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Chapter 11
Labor Markets
 • Key Concepts
 • Summary
 • Practice Quiz
 • Internet Exercises
    ©2000 South-Western College Publishing
                                             1
In this chapter, you will
  learn to solve these
   economic puzzles:
What determines unions
  Howthe NCAAthe wage
 Does   do labor exploit
   influence wagespays?
       an employer and
  ratecollege athletes?
       employment?

                   2
In a Perfectly
Competitive Market,
what determines the
  level of Wages?
The intersection of the
 demand for labor and
 the supply of labor

                   3
Market Supply and Demand


                    S
Wages




                            D
          Quantity of Labor
                        4
What does the Demand
Curve for Labor show?
The different quantities of
 labor employers are
 willing to hire at different
 wage rates in a given time
 period, ceteris paribus
                      5
60                          Production Function
50
     Total Output
40
30
                                 Total Output
20
10
                              Quantity of Labor
                    1   2    3       4       5   6
                                         6
What is Marginal
  Revenue Product?
The increase in total
 revenue to a firm
 resulting from hiring an
 additional unit of labor or
 other variable resource
                     7
12                          Marginal Product Curve
10
     Marginal Product
 8
 6
                                  Law of
 4                              Diminishing
                                  Returns
 2
                                   Quantity of Labor
                        1   2      3     4        5   6
                                              8
What is the Demand
Curve for Labor equal to?
 It is equal to the marginal
   revenue product of labor



                       9
$350   Demand Curve for Labor
$280       M
               RP
$210                =d
                      em
$140                       an
                             d
$70

       1       2     3      4     5Q
                             10
Increase in Quantity
       of labor an employer
             will hire



Decrease in
Wage Rate
                     11
How do we measure MRP
 in Perfect Competition?
A perfectly competitive
 firm’s marginal revenue
 product is equal to the
 marginal product of its labor
 times the price of its product
                       12
What is
   Derived Demand?
The demand for labor and
 other factors of production
 that depends on the
 consumer demand for final
 goods and services the
 factors produce
                     13
What does the Supply
Curve for Labor show?
The different quantities of
 labor workers are willing to
 offer employers at different
 wage rates in a given time
 period, ceteris paribus
                     14
$350                            Supply Curve of Labor
       Wage Rate per day
$280
                                                   S
$210
$140

$70                                                D
            Quantity of Labor
                           10     20    30    40       50
                                              15
Increase in Quantity of
     labor willing to work



Increase in
Wage Rate
                    16
What is Human Capital?
  The accumulation of
   education, training,
   experience, and health
   that enables a worker
   to enter an occupation
   and be productive
                    17
$350                       Competitive Labor Market
       Wage Rate per day
$280
                                      E          S
$210
$140

$70                                              D
            Quantity of Labor
                           10   20   30    40        50
                                            18
$350                       Competitive Labor Market

$280   Wage Rate per day
                                      E
$210                                             S
$140

$70                                              D
           Quantity of Labor
                           1    2     3     4        5
                                            19
Does the Perfectly
Competitive model apply
 to workers in unions?
         No

                 20
What are examples
     of Unions?
• Teamsters
• United Auto Workers
• National Education Assoc.
• American Federation of
  Government Employees
                    21
How do Unions attempt
   to raise wages?
• Increase demand for labor
• Decrease supply for labor
• Power

                    22
What is Featherbedding?
 Unions force firms to hire
  more workers than are
  required or to impose
  work rules that reduce
  output per worker
                      23
What else can Unions
 do to increase the
 demand for labor?
 Decrease competition
  from other nations


                  24
Unions cause an increase
$350                        in the demand for labor
$280   Wage Rate per day
                                       E2         S
$210
                                E1
$140

$70                                               D2
         Quantity of Labor                  D1
                           10   20    30    40        50
                                             25
Increase in wages
          and employment

     Increase in the
    demand for labor

   Union
featherbeds
                       26
Unions cause a decrease
$420                            in the supply for labor
$350   Wage Rate per day
                                         E2     S2
$280                                                 S1
                                               E1
$210

