AP Microeconomics Unit V: The Factor (Resource) Market Problem Set #5

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1 1. /15 2. /20 3. /15 4. /25 Total: /75 Name: Team: AP Microeconomics Unit V: The Factor (Resource) Market Problem Set #5 1. ( /15) Define the term and explain a situation that demonstrates the real world application of each of the following. Make sure your example clearly demonstrates your understanding of each concept. a. Derived Demand ( /5) b. Marginal Revenue Product (MRP) and Marginal Resource Cost (MRC) ( /5) c. Monopsony ( /5) 2. ( /20) Use the chart regarding a perfectly competitive Yo-Yo factory to complete the following: a. Fully explain why the number of yo-yos produced increases at a decreasing rate as more workers are hired. Identify and explain the three stages of returns. ( /5) b. Explain how a firm decides how many workers to hire. If the wage was constant at $10 per day, how many workers should be hired? Explain how you got your answer. ( /5) c. PLOT the labor demand and labor supply for this firm. Compare it to a firm in a perfectly competitive PRODUCT MARKET. Explain why suppy is constant and why demand is downward sloping. ( /5) d. Assume there is an increase in demand of yo-yos and they are now $3 each. Explain how the level of employment will be affected. How many workers should be hired? Why did it change? ( /5) Number of Workers Output (Quantity) Marginal Product Price of Yo-Yos Total Revenue $ Marginal Revenue Product 3. ( /15) Worksheets and handouts a. How Wages are Determined in Competitive Labor Markets. ( /5) b. How Markets Allocate Resources ( /5) c. Push-up Machine Handout ( /5) (in class ATTACH to the problem set 4. ( /25) Complete the practice FRQs. a. FRQ #1 ( /7) b. FRQ#2 ( /6) c. FRQ#3 ( /6) d. FRQ#4 ( /6)

2 The Push-Up Machine Groove-econ Incorporated has invented a new machine that generates energy from human pushups. You have just been hired as the manager in charge of hiring workers. Your goal is to make sure this firm hires the right amount of workers to maximize profit. Assume that you are hiring workers in a perfectly competitive LABOR MARKET and that the price of electricity is constant. 1. Define Marginal Resource Cost (MRC)- Supply of Labor 2. Explain why MRC is sometimes called MFC 3. Explain why the MRC is the equal to the supply of labor 4. Explain why MRC/Wage is constant (graph MRC on back) 5. Define Marginal Revenue Product (MRP)- Demand for Labor 6. Identify how to calculate a workers MRP- 7. Calculate the MP and MRP assuming that each push-up can generate $1 worth of energy: Workers Total Product Marginal Product $1 $ Explain why the MRP is the equal to the demand of labor 9. Explain why MRP eventually begins to fall (graph MRP on back) 10. Identify the number of workers that the firm should hire. Explain how you determined your answer.

3 FIRM in a Perfectly Competitive Labor Market $ Wage /$ Quantity of Workers Shifting Demand 11. MRP depends on two variables. Marginal Product and the price of the product being produced. For each of the following, identify whether MP or Price changes and indicate if the demand (MRP) increase or decreases. Situation Marg. Product Price Demand/MRP The price of electricity falls Stronger workers increases push-up output significantly Consumers prefer energy generated by wind New and improved machines increase the amount of electricity each push-up generates During the hot summer, consumer use more electricity 12. Assume the demand increases for electricity produced by this firm and now each push-up can generate $2 worth of energy. How many workers should this firm hire? Explain 13. Draw an industry and firm in a perfectly competitive labor market:

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10 FRQ #4: Labor and Production Assume that a firm produces output using $100 of fixed inputs. The only variable input is labor, which can be obtained at a wage rate of $11. The firm can sell all of the output it produces at a market price of $3. Number of Employees Total Product (Quantity) Marginal Product Marginal Revenue Product Marginal Factor Cost a) Explain how the law of diminishing marginal returns is demonstrated in this example. b) Using marginal analysis, identify how many employees this firm should hire? How can you tell? c) At the level of output identified in part (b), is the firm earning an economic profit or economic loss. How much?

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