
kids playing.
9. Assume that a major new study finds that women find men who have just had their haircut much more
attractive than those who have not. What can you expect to happen to wages for barbers in the short run?
Wages for barbers will go up in the short run because the
study will increase the demand for haircuts. The demand for
barbers will then go up because the demand for barbers is
derived from the demand for haircuts.
Explain.
10. Suppose that the market for low-wage labor is perfectly competitive and initially in equilibrium. If the
government establishes an effective minimum wage, what will happen to the number of low-wage
workers employed and the unemployment rate as a result? Explain. Draw a correctly labeled graph of the
low-wage labor market to illustrate your answer. You can see an example of a graph of a labor market on
the last page of this packet. (Hint, what concept from our unit on supply and demand applies here?)
The number of low-wage workers
employed will decrease because the
demand for low-wage workers will
be lower at the new effective
minimum wage than it was before.
Unemployment will increase
because there will be a gap between
the number of workers employed at
the new wage and the number of
low-wage workers who would like to work at that wage (see
diagram).
Mr. Maurer
AP Economics
Name:_______________________
11. A profit-maximizing firm that sells its output in a perfectly competitive market hires three additional
workers, calculating that the contribution to total revenue of the last worker hired just equals the extra
cost of hiring that worker. One year later, the firm finds that the last worker’s contribution to total
revenue is less than the extra cost of hiring that worker. Which of the following may have occurred in the
interim to explain this change?
(A) The firm laid off some workers.
(B) The market supply for the firm’s product decreased.
(C) The market demand for the firm’s product decreased.
(D) A technological advance increased the productivity of the firm’s workforce.
(E) The firm negotiated new contracts with workers, lowering wages.
12. Assume that, instead of the scenario described in #11, that the firm found that, after a year, the total
revenue of the last worker hired was greater than the extra cost of hiring that worker. Describe a scenario
Any scenario that causes a higher price
for the firm’s product OR an increase in worker productivity
OR a lower wage for the firm’s workers would explain this
change.
that could account for that change.
13. If a 4 percent wage increase in a particular labor market results in a 12 percent decrease in
employment, what is the elasticity of the demand for labor? Provide both an elasticity coefficient and
indicate if elasticity is elastic, inelastic, unit elastic, perfectly elastic, or perfectly inelastic.
12% ÷ 4% = 3. Elasticity coefficient is 3, which is elastic.
14. If a 10 percent wage increase in a particular labor market results in a 20 percent decrease in
employment, what is the elasticity of the demand for labor? Provide both an elasticity coefficient and
indicate if elasticity is elastic, inelastic, unit elastic, perfectly elastic, or perfectly inelastic.
20% ÷ 10% = 2. Elasticity coefficient is 2, which is elastic.
15. An increase in the effective minimum wage will have less of an impact on employment if the demand
for labor is (circle one) and explain your answer.
(A) a derived demand
(B) decreasing (C) relatively elastic
(D) relatively inelastic (E) unit elastic
If the demand for labor is relatively inelastic, then the quantity
of workers hired will not decrease as much when wage rate
increases as it would if the demand for labor was elastic.
16. Businesses employ workers from city neighborhoods and rural areas. These workers are perfect
substitutes and cannot relocate in the short run. The government offers businesses a wage subsidy if they
hire workers from city neighborhoods. What effect will the subsidy have on the wage rate of rural
workers and on the total hours they work? Explain.
The wage rate and total hours worked for rural workers will
both decrease because demand for rural workers will decrease
due to the lower factor cost (wage rate – subsidy) of hiring city
workers.
Mr. Maurer
AP Economics
Name:_______________________
17. Suppose that a large number of unskilled workers enter a nation’s labor market. If the labor market is
competitive, how will the number of unskilled workers hired and the wage rate for unskilled workers
change? Explain.
The number of unskilled workers hired will increase and the
wage rate for unskilled workers will decrease due to the
increased supply of unskilled workers.
18. Which of the following tends to increase the gap in earning between highly educated and poorly
educated workers over time?
(A) An increase in the demand for poorly educated workers relative to highly educated workers
(B) An increase in the supply of highly educated workers relative to poorly educated workers
(C) A decrease in the demand for poorly educated workers
relative to highly educated workers
(D) A decrease in both the demand for and the supply of poorly educated workers.
(E) An increase in both the demand for and the supply of poorly educated workers.
19. Motivated by lower import prices, United States manufacturers increase their imports of steel from
other steel-producing countries. What would you expect to be the effect on wages for United States
Wages for U.S. steelworkers will decrease,
due to decreased demand for U.S. steelworkers because of the
decreased demand for American steel. The demand for U.S.
steelworkers is derived from the demand for U.S. steel.
steelworkers as a result? Explain.
20. How will an increase in the demand for automobiles change the demand for skilled automobile
workers and the wage rate of skilled automobile workers? Explain.
Both the demand for skilled automobile workers and their
wage rate will increase. Demand will increase because it is a
derived demand, based on the demand for automobiles. Wage
rate will increase as demand for skilled automobile workers
increases.
21. When labor supply in a competitive
labor market increases, what will happen to
the equilibrium wage rate and level of
employment? Draw a correctly labeled
graph to illustrate your answer.
The equilibrium wage rate
will decrease and the level of
employment will increase.
See graph at left.
Mr. Maurer
AP Economics
Name:_______________________
22. The graph above illustrates the labor market for teenage workers. The current minimum wage for all
workers is W1. If Congress introduces a sub-minimum wage, W2, that applies only to teenagers, what is
Teenage employment
will increase because the quantity of teenage workers
demanded will be greater at the new minimum wage, W2, than
it was at the original minimum wage, W1.
the most likely effect on the level of teenage employment? Explain.
23. If a competitive firm pays its workers the value of the marginal product of the last worker hired,
which of the following is true?
(A) The firm will not earn any economic profits.
(B) Workers will look for employment elsewhere.
(C) The wage will be less than the marginal product.
(D) The firm will not maximize profits.
(E) The contribution of the last worker hired to the firm’s
profit will be zero.