$140                                                D1
         Quantity of Labor
                           10      20    30    40    50
                                               27
How else can Unions
   raise wages?
 Collective bargaining



                  28
What is
Collective Bargaining?
The process of negotiations
 between the union and
 management over wages
 and working conditions

                    29
$350                       Collective Bargaining causes
                              a Wage Rate increase
$280   Wage Rate per day           Unemployment
                                                       S
$210
$140

$70                                                    D
         Quantity of Labor
                           10    20    30     40           50
                                                  30
What factors can cause
   a change in the
 Demand for Labor?
 • Unions
 • Prices of substitute goods
 • Demand for final products
 • Marginal product of labor

                       31
What factors can
  cause a change in the
   Supply for Labor?
• Unions
• Demographic trends
• Expectations of future income
• Changes in immigrations laws
• Education and training
                       32
What has happened to
 Union Membership
   since WWII?
Union power has declined



                  33
In which sectors has
   union membership
 increased since 1989?
Public sector and services



                     34
How does union
 membership in the
  U.S. compare to
  other countries?
Union membership is far
 below that of other
 industrialized countries

                    35
What is a Monopsony?
A labor market in which a
 single firm hires labor



                   36
87%


                              40%
                      37%
                   32%
             29%
       24%
15%

U.S. Japan CanadaU.K. Germany Italy Sweden
                              37
What is Marginal Factor
    Cost (MFC)?
 The additional total cost
  resulting from a one-
  unit increase in the
  quantity of labor
                     38
What conclusion can be
   drawn from a
Monopsonistic Market?
Because the monopsonist
 can hire additional
 workers only by raising
 the wage rate for all
 workers, the MFC > W
                    39
A Monopsonist determines its Wage Rate
$5
$4   Dollars per hour           MFC
$3
                                    S
$2
                                D (MRP)
$1
       Quantity of Labor
                        1   2   3   4     5
                                    40
How are wages compared
between the two markets?
 A monopsony hires fewer
  workers and pays a lower
  wage than a firm in a
  competitive labor market

                    41
Key Concepts



           42
Key Concepts
•   In a Perfectly Competitive Market, what deter
•   What is Marginal Revenue Product?
•   What is the Demand Curve for Labor equal to
•   How do we measure MRP in Perfect Competit
•   What does the Supply Curve for Labor show?




                                  43
Key Concepts cont.
•   How do Unions attempt to raise wages?
•   What is Featherbedding?
•   What is Collective Bargaining?
•   What factors can cause a change in the Dema
•   What factors can cause a change in the Suppl




                                 44
Key Concepts cont.
•   What has happened to Union Membership sinc
•   How does union membership in the U.S. comp
•   What is a Monopsony?
•   What is Marginal Factor Cost (MFC)?
•   How are wages compared between the
    two markets?



                                45
Summary




          46
Marginal revenue product (MRP)
is determined by a worker’s
contribution to a firm’s total revenue.
Algebraically, the MRP equals the
price of the product times the
worker’s marginal product (MP).



                             47
The demand curve for labor is
the curve showing the quantities of
labor a firm is willing to hire at
different prices of labor. The
marginal revenue product (MRP) of
labor curve is the firm’s demand
curve for labor. Summing individual
demand for labor curves gives the
market demand curve for labor.

                           48
$350   Demand Curve for Labor
$280       M
               RP
$210                =d
                      em
$140                       an
                             d
$70

       1       2     3      4     5Q
                             49
Derived demand means that a
firm demands labor because labor is
productive. Changes in consumer
demand for a product cause changes
in demand for labor and for other
resources used to make the product.



                            50
The supply curve of labor is the
curve showing the quantities of
workers willing to work at different
prices of labor. The market supply
curve of labor is derived by adding
the individual supply curves of labor.



