Pure Competition

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ANSWERS TO END-OF-CHAPTER QUESTIONS

3,4, 7 AND 8 WERE HOMEWORK QUESTIONS

122(Key Question) Complete the following labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market.

| | | | | |
Unitsoflabor| Totalproduct| Marginalproduct| Productprice| Totalrevenue| Marginalrevenueproduct| | | | | | | | | | |
| | | | | | | | | |
0123456| 0173143536065| | ____________________________| $2222222| | $____________________________| | $________________________| |

a.How many workers will the firm hire if the going 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.

Marginal product data, top to bottom: 17; 14; 12; 10; 7; 5. Total revenue data, top to bottom: $0, $34; $62; $86; $106; $120; $130. Marginal revenue product data, top to bottom: $34; $28; $24; $20; $14; $10. (a)Two workers at $27.95 because the MRP of the first worker is $34 and the MRP of the second worker is $28, both exceeding the $27.95 wage. Four workers at $19.95 because workers 1 through 4 have MRPs exceeding the $19.95 wage. The fifth worker’s MRP is only $14 so he or she will not be hired. (b) The demand schedule consists of the first and last columns of the table:

(c)Reconstruct the table. New product price data, top to bottom: $2.20; $2.15; $2.10; $2.05; $2.00; $1.95. New total revenue data, top to bottom: $0; $37.40; $66.65; $90.30; $108.65; $120.00; $126.75. New marginal revenue product data, top to bottom: $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. 12-3Suppose that marginal product tripled while product price fell by one-half in Table 12.1. What would be the new MRP values in Table 12.1? What would be the net impact on the location of the resource demand curve in Figure 12.1?

New MRP values (top to bottom): $21, 18, 15, 12, 9, 6, 3.
The resource demand curve would shift up, with the MRP fifty percent greater for each quantity of resource demanded. 12-4In 2005 General Motors (GM) announced that is would reduce employment by 30,000 workers. What does this decision reveal about how it viewed its marginal revenue product (MRP) and marginal resource cost (MRC)? Why didn’t GM reduce employment by more than 30,000 workers? By less than 30,000 workers?

GM’s decision suggests that the MRC of those 30,000 workers was greater than the MRP. GM didn’t reduce employment further because the MRP of the remaining workers exceeds the MRC. Reducing employment by less than 30,000 workers would have left GM with some employees for whom the MRC exceeded the MRP, reducing the company’s profits. 125(Key Question) What factors determine the elasticity of resource demand? What effect will each of the following have on the elasticity or 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 the uncertainty.

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...
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