CHAPTER 16
The Demand for Resources
A. Short-Answer, Essays, and Problems
1. What are four significant reasons for studying resource pricing?
2. The theory of resource pricing is sometimes referred to by economists as the theory of income distribution.
Why?
3. Why aren’t the tools of product market analysis directly applicable to the resource market?
4. How do the factors determining resource demand differ from those in the product market?
5. Why is the demand for resources called a “derived” demand? On what two factors does the strength of the
demand for resources depend? How are these two factors related?
6. What are the two key factors that determine the strength of demand? How do they determine whether a
good is in high demand or low demand?
7. What is the profit-maximizing condition for the use of a resource?
8. Why is the marginal revenue product schedule a demand schedule for the individual firm in a purely
competitive resource market and selling output in a purely competitive product market?
9. The table below shows the total production a firm will be able to obtain if it employs varying amounts of
resource X while the amounts of the other resources the firm employs remain constant. Compute the
marginal product of each of the seven units of resource X and enter these figures in the table. Assume the
product the firm produces sells in the market for $3.00 per unit. Compute the total revenue of the firm at
each of the eight levels of output and the marginal revenue product of each of the seven units of resource X.
Enter these figures in the table below.
Quantity of
resource X
employed
Total
product
Marginal
product of X
Total
revenue
Marginal
revenue product
of X
0
0
1
24
_____
$_____
$_____
2
44
_____
_____
_____
3
60
_____
_____
_____
4
72
_____
_____
_____
5
80
_____
_____
_____
6
84
_____
_____
_____
7
86
_____
_____
_____
On the basis of your computations complete the firm’s demand schedule for resource X by indicating in the
table below how many units of resource X the firm would employ at the given prices.
Price of X
Quantity of X
demanded
$84
_____
72
_____
60
_____
48
_____
36
_____
24
_____
12
_____
6
_____
10. What is the difference between the demand curve for a resource under pure competition and under
imperfect competition?
11. Contrast the factors that underlie the downsloping resource demand curve with those which underlie the
downsloping product demand curve.
16–344
12. Use the following total-product schedule for a resource to answer the next three questions. Assume that the
quantities of other resources the firm employs remain constant.
Units of
resource
Total
product
1
12
2
21
3
27
4
32
5
36
(a) If the firm’s product sells for a constant $2 per unit, what is the marginal revenue product of the third
unit of the resource?
(b) If the firm’s product sells for a constant $2 per unit and the price of this resource is $8, how many units
of the resource will the firm employ?
(c) If the firm can sell 12 units of output at a price of $1.00 per unit and 21 units of output at a price of
$0.80 per unit, what is the marginal revenue product of the second unit of the resource?
13. The table below summarizes the marginal product data for labor in producing personal computers. Assume
the other quantities employed by the firm remain constant. Compute the MPL, TR, and MRP and answer
the following questions.
L
MPL
Price
TR
MRP
0
$1000
_____
1
_____
1000
_____
_____
2
_____
900
_____
_____
3
_____
800
_____
_____
4
_____
700
_____
_____
5
_____
600
_____
_____
(a) What type of market is the one for personal computers?
Now look at the table below showing a different market situation for the demand for personal computers.
Fill in the table and answer the following questions.
L
MPL
Price
TR
MRP
0
$1000
_____
1
_____
1000
_____
_____
2
_____
1000
_____
_____
3
_____
1000
_____
_____
4
_____
1000
_____
_____
5
_____
1000
_____
_____
(b) What type of market does the firm face for personal computers?
16–345
14. In the table below are the marginal product data for resource Y. Assume that the quantities of other
resources employed by the firm remain constant. Compute the total product (output) of the firm for each of
the seven quantities of resource Y employed and enter these figures in the table. Assume that the firm sells
its output in an imperfectly competitive market and that the prices at which it can sell its product are those
given in the table. Compute and enter in the table total revenue and the marginal revenue product for each
of the seven units of resource Y.
Quantity of
resource Y
employed
Marginal
product
of Y
Total
product
Product
price
Total
revenue
Marginal
revenue
product of Y
0
–
0
–
–
1
44
_____
$2.00
$_____
$_____
2
42
_____
1.90
_____
_____
3
39
_____
1.80
_____
_____
4
32
_____
1.70
_____
_____
5
24
_____
1.60
_____
_____
6
14
_____
1.50
_____
_____
7
2
_____
1.40
_____
_____
How many units of resource Y would the firm employ at each of the following resource prices?