                             51
$350                            Supply Curve of Labor
       Wage Rate per day
$280
                                                   S
$210
$140

$70                                                D
            Quantity of Labor
                           10     20    30    40       50
                                              52
Human capital is the
accumulated people make in
education, training, experience, and
health in order to make themselves
more productive. One explanation
for earnings differences is
differences in human capital.


                           53
Collective bargaining is the
process through which a union and
management negotiate a labor
contract.




                           54
Monopsony is a labor market in
which a single firm hires labor.
Because the monopsonist faces the
industry supply curve of labor and each
worker is paid the same wage, changes
in total wage cost exceed the wage rate
necessary to hire each additional
worker. As a result, the marginal factor
cost (MFC) of labor curve lies above
the supply curve of labor.
                              55
The monopsonist’s wage rate and
quantity of labor are determined where
the MFC equals MRP . Since at this
point the worker’s MRP is greater than
the wage paid, the monopsonist
exploits the workers.



                             56
A Monopsonist determines its Wage Rate
$5
$4   Dollars per hour           MFC
$3
                                    S
$2
                                D (MRP)
$1
       Quantity of Labor
                        1   2   3   4     5
                                    57
Chapter 11 Quiz



   ©2000 South-Western College Publishing
                                            58
1. Marginal revenue product measures the
  increase in
   a. output resulting from one more unit of
     labor.
   b. TR resulting from one more unit of
     output.
   c. revenue per unit from one more unit of
     output.
   d. total revenue resulting from one more
     unit is the increase in total revenue to a
D. MRP    of labor.
  firm resulting from hiring an additional unit
  of labor or other variable resource.

                                   59
2. Troll Corporation sells dolls for $10.00
   each in a market that is perfectly
   competitive. Increasing the number of
   workers from 100 to 101 would cause
   output to rise from 500 to 510 dolls per day.
   Troll should hire the 101st worker only
   when the wage is
    a. $100 or less per day.
    b. more than $100 per day.
    c. $5.10 or less per day.
    d. none of the above.
A. Under perfect competition, the firm hires
  workers until the MRP equals the wage rate.
  MRP equals $10 x MP (510 - 500) = $100.
                                    60
3. Derived demand for labor depends on the
   a. cost of factors of production used in the
     product.
   b. market supply curve of labor.
   c. consumer demand for the final goods
     produced by labor.
   d. firm’s total revenue less economic
     profit.
 C. If consumers do not purchase goods, there
   is no MRP and no workers are hired.


                                   61
4. If demand for a product falls, the
   demand curve for labor used to produce
   the product will shift
    a. leftward.
    b. rightward.
    c. upward.
    d. downward.

A. If consumers demand for a product
 decreases and supply remains the
 constant, the price of the product falls
 and the MRP (P x MP) decreases.

                                   62
5. The owner of a restaurant will hire
  waiters if the
   a. additional labor’s pay is close to the
     minimum wage .
   b. marginal product is at the maximum.
   c. additional work of the employees adds
     more to total revenue than to costs.
   d. waiters do not belong to a union.
C. If MRP exceeds the wage rate paid
 waiters, it is profitable for the restaurant
 to hire more waiters.

                                    63
6. In a perfectly competitive market, the
  demand curve for labor
   a. slopes upward.
   b. slopes downward because of
     diminishing marginal productivity.
   c. is perfectly elastic at the equilibrium
     wage rate.
   d. is described by all of the above.
B. As output expands in the short run, a
  fixed factor results in diminishing returns
  causing MP to decrease. Correspondingly,
  MRP decreases.
                                  64
7. A union can influence the equilibrium
    wage rate by
     a. featherbedding.
     b. requiring longer apprenticeships.
     c. favoring trade restrictions on
       foreign products.
     d. all of the above.
     e. none of the above.
D. Featherbedding and trade protectionism
 increase the demand for labor. Requiring
 longer apprenticeship decreases the
 demand for labor.

                                 65
8. In which of the following market
    structures is the firm not a price taker
    in the factor market?
     a. Oligopoly.
     b. Monopsony.
     c. Monopoly.
     d. Perfect competition.

