Factor Markets
I. Consider a firm that sells its product in a perfectly competitive market for a price of $2. It also
hires labor in a perfectly competitive market.
a. Complete the table below except for the last two columns.
Put your formulas up here:
quantity
of labor
(L)
quantity
of output
(Q)
product
price
(P)
marginal
physical
product
(MPP)
total
revenue
(TR)
marginal
revenue
(MR)
marginal
revenue
product
(MRP)
total
cost of
labor
(TCL)
marginal
resource
cost
(MRC)
0
0
---
---
0
---
---
0
---
1
17
2
31
3
43
4
53
5
60
6
65
b. Remember, the demand curve for labor is the downward sloping part of the marginal revenue
product curve. On a separate sheet of paper, graph the demand curve for labor for this firm,
with L on the horizontal axis and MRP on the vertical axis. Label your curve (DL1)
Suppose there are 100 firms in this labor market. All
firms have the same DL as the firm above. Then the total
demand for labor curve is as shown below.
qty of labor demanded
(by 100 firms)
100
200
300
400
500
600
wage
34
28
24
20
14
10
Suppose the quantity supplied of
labor is as indicated below.
qty of labor supplied
250
200
150
100
75
50
wage
34
28
24
20
14
10
c. What is the equilibrium wage? _____
d. Complete the last two columns of the table at the top of the page.
e. Comparing the marginal revenue product and the marginal resource cost, determine how much
labor the firm will hire at the equilibrium wage. Explain.
II. Consider a firm that sells its product in an imperfectly competitive market. It hires labor in a
perfectly competitive market. The product demand schedule is as given below.
qty of product demanded
17
31
43
53
60
65
price of product
2.20
2.15
2.10
2.05
2.00
1.95
a. Complete the table below except for the last two columns.
Put your formulas up here:
quantity
of labor
(L)
quantity
of output
(Q)
product
price
(P)
marginal
physical
product
(MPP)
total
revenue
(TR)
marginal
revenue
(MR)
marginal
revenue
product
(MRP)
total
cost of
labor
(TCL)
marginal
resource
cost
(MRC)
0
0
---
---
0
---
---
0
---
1
17
2
31
3
43
4
53
5
60
6
65
b. On the same axes you used for part Ib, graph the demand curve for labor for this firm (Label it DL2).
c. Is the labor demand curve of the perfectly competitive firm (DL1) steeper or flatter than the
labor demand curve of the imperfectly competitive firm (DL2)? ____________
Which firm has the greater elasticity of demand for labor – the firm that operates in a
perfectly competitive product market or the one that operates in an imperfectly competitive
product market? ___________________________
Which firm will reduce its labor usage more in response to a wage increase?
___________________________
d. Suppose the going wage rate is $28. Complete the last two columns of the previous table.
Then comparing the marginal revenue product and the marginal resource cost, determine how
much labor the firm will hire at the going wage. Explain.