Resource
price
Quantity
employed
$90
_____
80
_____
70
_____
60
_____
50
_____
40
_____
30
_____
20
_____
10
_____
1
_____
16–346
15. Complete the following table, where L is the units of labor, TPL is the total product of labor, MPL is the
marginal product of labor, P is product price, TR is total revenue, and MRPL is the marginal revenue
product of labor.
L
MPL
P
TR
MRPL
0
$2.00
$_____
1
_____
2.00
_____
$_____
2
_____
2.00
_____
_____
3
_____
2.00
_____
_____
4
_____
2.00
_____
_____
5
_____
2.00
_____
_____
6
_____
2.00
_____
_____
7
_____
2.00
_____
_____
8
_____
2.00
_____
_____
9
_____
2.00
_____
_____
10
_____
2.00
_____
_____
(a) In what type of market is the firm selling its product? How do you know?
(b) Why does the MRP schedule decrease as labor increases?
(c) Complete the following table.
Wage
rate
Quantity of
workers employed
$16
_____
14
_____
12
_____
10
_____
8
_____
6
_____
16–347
16. Complete the following table, where L is the units of labor, TPL is the total product of labor, MPL is the
marginal product of labor, P is product price, TR is total revenue, and MRPL is the marginal revenue
product of labor.
L
MPL
P
TR
MRPL
0
$2.00
$_____
1
_____
1.90
_____
$_____
2
_____
1.80
_____
_____
3
_____
1.70
_____
_____
4
_____
1.60
_____
_____
5
_____
1.50
_____
_____
6
_____
1.40
_____
_____
7
_____
1.30
_____
_____
8
_____
1.20
_____
_____
9
_____
1.10
_____
_____
10
_____
1.00
_____
_____
(a) In what type of market is the firm selling its product? How do you know?
(b) Why does the MRP schedule decrease as labor increases?
(c) Complete the following table.
Wage
rate
Quantity of
workers employed
$16
_____
14
_____
12
_____
10
_____
8
_____
6
_____
16–348
17. Complete the following table, where L is the units of labor, TPL is the total product of labor, MPL is the
marginal product of labor, P is product price, TR is total revenue, and MRPL is the marginal revenue
product of labor.
L
MPL
P
TR
MRPL
0
$5.00
$_____
1
_____
5.00
_____
$_____
2
_____
5.00
_____
_____
3
_____
5.00
_____
_____
4
_____
5.00
_____
_____
5
_____
5.00
_____
_____
6
_____
5.00
_____
_____
7
_____
5.00
_____
_____
8
_____
5.00
_____
_____
9
_____
5.00
_____
_____
10
_____
5.00
_____
_____
(a) In what type of market is the firm selling its product? How do you know?
(b) Why does the MRP schedule decrease as labor increases?
(c) Complete the following table.
Wage rate
8-hr shift
Quantity of
workers employed
$135
_____
120
_____
105
_____
90
_____
75
_____
60
_____
18. Use the information in the table to answer the questions below.
(1)
Units of
Resource
(2)
Total Product
(Output)
(3)
Marginal
Product (MP)
(4)
Product
Price
(5)
Total
Revenue
(6)
Marginal
Revenue Product
(MRP)
0
0
—
4
—
1
5
4
2
9
4
3
12
4
4
14
4
5
15
4
(a) Complete the information in the columns (3), (5), and (6).
(b) Graph the derived demand curve on the graph provided below. Be sure to label the axis.
19. Use the information in the table to answer the questions below.
(1)
Units of
Resource
(2)
Total
Product
(Output)
(3)
Marginal
Product
(MP)
(4)
Product
Price
(5)
Total
Revenue
(6)
Marginal
Revenue
Product (MRP)
0
0
—
5.60
—
1
16
5.20
2
27
4.80
3
36
4.20
4
44
3.90
5
51
3.70
(a) Complete the information in the columns (3), (5), and (6).
(b) Graph the derived demand curve on the graph provided below. Be sure to label the axis.
(c) Suppose the equilibrium wage is $21. What is the quantity of workers that will be employed?
20. (Consider This) How is marginal revenue product reflected in “winner-take-all” markets such as in the music
industry?