B. Monopsony is a labor market in which a
  single firm hires labor. For example, the
  “company town” where everyone works
  for the same employer.

                                   66
9. The extra cost of obtaining each
  additional unit of a factor of production
  is called the marginal
   a. physical product.
   b. revenue product.
   c. factor cost.
   d. implicit cost.

C. The assumption of MFC is that the firm
 must pay a higher wage to each additional
 worker as well as to all previously hired
 workers.

                                  67
10. A monopsonist’s marginal factor cost
  curve lies above its supply curve because the
  firm must
   a. increase the price of its product to sell
     more.
   b. lower the price of its product to sell more.
   c. increase the wage rate to hire more labor.
   d. lower the wage rate to hire more labor.
  C. The monopsonist can hire an
     additional worker only by raising the
     wage rate for all workers. Therefore,
     the MFC exceeds the wage rate along
     the labor supply curve.
                                     68
11. In order to maximize profits, a
   monopsonist will hire the quantity of labor
   to the point where the marginal factor cost
   is equal to
    a. marginal physical product.
    b. marginal revenue product.
    c. total revenue product.
    d. any of the above.
B. The MRP curve is the contribution of each
  worker to total revenue and MFC the
  addition to total cost. When MRP > MFC,
  the firm hires more workers.

                                   69
Marginal Factor Cost (MFC) and
$10                      Marginal Revenue Product (MRP)
$8    Dollars per hour        Surplus    MFC
$6
$4                            Shortage   D (MRP)
$2
        Quantity of Labor
                          1      2       3   4     5
                                             70
12. BigBiz, a local monopolist, currently hires
  50 workers and pays them $6 per hour. To
  attract an additional worker to its labor
  force, BigBiz would have to raise the wage
  rate to $6.25 per hour. What is BigBiz’s
  marginal factor cost?
   a. $6.25 per hour.
   b. $12.50 per hour.
   c. $18.75 per hour.
   d. $20.00 per hour.
C. Its total cost would increase by $18.75 to
 hire that additional worker (25 x 50 + 6.25).

                                   71
13. Suppose a firm can hire 100 workers at
  $8.00 per hour, but must pay $8.05 per hour
  to hire 101 workers. Marginal factor cost
  (MFC) for the 101st worker is
  approximately equal to
   a. $8.00.
   b. $8.05.
   c. $13.05.
   d. $13.00.
C. The firm’s total cost would increase $13.05
 to hire the 101st worker (.05 x 100 + 8.05).

                                   72
14. A monopsonist in equilibrium has a
  marginal revenue product of $10 per worker
  hour. Its equilibrium wage rate must be
   a. less than $10.
   b. equal to $10.
   c. greater than $10.
   d. equal to $5.
A. Because of its monopoly in the labor
  market, a monopsony hires fewer workers
  and pays a lower wage than a firm in a
  competitive labor market.


                                73
A Monopsonist determines its Wage Rate
$5
$4   Dollars per hour           MFC
$3
                                    S
$2
                                D (MRP)
$1
       Quantity of Labor
                        1   2   3   4     5
                                    74
Internet Exercises
Click on the picture of the book,
 choose updates by chapter for
 the latest internet exercises




