Chapter 3 Problems Flashcards
When a firm faces competition in the labor market
a. the wage the firm pays can be treated as constant. b. the firm can buy as much or as little labor as it wants at a going wage rate. c. the firm’s marginal expense of labor equals the wage rate. d. all of the above.
D.
Competition ensures that the firm will be a wage taker. If the firm pays less than the
going wage, no one would work for the firm. If the firm pays more, it will be at a cost
disadvantage relative to rivals that did pay the going wage, and as a result the firm will
be forced to close. Since the wage does not change as employment changes, the additional cost associated with hiring an additional worker is just the going wage that the firm pays
When a firm faces competition in the product market
a. the product price the firm receives can be treated as a given. b. the firm can sell as much or as little of its product as it wants at a going price. c. the firm’s marginal revenue equals the product price. d. all of the above.
D.
Competition ensures that the firm will be a price taker. If the firm sells for more than the
going price, no one would buy the product. If the firm sells for less, it will not be taking
in the amount of revenue it could and so earns less than comparable firms. If this continues the firm will be forced to close. Since the price does not change as output changes, the additional revenue associated with an additional unit of output is just the going price that the firm receives.
As the firm increases its employment, it is typically assumed that the marginal product of labor will eventually decline. An economic reason for why this occurs is that
Each additional worker has a smaller share of capital with which to work.
A firm will maximize its profits in the short run when
MRL equals MEL, or the difference between them is as small as possible; all the moves that add to profit have been made.
The marginal revenue product curve is the firm’s short-run demand curve for labor provided
the firm faces competition in the labor market.
For a firm to survive in a competitive environment
it must act as if it is following the MRPL = MEL rule.
Suppose the price of capital falls. If the scale effect associated with the price change dominates the substitution effect,
The quantity of labor demanded will increase.
Suppose the price of capital falls. If capital and labor are used in fixed proportions in the production process,
a. the substitution effect is zero.
b. the scale effect will dominate the substitution effect.
c. labor and capital will be gross complements.
d. all of the above.
D
If the price of capital rises and the long-run demand for labor curve shifts right, one can infer that
a. the scale effect dominated the substitution effect.
b. the substitution effect dominated the scale effect.
c. labor and capital are gross substitutes.
d. both b and c.
D
The percentage of the tax the workers bear in the form of lower wages
Unit Tax/ Driven down equilibrium wage
What percentage of the tax would the worker bear in the form of lower wages if the supply curve (S) were perfectly vertical (i.e., quantity supplied was extremely insensitive to changes in the wage)?
100%
Using the definitions of marginal revenue and marginal product of labor, prove that MR × MPL equals the marginal revenue associated with an additional unit of labor (MRL).
MR is the change in total revenue (R) associated with a one-unit change in output (Q), holding all else constant. More formally, if ΔQ represents a small change in output, and ΔR represents the resulting change in revenue, then
MR =ΔR/ ΔQ
Similarly, MPL is the change in output associated with a one-unit change in labor, holding all else constant. Formally, the MPL can be written as
MPL = ΔQ/ ΔL
By definition, MR◊MPL is the marginal revenue product (MRPL). Substituting the above expressions for MR and MPL yields
(ΔR/ ΔQ) x (ΔQ/ΔL) = ΔR/ΔL
which is by definition MRL, the additional revenue associated with a one-unit change in labor.
Explain why the MRPL curve slopes downward.
If there is perfect competition in the output market, MR simplifies to P in the MRPL expression.
With P constant, the MRPL slopes downward because MPL is assumed to diminish. With P
constant, MRPL reaches zero when the MPL reaches zero.
When the firm has monopoly power in the output market, the MRPL is downward sloping because both MR and MPL diminish as L increases.
(For a monopoly, MR falls as Q increases, and Q increases as L increases.)
What curve plays the role of the firm’s demand curve for labor when the real wage is plotted on the
vertical axis?
The marginal product of labor curve now serves as the firm’s demand curve for labor.
What similarity do you see between the analysis of payroll tax burdens and proposals that employers
be required to provide certain benefits (like health insurance or parental leave) to their employees?
What are the likely effects of such mandates?
Like the payroll tax, mandated benefits impose real per-unit labor costs on firms. The effect of such costs would be to shift the demand for labor down and thereby reduce wages and employment levels. When all adjustments required by the market have been made, workers are likely to have borne a significant share of the cost of such programs
