Chapter 16 – The Demand for Resources
16-1
Chapter 16 – The Demand for Resources
McConnell Brue Flynn 21e
DISCUSSION QUESTIONS
1. What is the significance of resource pricing? Explain how the factors determining resource demand
differ from those determining product demand. Explain the meaning and significance of the fact that the
demand for a resource is a derived demand. Why do resource demand curves slope downward? LO1
2. In 2009 General Motors (GM) announced that it would reduce employment by 21,000 workers. What
does this decision reveal about how GM viewed its marginal revenue product (MRP) and marginal
resource cost (MRC)? Why didn’t GM reduce employment by more than 21,000 workers? By fewer than
21,000 workers? LO3
Chapter 16 – The Demand for Resources
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3. What factors determine the elasticity of resource demand? What effect will each of the following have
on the elasticity or the location of the demand for resource C, which is being used to produce commodity
X? Where there is any uncertainty as to the outcome, specify the causes of that uncertainty. LO4
a. An increase in the demand for product X.
b. An increase in the price of substitute resource D.
c. An increase in the number of resources substitutable for C in producing X.
d. A technological improvement in the capital equipment with which resource C is combined.
e. A fall in the price of complementary resource E.
f. A decline in the elasticity of demand for product X due to a decline in the competitiveness of product
market X.
4. In each of the following four cases, MRPL and MRPC refer to the marginal revenue products of labor
and capital, respectively, and PL and PC refer to their prices. Indicate in each case whether the conditions
are consistent with maximum profits for the firm. If not, state which resource(s) should be used in larger
amounts and which resource(s) should be used in smaller amounts. LO5
a. MRPL = $8; PL = $4; MRPC = $8; PC = $4.
b. MRPL = $10; PL = $12; MRPC = $14; PC = $9.
c. MRPL = $6; PL = $6; MRPC = $12; PC = $12.
d. MRPL = $22; PL = $26; MRPC = $16; PC = $19.
Chapter 16 – The Demand for Resources
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5. Florida citrus growers say that the recent crackdown on illegal immigration is increasing the market
wage rates necessary to get their oranges picked. Some are turning to $100,000 to $300,000 mechanical
harvesters known as “trunk, shake, and catch” pickers, which vigorously shake oranges from the trees. If
widely adopted, what will be the effect on the demand for human orange pickers? What does that imply
about the relative strengths of the substitution and output effects? LO5
6. LAST WORD To save money, some fast food chains are now having their customers place their
orders at computer kiosks. Will the kiosks necessarily reduce the total number of workers employed in the
fast food industry?
REVIEW QUESTIONS
1. Cindy is a baker and runs a large cupcake shop. She has already hired 11 employees and is thinking of
hiring a 12th. Cindy estimates that a 12th worker would cost her $100 per day in wages and benefits
while increasing her total revenue from $2,600 per day to $2,750 per day. Should Cindy hire a 12th
worker? LO2
a. Yes.
b. No.
c. You need more information to figure this out.
Chapter 16 – The Demand for Resources
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2. Complete the following labor demand table for a firm that is hiring labor competitively and selling its
product in a competitive market. LO2
a. How many workers will the firm hire if the market wage rate is $27.95? $19.95? Explain why the firm
will not hire a larger or smaller number of units of labor at each of these wage rates.
b. Show in schedule form and graphically the labor demand curve of this firm.
c. Now again determine the firm’s demand curve for labor, assuming that it is selling in an imperfectly
competitive market and that, although it can sell 17 units at $2.20 per unit, it must lower product price by
5 cents in order to sell the marginal product of each successive labor unit. Compare this demand curve
with that derived in question 2b. Which curve is more elastic? Explain.
Chapter 16 – The Demand for Resources
c. New Table:
Units
of
labor
Total
product
Marginal
product
Product
price
Total
revenue
Marginal
revenue
product
0
1
2
3
4
5
6
0
17
31
43
53
60
65
17
14
12
10
7
5
____
____
____
____
____
____
$2.25
2.20
2.15
2.10
2.05
2.00
1.95
$37.40
29.25
23.65
18.35
11.35
6.75
The new labor demand is less elastic. Here, MRP falls because of diminishing returns and
because product price declines as output increases. A decrease in the wage rate will produce less
of an increase in the quantity of labor demanded, because the output from the added labor will
reduce product price and thus MRP.