                            75
END

      76

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11 labor markets

  • 1. Chapter 11 Labor Markets • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing 1
  • 2. In this chapter, you will learn to solve these economic puzzles: What determines unions Howthe NCAAthe wage Does do labor exploit influence wagespays? an employer and ratecollege athletes? employment? 2
  • 3. In a Perfectly Competitive Market, what determines the level of Wages? The intersection of the demand for labor and the supply of labor 3
  • 4. Market Supply and Demand S Wages D Quantity of Labor 4
  • 5. What does the Demand Curve for Labor show? The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus 5
  • 6. 60 Production Function 50 Total Output 40 30 Total Output 20 10 Quantity of Labor 1 2 3 4 5 6 6
  • 7. What is Marginal Revenue Product? The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource 7
  • 8. 12 Marginal Product Curve 10 Marginal Product 8 6 Law of 4 Diminishing Returns 2 Quantity of Labor 1 2 3 4 5 6 8
  • 9. What is the Demand Curve for Labor equal to? It is equal to the marginal revenue product of labor 9
  • 10. $350 Demand Curve for Labor $280 M RP $210 =d em $140 an d $70 1 2 3 4 5Q 10
  • 11. Increase in Quantity of labor an employer will hire Decrease in Wage Rate 11
  • 12. How do we measure MRP in Perfect Competition? A perfectly competitive firm’s marginal revenue product is equal to the marginal product of its labor times the price of its product 12
  • 13. What is Derived Demand? The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce 13
  • 14. What does the Supply Curve for Labor show? The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus 14
  • 15. $350 Supply Curve of Labor Wage Rate per day $280 S $210 $140 $70 D Quantity of Labor 10 20 30 40 50 15
  • 16. Increase in Quantity of labor willing to work Increase in Wage Rate 16
  • 17. What is Human Capital? The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive 17
  • 18. $350 Competitive Labor Market Wage Rate per day $280 E S $210 $140 $70 D Quantity of Labor 10 20 30 40 50 18
  • 19. $350 Competitive Labor Market $280 Wage Rate per day E $210 S $140 $70 D Quantity of Labor 1 2 3 4 5 19
  • 20. Does the Perfectly Competitive model apply to workers in unions? No 20
  • 21. What are examples of Unions? • Teamsters • United Auto Workers • National Education Assoc. • American Federation of Government Employees 21
  • 22. How do Unions attempt to raise wages? • Increase demand for labor • Decrease supply for labor • Power 22
  • 23. What is Featherbedding? Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker 23
  • 24. What else can Unions do to increase the demand for labor? Decrease competition from other nations 24
  • 25. Unions cause an increase $350 in the demand for labor $280 Wage Rate per day E2 S $210 E1 $140 $70 D2 Quantity of Labor D1 10 20 30 40 50 25
  • 26. Increase in wages and employment Increase in the demand for labor Union featherbeds 26
  • 27. Unions cause a decrease $420 in the supply for labor $350 Wage Rate per day E2 S2 $280 S1 E1 $210 $140 D1 Quantity of Labor 10 20 30 40 50 27
  • 28. How else can Unions raise wages? Collective bargaining 28
  • 29. What is Collective Bargaining? The process of negotiations between the union and management over wages and working conditions 29
  • 30. $350 Collective Bargaining causes a Wage Rate increase $280 Wage Rate per day Unemployment S $210 $140 $70 D Quantity of Labor 10 20 30 40 50 30
  • 31. What factors can cause a change in the Demand for Labor? • Unions • Prices of substitute goods • Demand for final products • Marginal product of labor 31
  • 32. What factors can cause a change in the Supply for Labor? • Unions • Demographic trends • Expectations of future income • Changes in immigrations laws • Education and training 32
  • 33. What has happened to Union Membership since WWII? Union power has declined 33
  • 34. In which sectors has union membership increased since 1989? Public sector and services 34
  • 35. How does union membership in the U.S. compare to other countries? Union membership is far below that of other industrialized countries 35
  • 36. What is a Monopsony? A labor market in which a single firm hires labor 36
  • 37. 87% 40% 37% 32% 29% 24% 15% U.S. Japan CanadaU.K. Germany Italy Sweden 37
  • 38. What is Marginal Factor Cost (MFC)? The additional total cost resulting from a one- unit increase in the quantity of labor 38