21. What is the difference between a change in resource demand and a change in the quantity of a resource
demanded? What factors contribute to a change in resource demand or a change in the quantity of a resource
demanded?
22. How will a change in productivity change the demand for a resource? What three factors will affect
productivity?
23. Compare the factors that will cause shifts in the downsloping resource demand and product demand curves.
24. Assume that labor and capital are substitutes in production. If there is an increase in the price of capital,
how can this lead to either an increase or decrease in the demand for labor?
25. Why is the effect of a change in price of a substitute good potentially ambiguous?
26. Does it matter whether capital and labor are substitutes or complements when figuring out what will
happen to the demand for labor if the price of capital increases? Explain.
27. Compare and explain the significance of the substitution and output effects as they apply to resource
pricing. What relationship, if any, do they bear to the income and substitution effects discussed in
connection with product demand?
28. Indicate how the following events will shift the firm’s demand curve for labor: increase it (I); decrease it
(D); keep it the same (S).
___ Technological advances increase labor’s productivity.
___ The wage rate increases.
___ The demand for the product that labor produces decreases.
___ The wage rate decreases.
___ Absenteeism reduces labor’s productivity.
___ The price of labor-saving machinery is reduced and the substitution effect is greater than the output
effect.
29. What are examples of the fastest growing occupations in percentage terms expected to be from 2014–2024?
What economic principle of resource pricing best explains these trends?
30. What are three examples of occupations that are expected to experience a rapid decline in employment
from 2014–2024? Why are these occupations likely to experience this decline?
31. What will be the elasticity of resource demand in the following cases?
(a) unit wages rise by 10% and the number of employed workers falls by 5%
(b) unit wages rise by 4% and the number of employed workers falls by 6%
(c) unit wages rise by 3% and the number of employed workers falls by 3%
32. Compare the factors that explain the elasticity of resource and product demand.
33. What effect, if any, will each of the following have upon the elasticity or the location of the demand curve
for resource J that is being used in the production of commodity X? If there is uncertainty as to the precise
effect, explain the sources of that uncertainty.
(a) A decline in the demand for product X.
(b) An increase in the price of Y, a substitute product for X.
(c) A decline in the price of substitute resource K.
(d) A decline in the number of available resources that are substitutable for J in the production of X.
(e) An increase in the price of complementary resource L.
(f) An increase in the elasticity of demand for product X due to an increase in the number of sellers in the
market.
34. Explain briefly and concisely the meaning and significance of the following equation:
35. A firm combines two resources, X and Y, to produce an output level Q in a purely competitive market. The
cost of a unit of X is $15 and the cost of a unit of Y is $8. The marginal product of X is 30 units and the
marginal product of Y is currently 24 units at output level Q. What would you recommend that the firm do
given this resource combination?
36. A firm combines two resources, X and Y, to produce an output level Q in a purely competitive market. The
cost of a unit of X is $20 and the cost of a unit of Y is $4. The marginal product of X is 100 units and the
marginal product of Y is currently 16 units at output level Q. What would you recommend that the firm do
given this resource combination?
1
capital of Price
capital of MRP
labor of Price
labor of MRP ==
16–351
37. A perfectly competitive firm in the factor and product markets sells its output for $1 and pays factors PL =
$9 and Pc = $12. What is the profit-maximizing combination of labor (L) and capital (C) for the firm?
QL
MPL
QC
MPC
1
28
1
18
2
24
2
15
3
20
3
12
4
16
4
9
5
9
5
6
6
4
6
3
7
2
7
2
38. In the table below are the marginal-product and marginal-revenue-product schedules for resource A and
resource B. Both resources are variable and are employed in purely competitive markets. The price of A is
$1 and the price of B is $2.
Quantity of
resource A
employed
Marginal
product
of A
Marginal
revenue
product of A
Quantity of
resource B
employed
Marginal
product
of B
Marginal
revenue
product of B
1
20
$5.00
1
20
$5.00
2
16
4.00
2
18
4.50
3
12
3.00
3
16
4.00
4
10
2.50
4
12
3.00
5
8
2.00
5
8
2.00
6
4
1.00
6
6
1.50
7
2
.50
7
4
1.00
(a) What is the least-cost combination of resources A and B that would enable the firm to product 120
units of output?
(b) What is the profit-maximizing combination of A and B?
(c) What is total output and profit when the firm is employing the profit-maximizing combinations of A
and B?