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3. Alice runs a shoemaking factory that utilizes both labor and capital to make shoes. Which of the
following would shift the factory’s demand for capital? You can select one or more answers from the
choices shown. LO3
a. Many consumers decide to walk barefoot all the time.
b. New shoemaking machines are twice as efficient as older machines.
c. The wages that the factory has to pay its workers rise due to an economy-wide labor shortage.
4. FreshLeaf is a commercial salad maker that produces “salad in a bag” that is sold at many local
supermarkets. Its customers like lettuce but don’t care so much what type of lettuce is included in each
bag of salad, so you would expect FreshLeaf’s demand for iceberg lettuce to be:LO4
a. Elastic.
b. Inelastic.
c. Unit elastic.
d. All of the above.
Chapter 16 – The Demand for Resources
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5. Suppose the productivity of capital and labor are as shown in the accompanying table. The output of
these resources sells in a purely competitive market for $1 per unit. Both capital and labor are hired under
purely competitive conditions at $3 and $1, respectively. LO5
a. What is the least-cost combination of labor and capital the firm should employ in producing 80 units of
output? Explain.
b. What is the profit-maximizing combination of labor and capital the firm should use? Explain. What is
the resulting level of output? What is the economic profit? Is this the least costly way of producing the
profit-maximizing output?
Chapter 16 – The Demand for Resources
16-8
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Answer: a. To answer this question we begin by finding the ratios of the marginal product of
each input to their respective prices for the first unit of each input.
Capital (unit 1): 24/3=8 Labor (unit 1): 11/1=11
Since the ratio is larger for labor we employ the first unit of labor giving us 11 units of output.
The next step is to calculate the marginal product of labor to price ratio for the second unit of
labor and compare this with the first unit of capital (which we did not select in the first step).
Capital (unit 1): 24/3=8 Labor (unit 2): 9/1=9
Since the ratio is once again larger for labor we employ the second unit of labor giving us an
additional 9 units of output and a total of 20 (=11 (for the first unit of labor) + 9 (for the second
unit of labor)) .
We continue the process comparing the third unit of labor with the first unit of capital.
Capital (unit 1): 24/3=8 Labor (unit 3): 8/1=8
Here they are equal so we could choose either, or in this case both, to increase output. Since we
now employ the first unit of capital we add 24 units to our total and the third unit of labor adds 8.
This gives is a total of 52 (= 20 (from above) + 24 +8).
Since we are still not at 80 units of output, we continue on down the marginal product of labor
and capital schedules choosing inputs based on the algorithm above.
We will end up employing 2 units of capital and 4 units of labor (the next step in the process
above).
Capital (unit 2): 21/3=7 Labor (unit 4): 7/1=7
Total output is 80 (=52 (from above) + 21 (unit 2 of capital) +7 (unit 4 of labor))
Thus, the least-cost combination is found by equating the marginal product of each input to their
respective prices. Or, employ the product that costs less per unit of output.
b. To determine the profit maximizing combination of inputs we use the same process above,
except we now need to calculate total cost, total revenue, and profit.
The first step gave us 1 unit of labor and 0 units of capital with 11 units of output. Total revenue
equals $11 and total cost equals $1, which gives us $10 in profit.
Step 2 gave us 2 units of labor and 0 units of capital with 20 units of output. Total revenue equals
$20 and total cost equals $2, which gives us $18 in profit.
Step 3 gave us 3 units of labor and 1 unit of capital with 52 units of output. Total revenue equals
$52 and total cost equals $6 (=$3 (capital) + $3 (3 units of labor)), which gives us $46 in profit.
Continuing on, Step 4 gives us 4 units of labor and 2 units of capital with 80 units of output. Total
revenue equals $80 and total cost equals $10, which gives us $70 in profit.
This process will continue until we reach 7 units of labor and 7 units of capital with 142 units of
output. Total revenue equals $142 and total cost equals $28, with a profit of $114. You can verify
that profit falls adding one more unit of capital or labor.
A less time intensive approach is to recognize that the Marginal Revenue Product (MRP) for
labor and capital equal their respective Marginal Product schedules since the price of each unit of
output is $1. Profit maximization occurs where the Marginal Resource Cost (MRC) equals
Marginal Revenue Product (MRP). Since the MRC is $3 for capital and $1 for labor, equate these
values with the MRP for capital and labor. This occurs at 7 units of capital (MRP=$3=MRC) and
7 units of labor (MRP=$1=MRC). This rule is MRPL/PL = MRPK/PK =1.
Finally, since MPL/PL = MPL/PL for profit maximization the least-cost rule also applies.