  • 39. What conclusion can be drawn from a Monopsonistic Market? Because the monopsonist can hire additional workers only by raising the wage rate for all workers, the MFC > W 39
  • 40. A Monopsonist determines its Wage Rate $5 $4 Dollars per hour MFC $3 S $2 D (MRP) $1 Quantity of Labor 1 2 3 4 5 40
  • 41. How are wages compared between the two markets? A monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market 41
  • 43. Key Concepts • In a Perfectly Competitive Market, what deter • What is Marginal Revenue Product? • What is the Demand Curve for Labor equal to • How do we measure MRP in Perfect Competit • What does the Supply Curve for Labor show? 43
  • 44. Key Concepts cont. • How do Unions attempt to raise wages? • What is Featherbedding? • What is Collective Bargaining? • What factors can cause a change in the Dema • What factors can cause a change in the Suppl 44
  • 45. Key Concepts cont. • What has happened to Union Membership sinc • How does union membership in the U.S. comp • What is a Monopsony? • What is Marginal Factor Cost (MFC)? • How are wages compared between the two markets? 45
  • 46. Summary 46
  • 47. Marginal revenue product (MRP) is determined by a worker’s contribution to a firm’s total revenue. Algebraically, the MRP equals the price of the product times the worker’s marginal product (MP). 47
  • 48. The demand curve for labor is the curve showing the quantities of labor a firm is willing to hire at different prices of labor. The marginal revenue product (MRP) of labor curve is the firm’s demand curve for labor. Summing individual demand for labor curves gives the market demand curve for labor. 48
  • 49. $350 Demand Curve for Labor $280 M RP $210 =d em $140 an d $70 1 2 3 4 5Q 49
  • 50. Derived demand means that a firm demands labor because labor is productive. Changes in consumer demand for a product cause changes in demand for labor and for other resources used to make the product. 50
  • 51. The supply curve of labor is the curve showing the quantities of workers willing to work at different prices of labor. The market supply curve of labor is derived by adding the individual supply curves of labor. 51
  • 52. $350 Supply Curve of Labor Wage Rate per day $280 S $210 $140 $70 D Quantity of Labor 10 20 30 40 50 52
  • 53. Human capital is the accumulated people make in education, training, experience, and health in order to make themselves more productive. One explanation for earnings differences is differences in human capital. 53
  • 54. Collective bargaining is the process through which a union and management negotiate a labor contract. 54
  • 55. Monopsony is a labor market in which a single firm hires labor. Because the monopsonist faces the industry supply curve of labor and each worker is paid the same wage, changes in total wage cost exceed the wage rate necessary to hire each additional worker. As a result, the marginal factor cost (MFC) of labor curve lies above the supply curve of labor. 55
  • 56. The monopsonist’s wage rate and quantity of labor are determined where the MFC equals MRP . Since at this point the worker’s MRP is greater than the wage paid, the monopsonist exploits the workers. 56
  • 57. A Monopsonist determines its Wage Rate $5 $4 Dollars per hour MFC $3 S $2 D (MRP) $1 Quantity of Labor 1 2 3 4 5 57
  • 58. Chapter 11 Quiz ©2000 South-Western College Publishing 58
  • 59. 1. Marginal revenue product measures the increase in a. output resulting from one more unit of labor. b. TR resulting from one more unit of output. c. revenue per unit from one more unit of output. d. total revenue resulting from one more unit is the increase in total revenue to a D. MRP of labor. firm resulting from hiring an additional unit of labor or other variable resource. 59
  • 60. 2. Troll Corporation sells dolls for $10.00 each in a market that is perfectly competitive. Increasing the number of workers from 100 to 101 would cause output to rise from 500 to 510 dolls per day. Troll should hire the 101st worker only when the wage is a. $100 or less per day. b. more than $100 per day. c. $5.10 or less per day. d. none of the above. A. Under perfect competition, the firm hires workers until the MRP equals the wage rate. MRP equals $10 x MP (510 - 500) = $100. 60
  • 61. 3. Derived demand for labor depends on the a. cost of factors of production used in the product. b. market supply curve of labor. c. consumer demand for the final goods produced by labor. d. firm’s total revenue less economic profit. C. If consumers do not purchase goods, there is no MRP and no workers are hired. 61
