Economics Chapter 12 1 The theory of resource pricing is sometimes referred to by economists as the theory of income distribution. Why

Chapter 12 – The Demand for Resources

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CHAPTER 12

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. 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?

5. 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?

6. What is the profit-maximizing condition for the use of a resource?

7. 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?

8. 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 _____ _____ _____

Chapter 12 – The Demand for Resources

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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 _____

9. What is the difference between the demand curve for a resource under pure competition and under

imperfect competition?

10. Contrast the factors that underlie the downsloping resource demand curve with those which underlie the

downsloping product demand curve.

11. 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?

12. 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 TPL MPL Price TR MRP

0 0 $1000 _____

1 10 _____ 1000 _____ _____

2 18 _____ 900 _____ _____

3 24 _____ 800 _____ _____

4 28 _____ 700 _____ _____

5 30 _____ 600 _____ _____

(a) What type of market is the one for personal computers?

Chapter 12 – The Demand for Resources

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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 TPL MPL Price TR MRP

0 0 $1000 _____

1 10 _____ 1000 _____ _____

2 18 _____ 1000 _____ _____

3 24 _____ 1000 _____ _____

4 28 _____ 1000 _____ _____

5 30 _____ 1000 _____ _____

(b) What type of market does the firm face for personal computers?

13. 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 _____

Chapter 12 – The Demand for Resources

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14. 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 TPL MPL P TR MRPL

0 0 $2.00 $_____

1 10 _____ 2.00 _____ $_____

2 19 _____ 2.00 _____ _____

3 27 _____ 2.00 _____ _____

4 34 _____ 2.00 _____ _____

5 40 _____ 2.00 _____ _____

6 45 _____ 2.00 _____ _____

7 49 _____ 2.00 _____ _____

8 52 _____ 2.00 _____ _____

9 54 _____ 2.00 _____ _____

10 55 _____ 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 _____

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 TPL MPL P TR MRPL

0 0 $2.00 $_____

1 10 _____ 1.90 _____ $_____

2 19 _____ 1.80 _____ _____

3 27 _____ 1.70 _____ _____

4 34 _____ 1.60 _____ _____

5 40 _____ 1.50 _____ _____

6 45 _____ 1.40 _____ _____

7 49 _____ 1.30 _____ _____

8 52 _____ 1.20 _____ _____

9 54 _____ 1.10 _____ _____

10 55 _____ 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?

Chapter 12 – The Demand for Resources

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(c) Complete the following table.

Wage rate Quantity of

workers employed

$16 _____

14 _____

12 _____

10 _____

8 _____

6 _____

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 TPL MPL P TR MRPL

0 0 $5.00 $_____

1 30 _____ 5.00 _____ $_____

2 57 _____ 5.00 _____ _____

3 81 _____ 5.00 _____ _____

4 102 _____ 5.00 _____ _____

5 120 _____ 5.00 _____ _____

6 135 _____ 5.00 _____ _____

7 147 _____ 5.00 _____ _____

8 156 _____ 5.00 _____ _____

9 162 _____ 5.00 _____ _____

10 165 _____ 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 _____

17. (Consider This) How is marginal revenue product reflected in “winner-take-all” markets such as in the music

industry?

18. 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?

19. How will a change in productivity change the demand for a resource? What three factors will affect

productivity?

20. Compare the factors that will cause shifts in the downsloping resource demand and product demand curves.

21. 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?

22. Why is the effect of a change in price of a substitute good potentially ambiguous?

23. 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.

Chapter 12 – The Demand for Resources

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24. 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?

25. 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.

26. What are examples of the fastest growing occupations in percentage terms expected to be from 2008–2018?

What economic principle of resource pricing best explains these trends?

27. What are three examples of occupations that are expected to experience a rapid decline in employment

from 2008–2018? Why are these occupations likely to experience this decline?

28. 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%

29. Compare the factors that explain the elasticity of resource and product demand.

30. 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.

31. Explain briefly and concisely the meaning and significance of the following equation:

1

capital of Price

capital of MRP

labor of Price

labor of MRP ==

Chapter 12 – The Demand for Resources

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32. 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?

33. 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

34. 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?

35. 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?

36. 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 QK MPK MRPK

1 50 $36 1 40 $30

Chapter 12 – The Demand for Resources

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2 45 30 2 38 29

3 30 24 3 32 25

4 20 18 4 30 20

5 10 12 5 20 18

6 5 6 6 15 15

7 0 0 7 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?

37. 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?

38. What are two criticisms of the marginal productivity theory of income distribution?

39. “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?

40. (Last Word) Why are banks using more automatic teller machines (ATMs) and employing fewer human

tellers? What economic principle is illustrated about resource markets by this example?

Chapter 12 – The Demand for Resources

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. 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?

5. 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?

Chapter 12 – The Demand for Resources

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