A n s w e r s t o t h e R e v i e w Q u i z z e s
Page 420
1. What are the factors of production and their prices?
The factors of production and their prices are: labor, which is paid a wage rate for
2. What is the distinction between capital and the services of capital?
Capital is the actual tools, instruments, machines, buildings, and constructions
that have been produced in the past and that businesses now use to produce
3. What is the distinction between the price of capital equipment and the rental
rate of capital?
The price of a unit of capital is how much must be paid to acquire the piece of
capital equipment. The rental rate of capital is the amount that must be paid to
Page 423
1. What is the value of marginal product of labor?
The value of marginal product of labor is the value to the rm of hiring one more
2. What is the relationship between the value of marginal product of labor and
the marginal product of labor?
3. How is the demand for labor derived from the value of marginal product of
labor?
The demand for labor is determined by the value of marginal product of labor. To
maximize its prot a rm hires the number of workers that sets the wage rate
© 2016 Pearson Education, Inc.
18
MARKETS FOR
FACTORS OF
PRODUCTION
M A R K E T S F O R FA C T O R S O F P R O D U C T I O N 4 5
4 6
4. What are the in@uences on the demand for labor?
Factors that in@uence the demand for labor are the wage rate, the price of the
rm’s output, the prices of other factors of production, and technology. A lower
Page 431
1. What determines the amount of labor that households plan to supply?
When households decide how much labor to provide in the labor market, they
compare the market wage rate to the value of the lost leisure that supplying labor
would entail. If the market wage rate exceeds the individual’s reservation wage
2. How are the wage rate and employment determined in a competitive labor
market?
3. How do labor unions in@uence wage rates?
Unions increase their members’ wage rates by increasing the demand for their
members’ labor and decreasing the supply of labor. In particular, to increase the
demand for their members’ labor, unions: increase the value of marginal product
4. What is a monopsony and why is a monopsony able to pay a lower wage rate
than a rm in a competitive labor market?
A monopsony is a market with a single buyer. A monopsony uses its market power
to force down the price it pays for what it buys in a similar way to how a monopoly
5. How is the wage rate determined when a union faces a monopsony?
When a monopoly seller, such as union, bargains with a monopsony buyer, such as
a large rm, the situation is called bilateral monopoly. The wage rate will be lower
46
6. What is the eBect of a minimum wage law in a monopsony labor market?
A minimum wage rate can increase employment in a monopsony market. Over a
range of employment, a minimum wage can lower the cost of hiring additional
workers for a monopsony. In the absence of the minimum wage, the marginal cost
of labor, MCL, curve exceeds the wage rate because hiring another worker requires
Page 435
1. What determines demand and supply in rental markets for capital and land?
The demand for capital depends on the value of marginal product of capital; the
demand for land depends on the value of marginal product of land. The higher the
marginal product of capital or land, the greater the demand for capital or land.
2. What determines the demand for a nonrenewable natural resource?
3. What determines the supply of a nonrenewable natural resource?
The supply of a nonrenewable natural resource depends on the total known
amount, such as the known oil reserves in the market for oil. It also depends on the
4. What is the market fundamentals price and how might it diBer from the
equilibrium price?
The market fundamentals price is the price determined by the fundamental
determinant of demand, the value of marginal product, and the fundamental
5. Explain the Hotelling principle.
The Hotelling principle is the result that the price of a nonrenewable natural
resource is expected to rise at a rate equal to the interest rate. Only when this
© 2016 Pearson Education, Inc.
M A R K E T S F O R FA C T O R S O F P R O D U C T I O N 4 7
4 8
A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d
A p p l i c a t i o n s
1. Tim is opening a new online store. He plans to hire two workers at $10 an hour. Tim is
a. In which factor markets does Tim operate?
Tim is operating in the labor market when he hires his workers. Tim also is
b. What is the price of the capital equipment and the rental rate of capital?
Use the following data to work Problems 2 to 6.
Wanda’s is a sh store that hires students to pack the
sh. Students can pack the amounts of sh shown in
the table. The sh market is competitive and the price of
sh is 50¢ a pound. The market for packers is
competitive and their market wage rate is $7.50 an
hour.
2. Calculate the value of marginal product of labor
and draw the value of marginal product curve.
The value of marginal product of labor is the
increase in total revenue that results from hiring
one additional student. For example, if Wanda hires 4
students, they produce 120 pounds of sh. Wanda
sells the sh for 50¢ a pound, so total revenue is $60. If Wanda increases the
Number
of
students
Quantity
of sh
(pounds)
1 20
2 50
3 90
4 120
5 145
6 165
7 180
8 190
48
3. a. Find Wanda’s demand for labor curve.
b. How many students does Wanda employ?
Wanda hires the number of students that makes the value of marginal product
equal to the wage rate of $7.50 an hour. When Wanda increases the number of
Use the following additional information to work Problems 4 and 5.