  • 62. 4. If demand for a product falls, the demand curve for labor used to produce the product will shift a. leftward. b. rightward. c. upward. d. downward. A. If consumers demand for a product decreases and supply remains the constant, the price of the product falls and the MRP (P x MP) decreases. 62
  • 63. 5. The owner of a restaurant will hire waiters if the a. additional labor’s pay is close to the minimum wage . b. marginal product is at the maximum. c. additional work of the employees adds more to total revenue than to costs. d. waiters do not belong to a union. C. If MRP exceeds the wage rate paid waiters, it is profitable for the restaurant to hire more waiters. 63
  • 64. 6. In a perfectly competitive market, the demand curve for labor a. slopes upward. b. slopes downward because of diminishing marginal productivity. c. is perfectly elastic at the equilibrium wage rate. d. is described by all of the above. B. As output expands in the short run, a fixed factor results in diminishing returns causing MP to decrease. Correspondingly, MRP decreases. 64
  • 65. 7. A union can influence the equilibrium wage rate by a. featherbedding. b. requiring longer apprenticeships. c. favoring trade restrictions on foreign products. d. all of the above. e. none of the above. D. Featherbedding and trade protectionism increase the demand for labor. Requiring longer apprenticeship decreases the demand for labor. 65
  • 66. 8. In which of the following market structures is the firm not a price taker in the factor market? a. Oligopoly. b. Monopsony. c. Monopoly. d. Perfect competition. B. Monopsony is a labor market in which a single firm hires labor. For example, the “company town” where everyone works for the same employer. 66
  • 67. 9. The extra cost of obtaining each additional unit of a factor of production is called the marginal a. physical product. b. revenue product. c. factor cost. d. implicit cost. C. The assumption of MFC is that the firm must pay a higher wage to each additional worker as well as to all previously hired workers. 67
  • 68. 10. A monopsonist’s marginal factor cost curve lies above its supply curve because the firm must a. increase the price of its product to sell more. b. lower the price of its product to sell more. c. increase the wage rate to hire more labor. d. lower the wage rate to hire more labor. C. The monopsonist can hire an additional worker only by raising the wage rate for all workers. Therefore, the MFC exceeds the wage rate along the labor supply curve. 68
  • 69. 11. In order to maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost is equal to a. marginal physical product. b. marginal revenue product. c. total revenue product. d. any of the above. B. The MRP curve is the contribution of each worker to total revenue and MFC the addition to total cost. When MRP > MFC, the firm hires more workers. 69
  • 70. Marginal Factor Cost (MFC) and $10 Marginal Revenue Product (MRP) $8 Dollars per hour Surplus MFC $6 $4 Shortage D (MRP) $2 Quantity of Labor 1 2 3 4 5 70
  • 71. 12. BigBiz, a local monopolist, currently hires 50 workers and pays them $6 per hour. To attract an additional worker to its labor force, BigBiz would have to raise the wage rate to $6.25 per hour. What is BigBiz’s marginal factor cost? a. $6.25 per hour. b. $12.50 per hour. c. $18.75 per hour. d. $20.00 per hour. C. Its total cost would increase by $18.75 to hire that additional worker (25 x 50 + 6.25). 71
  • 72. 13. Suppose a firm can hire 100 workers at $8.00 per hour, but must pay $8.05 per hour to hire 101 workers. Marginal factor cost (MFC) for the 101st worker is approximately equal to a. $8.00. b. $8.05. c. $13.05. d. $13.00. C. The firm’s total cost would increase $13.05 to hire the 101st worker (.05 x 100 + 8.05). 72
  • 73. 14. A monopsonist in equilibrium has a marginal revenue product of $10 per worker hour. Its equilibrium wage rate must be a. less than $10. b. equal to $10. c. greater than $10. d. equal to $5. A. Because of its monopoly in the labor market, a monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market. 73
  • 74. A Monopsonist determines its Wage Rate $5 $4 Dollars per hour MFC $3 S $2 D (MRP) $1 Quantity of Labor 1 2 3 4 5 74
  • 75. Internet Exercises Click on the picture of the book, choose updates by chapter for the latest internet exercises 75
  • 76. END 76