704 section 13 Factor Markets
the marginal factor cost curve is above the labor supply curve. The equilibrium quan-
tity of labor is found where the marginal revenue product equals the marginal factor
cost, as represented by L* on the graph. The firm will pay the wage required to hire L*
workers, which is found on the supply curve above L*. The labor supply curve shows
that the quantity of labor supplied is equal to L* at a wage of W*. The equilibrium
wage in the market is thus W*. Note that, unlike the wage in a perfectly competitive
labor market, the wage in the imperfectly competitive labor market is less than the
marginal factor cost of labor.
In Modules 69–71 we have learned how firms determine the optimal amount of
land, labor, or capital to hire in factor markets. But often there are different combina-
tions of factors that a firm can use to produce the same level of output. In the next
module, we look at how a firm chooses between alternative input combinations for
producing a given level of output.Module 71 AP Review
Check Your Understanding
- Formerly, Clive was free to work as many or as few hours per
week as he wanted. But a new law limits the maximum number
of hours he can work per week to 35. Explain under what
circumstances, if any, he is made
a. worse off.
b. equally well off.
c. better off.
2. Explain in terms of the income and substitution effects how a
fall in Clive’s wage rate can induce him to work more hours
than before.
Solutions appear at the back of the book.
Tackle the Test: Multiple-Choice Questions
- Which of the following is necessarily true if you work more
when your wage rate increases?
a. The income effect is large.
b. The substitution effect is small.
c. The income effect dominates the substitution effect.
d. The substitution effect dominates the income effect.
e. The income effect equals the substitution effect. - Which of the following will cause you to work more as your
wage rate decreases?
I. the income effect
II. the substitution effect
III. a desire for leisure
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III - Which of the following will shift the supply curve for labor to
the right?
a. a decrease in the labor force participation rate of women
b. a decrease in population
c. an increase in wealth
d. a decrease in the opportunity cost of leisure
e. an increase in labor market opportunities for women- An increase in the wage rate will
a. shift the labor supply curve to the right.
b. shift the labor supply curve to the left.
c. cause an upward movement along the labor supply curve.
d. cause a downward movement along the labor supply curve.
e. have no effect on the quantity of labor supplied. - The factor demand curve for a firm in an imperfectly
competitive factor market is the same as which of the following
curves?
a. VMP
b.MPP
c. MFC
d.MRP
e. MP