39. In the table below are the marginal-product and marginal-revenue-product schedules for resource A and
resource B. Both resources are variable and are employed in purely competitive markets. The price of A is
$2 and the price of B is $4.
Quantity of
resource A
employed
Marginal
product
of A
Marginal
revenue
product of A
Quantity of
resource B
employed
Marginal
product
of B
Marginal
revenue
product of B
1
40
$10.00
1
40
$10.00
2
32
8.00
2
36
9.00
3
24
6.00
3
32
8.00
4
20
5.00
4
24
6.00
5
16
4.00
5
16
4.00
6
8
2.00
6
12
3.00
7
4
1.00
7
8
2.00
(a) What is the least-cost combination of resources A and B that would enable the firm to produce 240
units of output?
(b) What is the profit-maximizing combination of A and B?
(c) What is the total output and profit when the firm is employing the profit-maximizing combination of A
and B?
40. The table below summarizes the marginal product and marginal revenue product information for labor and
capital. Assume the other quantities used by the firm remain constant. The price for labor is $6 and the
price for capital is $4. Use the table to answer the following questions.
QL
MPL
MRPL
MPK
MRPK
1
50
$36
40
$30
2
45
30
38
29
3
30
24
32
25
4
20
18
30
20
5
10
12
20
18
6
5
6
15
15
7
0
0
10
10
(a) What would be the least-cost combination of labor and capital that would enable the firm to produce
285 units?
(b) What is the profit-maximizing combination of A and B?
(c) Suppose the price of capital decreases to $3. Now, what is the least-cost combination of labor and
capital? How many units of output would it allow the firm to produce?
(d) Given the price change, now what is the profit-maximizing combination of labor and capital? How has
output changed?
41. A firm combines two resources, A and B, to produce an output level Q in a purely competitive market. The
cost of a unit of A is $5 and the cost of a unit of B is $12. The marginal revenue product of A is $5 and the
marginal revenue product of B is currently $12. What would you recommend that the firm do given this
resource combination?
42. What are two criticisms of the marginal productivity theory of income distribution?
43. “Under competition, workers are paid what they are worth.” Explain and evaluate this statement. Does it
follow that the resulting distribution of wage incomes is desirable?
44. (Last Word) What has the long-term effect of ATMs on the demand for bank teller labor?
45. (Last Word) “Capital is, overall, a complement for human labor, not a substitute.” Evaluate this statement
in terms of the effect technological innovations in capital will have on the labor market.
B. Answers to Short-Answer, Essays, and Problems
1. What are four significant reasons for studying resource pricing?
2. The theory of resource pricing is sometimes referred to by economists as the theory of income distribution.
Why?
3. Why aren’t the tools of product market analysis directly applicable to the resource market?
4. How do the factors determining resource demand differ from those in the product market?
5. Why is the demand for resources called a “derived” demand? On what two factors does the strength of the
demand for resources depend? How are these two factors related?
6. What are the two key factors that determine the strength of demand? How do they determine whether a
good is in high demand or low demand?
7. What is the profit-maximizing condition for the use of a resource?
8. Why is the marginal revenue product schedule a demand schedule for the individual firm in a purely
competitive resource market and selling output in a purely competitive product market?
16–355
9. The table below shows the total production a firm will be able to obtain if it employs varying amounts of
resource X while the amounts of the other resources the firm employs remain constant. Compute the
marginal product of each of the seven units of resource X and enter these figures in the table. Assume the
product the firm produces sells in the market for $3.00 per unit. Compute the total revenue of the firm at
each of the eight levels of output and the marginal revenue product of each of the seven units of resource X.
Enter these figures in the table below.
Quantity of
resource X
employed
Total
product
Marginal
product of X
Total
revenue
Marginal
revenue product
of X
0
0
1
24
_____
$_____
$_____
2
44
_____
_____
_____
3
60
_____
_____
_____
4
72
_____
_____
_____
5
80
_____
_____
_____
6
84
_____
_____
_____
7
86
_____
_____
_____
On the basis of your computations complete the firm’s demand schedule for resource X by indicating in the
table below how many units of resource X the firm would employ at the given prices.
