152 á Step 4. Review the Knowledge You Need to Score High
á Answers and Explanations
- C—Since ovens would be a less expensive com-
plementary resource (with more ovens, they can
bake more pies), your aunt needs more employ-
ees to go along with the extra ovens. Apple corers
and peelers are complements, but even if you
think they are substitutes, the impact on labor
demand is uncertain because of the competing
output and substitution effects. - C—Do a quick ratio of marginal product per
dollar. When you see that the MPL/PL>MPK/PK,
you notice that the firm is getting more “bang for
the buck” with labor. Immediately rule out any
choice that says they hire less labor. The only way
that MPL/PLfalls to equal MPK/PKis to decrease
the capital and increase the labor, causing the
MPKto rise and the MPLto fall. The firm does
this until the marginal products divided by the
prices are equal.
3. B—The equilibrium wage rises with stronger
demand or lessened supply of labor. The stronger
demand for the product increases the wage as
the demand for labor increases. All other choices
either increase the labor supply or decrease the
demand, thus decreasing the wage. Emergence of
monopsony decreases the wage below competitive
levels.
4. E—In a competitive labor market, equilibrium is
where W=MRPL.
5. D—In a monopsony labor market, equilibrium
is where MFC =MRPL.
á Rapid Review
Marginal revenue product (MRP):Measures the value of what the next unit of a resource
(e.g., labor) brings to the firm. MRPL=MR ¥MPL. In a perfectly competitive product
market, MRPL=P¥MPL. In a monopoly product market, MR <Pso MRPm<MRPc.Marginal resource cost (MRC):Measures the cost the firm incurs from using an addi-
tional unit of an input. In a perfectly competitive labor market, MRC =Wage. In a monop-
sony labor market, the MRC >Wage.Profit-maximizing resource employment:The firm hires the profit-maximizing amount
of a resource at the point where MRP =MRC.Demand for labor:Labor demand for the firm is the MRPLcurve. The labor demand for
the entire market DL= SMRPLof all firms.Derived demand:Demand for a resource like labor is derived from the demand for the
goods produced by the resource.Determinants of labor demand:One of the external factors that influences labor demand.
When these variables change, the entire demand curve shifts to the left or right.Least-Cost Rule:The combination of labor and capital that minimizes total costs for a
given production rate. Hire L and K so that MPL/PL=MPK/PKor MPL/MPK=PL/PK.Monopsonist:A firm that has market power in the factor market, i.e., a wage setter.http://www.ebook3000.com