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6. A software company in Silicon Valley uses programmers (labor) and computers (capital) to produce
apps for mobile devices. The firm estimates that when it comes to labor, MPL = 5 apps per month while
PL = $1,000 per month. And when it comes to capital, MPC = 8 apps per month while PC = $1,000 per
month. If the company wants to maximize its profits, it should: LO5
a. Increase labor while decreasing capital.
b. Decrease labor while increasing capital.
c. Keep the current amounts of capital and labor just as they are.
d. None of the above.
PROBLEMS
1. A delivery company is considering adding another vehicle to its delivery fleet, all the vehicles of which
are rented for $100 per day. Assume that the additional vehicle would be capable of delivering 1500
packages per day and that each package that is delivered brings in ten cents ($.10) in revenue. Also
assume that adding the delivery vehicle would not affect any other costs. LO2
a. What is the MRP? What is the MRC? Should the firm add this delivery vehicle?
b. Now suppose that the cost of renting a vehicle doubles to $200 per day. What are the MRP and MRC?
Should the firm add a delivery vehicle under these circumstances?
c. Next suppose that the cost of renting a vehicle falls back down to $100 per day but, due to extremely
congested freeways, an additional vehicle would only be able to deliver 750 packages per day. What are
the MRP and MRC in this situation? Would adding a vehicle under these circumstances increase the
firm’s profits?
Chapter 16 – The Demand for Resources
16-10
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Feedback: Part a: To find the Marginal Revenue Product (MRP) of an additional truck, calculate
the additional revenue this truck will generate for the company. Since the truck delivers 1500
packages and each package generates $0.10 in revenue, the truck generates $150.00 (= $0.10 x
1500) in total revenue. Thus, the MRP of the truck is $150.00. The Marginal Resource Cost is the
cost of renting the truck for the day, which is $100.00.
Given that the MRP = $150.00 and the MRC = $100.00 (MRP>MRC) you should add this
delivery vehicle.
Part b:Since the cost of renting the vehicle has doubled, the MRC = $200. The MRP has not
changed and equals $150.00. The company should not add the vehicle (MRP<MRC).
Part c: Since the cost of renting the vehicle is $100.00 again, the MRC = $100.00. However, the
truck only delivers 750 packages per day now and each package delivered still brings in ten cents
($.10) in revenue. Thus, the truck generates $75.00 (= $0.10 x 750) in total revenue. Here the
MRP = $75.00. This is less than the MRC so adding the truck would reduce profits.
2. Suppose that marginal product tripled while product price fell by one-half in Table 16.1. What would
be the new MRP values in Table 16.1? What would be the net impact on the location of the resource
demand curve in Figure 16.1? LO2
Chapter 16 – The Demand for Resources
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3. Suppose that a monopoly firm finds that its MR is $50 for the first unit sold each day, $49 for the
second unit sold each day, $48 for the third unit sold each day, and so on. Further suppose that the first
worker hired produces 5 units per day, the second 4 units per day, the third 3 units per day, and so on.
LO3
a. What is the firm’s MRP for each of the first five workers?
b. Suppose that the monopolist is subjected to rate regulation and the regulator stipulates that it must
charge exactly $40 per unit for all units sold. At that price, what is the firm’s MRP for each of the first
five workers?
c. If the daily wage paid to workers is $170 per day, how many workers will the unregulated monopoly
demand? How many will the regulated monopoly demand? Looking at those figures, will the regulated or
the unregulated monopoly demand more workers at that wage?
d. If the daily wage paid to workers falls to $77 per day, how many workers will the unregulated
monopoly demand? How many will the regulated monopoly demand? Looking at those figures, will the
regulated or the unregulated monopoly demand more workers at that wage?
e. Comparing your answers to parts c and d, does regulating a monopoly’s output price always increase its
demand for resources?
Chapter 16 – The Demand for Resources
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Feedback: Parts a and b:
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4. Consider a small landscaping company run by Mr. Viemeister. He is considering increasing his firm’s
capacity. If he adds one more worker, the firm’s total monthly revenue will increase from $50,000 to
$58,000. If he adds one more tractor, monthly revenue will increase from $50,000 to $62,000. Additional
workers each cost $4,000 per month while an additional tractor would also cost $4,000 per month. LO5
a. What is the marginal product of labor? The marginal product of capital?
b. What is the ratio of the marginal product of labor to the price of labor (MPL/PL)?
What is the ratio of the marginal product of capital to the price of capital (MPK/PK)?
c. Is the firm using the least-costly combination of inputs?
d. Does adding an additional worker or adding an additional tractor yield a larger increase in total revenue
for each dollar spent?