Price of X
Quantity of X
demanded
$84
_____
72
_____
60
_____
48
_____
36
_____
24
_____
12
_____
6
_____
Quantity of
resource X
employed
Total
product
Marginal
product of X
Total
revenue
Marginal
revenue product
of X
0
0
1
24
24
$ 72
$72
2
44
20
132
60
3
60
16
180
48
4
72
12
216
36
5
80
8
240
24
6
84
4
252
12
7
86
2
258
6
Price of X
Quantity of X
demanded
$84
0
72
1
60
2
48
3
36
4
24
5
12
6
6
7
16–356
10. What is the difference between the demand curve for a resource under pure competition and under
imperfect competition?
11. Contrast the factors that underlie the downsloping resource demand curve with those which underlie the
downsloping product demand curve.
12. Use the following total-product schedule for a resource to answer the next three questions. Assume that the
quantities of other resources the firm employs remain constant.
Units of
resource
Total
product
1
12
2
21
3
27
4
32
5
36
(a) If the firm’s product sells for a constant $2 per unit, what is the marginal revenue product of the third
unit of the resource?
(b) If the firm’s product sells for a constant $2 per unit and the price of this resource is $8, how many units
of the resource will the firm employ?
(c) If the firm can sell 12 units of output at a price of $1.00 per unit and 21 units of output at a price of
$0.80 per unit, what is the marginal revenue product of the second unit of the resource?
16–357
13. The table below summarizes the marginal product data for labor in producing personal computers. Assume
the other quantities employed by the firm remain constant. Compute the MPL, TR, and MRP and answer
the following questions.
L
MPL
Price
TR
MRP
0
$1000
_____
1
_____
1000
_____
_____
2
_____
900
_____
_____
3
_____
800
_____
_____
4
_____
700
_____
_____
5
_____
600
_____
_____
(a) What type of market is the one for personal computers?
Now look at the table below showing a different market situation for the demand for personal computers.
Fill in the table and answer the following questions.
L
MPL
Price
TR
MRP
0
$1000
_____
1
_____
1000
_____
_____
2
_____
1000
_____
_____
3
_____
1000
_____
_____
4
_____
1000
_____
_____
5
_____
1000
_____
_____
(b) What type of market does the firm face for personal computers?
(a) The market for computers faces imperfect competition, shown by the decreasing price as the quantity
of labor increases. See table.
L
MPL
Price
TR
MRP
0
$1000
0
1
10
1000
$10,000
$10,000
2
8
900
16,200
6,200
3
6
800
19,200
3,000
4
4
700
19,600
400
5
2
600
18,000
−1,600
(b) The market is competitive, because price stays constant as the quantity of labor employed increases
and the output increases. See table.
L
MPL
Price
TR
MRP
0
$1000
0
1
10
1000
$10,000
$10,000
2
8
1000
18,000
8,000
3
6
1000
24,000
6,000
4
4
1000
28,000
4,000
5
2
1000
30,000
2,000
14. In the table below are the marginal product data for resource Y. Assume that the quantities of other
resources employed by the firm remain constant. Compute the total product (output) of the firm for each of
the seven quantities of resource Y employed and enter these figures in the table. Assume that the firm sells
its output in an imperfectly competitive market and that the prices at which it can sell its product are those
given in the table. Compute and enter in the table total revenue and the marginal revenue product for each
of the seven units of resource Y.
Quantity of
resource Y
employed
Marginal
product
of Y
Total
product
Product
price
Total
revenue
Marginal
revenue
product of Y
0
–
0
–
–
1
44
_____
$2.00
$_____
$_____
2
42
_____
1.90
_____
_____
3
39
_____
1.80
_____
_____
4
32
_____
1.70
_____
_____
5
24
_____
1.60
_____
_____
6
14
_____
1.50
_____
_____
7
2
_____
1.40
_____
_____
How many units of resource Y would the firm employ at each of the following resource prices?
Res
ourc
e
price
Quan
tity
empl
oyed
$90
____
_
80
____
_
70
____
_
60
____
_
50
____
_
40
____
_
30
____
_
20
____
_
10
____
_
1
____
_
Quan
tity
of
reso
urce
Y
empl
oyed
Mar
gin
al
pro
duc
t
of Y
Tot
al
pro
duc
t
Pro
duc
t
pric
e
Tot
al
rev
enu
e
Margi
nal
reven
ue
prod
uct of
Y
0
–
0
–
–
1
44
44
$2.
00
$
88.
00
$
88.00
2
42
86
1.9
163
75.40