Chapter 14

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Explain why the demand for labor might decrease if the price of capital decreases. Explain why the demand for labor might increase if the price of capital increases. Use substitution and output effect concepts in explanation. Explain how one effect (of either substitution or output) may offset the other effect.

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Least-Cost Combination of Resources

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MRP = MRC Rule

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Marginal Product (MP)

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Explain the profit-maximizing rule for a combination of resources

The price of any resource must be equal to its marginal revenue product, and thus the ratio must always equal 1.

Suppose the demand for strawberries rises sharply, resulting in an increase price of strawberries. As it relates to strawberry pickers, we could expect the

MRP curve to shift to the right

"Income receivers should be paid in accordance with the value of output each produces." This statement is consistent with the

Marginal productivity theory of income distribution

Resource X has many close substitutes whereas resource Y has no close substitutes. Other things equal, we would expect

The demand for resource X to be more elastic than the demand for resource Y.

Marginal revenue product is the increase in

Total revenue from the use of an additional unit of a resource

Which is an example of a change in product demand that increases labor demand

Tourism increases in popularity, increasing the demand for workers at tourist resorts

The demand for a resource depends primarily on

The demand for the product or service that it helps produce

The more inelastic the demand for a resource, the

less elastic its marginal revenue product curve

If the wage rate increases

A purely competitive and an imperfectly competitive producer will both hire less labor

Derived Demand

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Elasticity of Resource Demand

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Explain how much of a resource a firm will hire using the MRP and MRC concepts

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Explain the change in of MRP under pure competition and imperfect competition and the difference of MP and P between them.

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Explain the difference between MR & MC to MRP and MRC

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Explain the rule of MRP = MRC and what happens when MRP > MRC or when MRP < MRC

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Marginal Productivity Theory of Income Distribution

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Marginal Resource Cost (MRC)

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Marginal Revenue Product (MRP)

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Output Effect

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Profit-Maximizing Combination of Resources

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Substitution Effect

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A firm is both hiring labor and selling output in purely competitive markets and its maximizing profits. It is currently operating in the elastic range of its MRP curve. If the wage rate increases, its total spending on ages at the new equilibrium will

Be smaller

The marginal revenue product of an input in a competitive market decreases as a firm increases the quantity of an input used because of the

Law of diminishing returns


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