The market price of sh falls to 33.33¢ a pound, but the packers’ wage rate remains
at $7.50 an hour.
4. How does the students’ marginal product change? How does the value of
marginal product of labor change?
The marginal product does not change. For instance, if Wanda hires 5.5 students a
day, the marginal product is still 20 pounds of sh.
5. How does Wanda’s demand for labor change? What happens to the number of
students that Wanda employs?
Wanda’s demand for labor decreases because her value of marginal product
6. At Wanda’s sh store, packers’ wages increase to $10 an hour, but the price
of sh remains at 50¢ a pound.
a. What happens to the value of marginal product of labor?
The value of marginal product does not change. For example, if Wanda hires 5.5
b. What happens to Wanda’s demand for labor curve?
c. How many students does Wanda employ?
Wanda hires fewer students. At the wage rate of $10 an hour, Wanda hires the
number of students that makes the value of marginal product equal to $10 an
Use the following news clip to work Problems 7 to 9.
In Modern Rarity, Workers Form Union at Small Chain
© 2016 Pearson Education, Inc.
M A R K E T S F O R FA C T O R S O F P R O D U C T I O N 4 9
5 0
In New York’s low-income neighborhoods, labor unions have virtually no presence.
But after a year-long struggle, 95 workers at a chain of 10 sneaker stores have
formed a union. After months of negotiations, the two sides signed a three-year
contract that sets the wage rate at $7.25 an hour.
Source: The New York Times, February 5, 2006
7. Why are labor unions scarce in New York’s low-income neighborhoods?
Labor unions probably are scarce because unions nd these workers diMcult to
organize. In particular, most of them are low-skilled workers and the supply of
8. Who wins from this union contract? Who loses?
The workers who signed the contract (and keep their jobs) win from the new union
9. How can this union try to change the demand for labor?
This union can try to change the demand for its members’ labor by creating
10. Land Prices Re5ect High Commodity Prices
As their family grows, the Steens are nding it more diMcult for the next
generation to stay in ranching. “The problem is they don’t create any more
land,” Steen said. As the prices for cattle, corn, and other commodities climb,
so does the value of land in South Dakota.
Source: Rapid City Journal, January 30, 2012
a. Why does the price of land in South Dakota keep rising? In your answer
include a discussion of the demand
for and supply of land.
Because of the increased prices for the
products grown on land in South
b. Use a graph to show why the price of
land in South Dakota has increased
over the past decade.
Figure 18.2 shows the market for this
land. The supply is perfectly inelastic so
the supply curve is vertical. Initially, the
50
c. Is the supply of land in South Dakota perfectly inelastic?
Answers to Additional Problems and Applications
11. Venus is opening a tennis school. She plans to hire a marketing graduate to
promote and manage the school at $20 an hour. Venus is also considering
buying or leasing a new tennis ball machine. The purchase price of the
machine is $1,000 and after three years it is worthless. The annual cost of
leasing the machine is $500.
a. In which factor markets does Venus operate?
Venus is operating in the labor market when she hires her marketing graduate and
b. What is the price of the capital equipment and the rental rate of capital?
Use the following data to work Problems 12 to 15.
Kaiser’s Ice Cream Parlor hires workers to produce
milk shakes. The market for milk shakes is perfectly
competitive, and the price of a milk shake is $4. The
labor market is competitive, and the wage rate is
$40 a day. The table shows the workers’ total
product schedule.
12. Calculate the marginal product of hiring the
fourth worker and the fourth worker’s value of
marginal product.
By hiring the 4th worker the number of milk
shakes increases by 10 milk shakes (43 milk
13. How many workers will Kaiser’s hire to maximize its prot and how many milk
shakes a day will Kaiser’s produce?
14. If the price of a milk shake rises to $5, how many workers will Kaiser’s hire?
If the price rises to $5 a milk shake, Kaiser’s will hire 4.5 workers. The value of
15. Kaiser’s installs a new machine for making milk shakes that increases the
productivity of workers by 50 percent. If the price of a milk shake remains at
$4 and the wage rises to $48 a day, how many workers does Kaiser’s hire?
Kaiser’s hires 4.5 workers because this is the quantity of workers that sets the
value of marginal product equal to the wage rate. With the old machine, the
marginal product of 4.5 workers was 8 milk shakes. The new machine increases
© 2016 Pearson Education, Inc.
Number
of
workers
Quantity
produced
(milk shakes per
day)
2 21
3 33
4 43
5 51
6 55
M A R K E T S F O R FA C T O R S O F P R O D U C T I O N 5 1
b. Draw a graph to illustrate the eBects
of rising gasoline prices on the market
for renery labor.
Figure 18.3 shows the impact in the
market for renery labor. The demand
for renery labor increases so the
demand for labor curve shifts rightward
Use the following news clip to work Problems 17 and 18.
52