factor markets

Question 1

demand for factors

Answer 1

factor demand is a derived demand

Question 2

marginal revenue product (MRP)

Answer 2

• additional revenue an additional worker provides –> MRP = MP x MR = change in total revenue / unit change in resource quantity
• profit maximizing firms will hire units of a variable factor up to the point at which the marginal revenue generated by the factor equals the marginal cost of employing the factor

Question 3

marginal product curve

Answer 3

• downward sloping because of the law of diminishing returns
• as the firm adds further units of the variable factor to a given quantity of the fixed factor, the marginal product of the variable factor decreases

Question 4

firm’s factor demand curve and elasticity

Answer 4

• the more elastic the demand for a factor, the greater the change in quantity demanded in response to a change in the price of that factor
• price elasticity of demand depends on elasticity of demand for final product and the ability to substitute between factors