Ch 18 Study Guide
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b. P = $3, Wage = $19
How many should hire?
= 3 workers b/c MRP =21
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c. Schools that teach
pottery skills increase
supply of workers and
lowers wage to $13. How
many should hire now?
= 5 workers b/c MRP=15
Represent a shift in D for
labor or movement?
= movement – only changed
value of Y axis …like
changing the P of a good
d. + e. Increase in D for
coffee mugs leads to P
increase to $5. Wage is
$13. How many hire now?
= 7 workers b/c MRP = 15
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Represent a movement or
a shift?
= a shift – changed an
outside factor , D curve is
MRP (MPL x P) if change
MPL or P then change the
D curve = shift
Study Guide Practice Prob #2
a. Show impact of an increase
in the D for lumber on the
market for lumber jacks.
= if D lumber increase =
increase P of lumber =
increase in MRP of
lumberjacks = shift D for
lumberjacks right =
increase Wage
b. What did the increase in the
P of lumber do to the MRP
of lumber jacks ? - see
answer to part a.
Study Guide Practice Prob #2
• What will happen to the MRP and the rental rate for timberland
and for capital that is used for cutting and shipping timber?
When the P of timber increases, it increases the MRP of Land, Labor, and
Capital ….the D curve for L,L,K is always = MRP of that factor of production….
…so if the P of the product goes up, not only is the Labor more valuable
(that is – for each unit Labor produces, it increases the MRP)…..but then the
Land must be more valuable and the Capital must be more valuable,,,so the
MRP of Land and Capital will also rise therefore raising the P of Land and
Capital
Land
Capital
• How has this event affected the prosperity of the firm
and the owners of the factors of production employed
by the firm?
• ….increase D for Lumber = increase P and Q =
prosperity of firm increases
• Who are the owners of the factors of production?
• Think circular flow model……
• Households
• ….so when P of Lumber increases , it increases the MRP
of L, L, K and shifts D right and increases the wages of
Labor and prices of Land and Capital …
• …so prosperity of all involved will rise
Study guide #3
• Suppose enormous amounts of forest land cleared for agricultural
use in Brazil. A. show impact of this event on the market for agricultural land in Brazil
=Increse in Supply = shift right =
price of land decreases
What has happened to
the Maginal Product of
land ?
= marginal product of
land decreased …
Can read this on the D
curve …see next slide
for explanation
How does the Marginal Product of Land Decrease?
• Just like labor, there is Diminishing Marginal
Product. Instead of each worker competing
for limited resources, so ….additional units of
land or capital compete for limited resources
(like labor)
Assume Farmer Bob is
working to his fullest
capacity and his 5
acres of land are
producing crops at full
capacity
Now we give him 5
more acres, but no
additional resources
(time, equip, etc..) will
this additional land
produce the same
amount as the original
5 acres?
Same idea would hold true if you looked
at capital ….ex: tractors
Suppose enormous amounts of forest land cleared for
agricultural use in Brazil. After considering the market for land,
now consider: what happened to the Marginal Product of the
labor and the wage? Explain
Lets assume that farmer
Bob is only working at 90%
but is still producing the
most he can given the land
he has…….so now…more
land….. =
More production =
increase Marginal Product
……
D for labor = MRP = MP x P
of goods ….so increase MP
= D for labor shifts right
and wages increase
Study Guide #4
Increase in capital (resources) for the workers so increase MP
so increase MRP = D for labor shifts right = wages increase
= increase D for Hondas = increase P = increase MRP of labor = D
shifts right and wages rise
Supply of labor increases = S curve shifts right = lower wages