Econ Chapter 16

In each of the following four cases, MRPL and MRPC refer to the marginal revenue products of labor and capital, respectively, and PL and PC refer to their prices. Indicate whether each of the following is consistent with maximum profits for the firm. If not, state which resource(s) should be used in larger amounts and which resource(s) should be used in smaller amounts. a. MRPL = $8; PL = $4; MRPC = $8; PC = $4. b. MRPL = $10; PL = $12; MRPC = $14; PC = $9. c. MRPL = $6; PL = $6; MRPC = $12; PC = $12. d. MRPL = $22; PL = $26; MRPC = $16; PC = $19.

a. False/ Use more of both b. False/ Use less labor and more capital c. True/ Conditions are already consistent d. False/ Use less of both

Alice runs a shoemaking factory that uses both labor and capital to make shoes. Which of the following would shift the factory's demand for capital?

- Many consumer decide to walk barefoot all the time - New shoemaking machines are twice as efficient as older machines - The wages that the factory has to pay its workers rise due to an economywide labor shortage.

Suppose that hiring a third worker at the campus coffee shop increases sales from $115 per hour to $130 per hour. What is the marginal product of labor per hour from adding that third worker?

15

In 2018, General Motors (GM) announced that it would reduce employment by 14,000 workers. a. What does this decision reveal about how GM viewed its marginal revenue product (MRP) and marginal resource cost (MRC)? b. Why didn't GM reduce employment by more than 14,000 workers or by fewer than 14,000 workers?

a. The MRC of those 14,000 workers was greater than the MRP. b. The company wanted to set the labor level where MRC equaled MRP to maximize profits.

Cindy is a baker and runs a large cupcake shop. She has already hired 11 employees and is thinking of hiring a 12th. Cindy estimates that a 12th worker would cost her $100 per day in wages and benefits while increasing her total revenue from $2,600 per day to $2,750 per day. Should Cindy hire a 12th worker?

Yes

To save money, some fast-food chains now have their customers place their orders at computer kiosks. Will the kiosks necessarily reduce the total number of workers employed in the fast-food industry?

Yes

Suppose that a monopoly firm finds that its MR is $50 for the first unit sold each day, $49 for the second unit sold each day, $48 for the third unit sold each day, and so on. Further suppose that the first worker hired produces 5 units per day, the second 4 units per day, the third 3 units per day, and so on.

a. 1 240, 2 174, 3 120, 4 75, 5 36 b. 1 200, 2 160, 3 120, 4 80, 5 40 c. 2 c. 1 c. Unregulated monopoly d. 3 d. 4 d. Regulated monopoly e. No

A delivery company is considering adding another vehicle to its delivery fleet; each vehicle is rented for $100 per day. Assume that the additional vehicle would be capable of delivering 1,500 packages per day and that each package that is delivered brings in $0.10 in revenue. Also assume that adding the delivery vehicle would not affect any other costs. a. What is the MRP? What is the MRC? b. Now suppose that the cost of renting a vehicle doubles to $200 per day. What are the MRP and MRC? c. Next suppose that the cost of renting a vehicle falls back down to $100 per day but, due to extremely congested freeways, an additional vehicle would only be able to deliver 750 packages per day. What are the MRP and MRC in this situation?

a. 150 a. 100 a. Yes b. 150 b. 200 b. No c. 75 c. 100 c. No

Suppose the productivity of capital and labor are as shown in the table below. The output of these resources sells in a purely competitive market for $1 per unit. Both capital and labor are hired under purely competitive conditions at $3 and $1, respectively. a. What is the least-cost combination of labor and capital the firm should employ in producing 80 units of output? b. What is the profit-maximizing combination of labor and capital the firm should use?

a. 4 a. 2 b. 7 b. 7 b. 142 b. 114 b. yes, this is the least costly way.

Suppose a campus restaurant increases the number of workers it hires from 2 workers per day to 4 workers per day. As a result, the restaurant's total revenue increases from $90 per day to $200 per day. a. Assuming that each worker is equally productive, what is the marginal revenue product per day of each additional worker? b. Assuming the restaurant uses its resources in a profit-maximizing way, and that each worker works 5 days each week, what is the current weekly wage rate in the labor market?

a. 55 b. 275

After a campus pub increases its output from 5 kegs of beer per day to 9 kegs of beer per day, its total resource cost increases from $225 per day to $450 per day. a. What is the marginal resource cost per day of the additional kegs? b. Assuming the pub is using its resources in a profit-maximizing way, what is the marginal revenue product per day of the additional kegs?

a. 56.25 b. 56.25

Suppose that the marginal product of labor for a local bakery is 12 units per day and the price of labor is $2 per day. a. What does the least-cost rule say that the ratio of the marginal product of capital to the price of capital should be? b. Now suppose that the marginal product of labor is 12 units per day, the price of labor is $2 per day, and the price of capital is $4 per day. What does the least-cost rule say that the marginal product of capital should be?

a. 6 b. 24

Consider a small landscaping company run by Mr. Viemeister. He is considering increasing his firm's capacity. If he adds one more worker, the firm's total monthly revenue will increase from $50,000 to $58,000. If he adds one more tractor, monthly revenue will increase from $50,000 to $62,000. Each additional worker costs $4,000 per month, while an additional tractor would also cost $4,000 per month. a. What is the marginal revenue product of labor? b. What is the ratio of the marginal revenue product of labor to the price of labor (MRPL/PL)? c. Is the firm using the least-costly combination of inputs? d. Does adding an additional worker or adding an additional tractor yield a larger increase in total revenue for each dollar spent?

a. 8,000 a. 12,000 b. 2 b. 3 c. No, because MRPC/PC > MRPL/PL d. Revenue is increased more by spending money on an additional tractor

6a. What factors determine the elasticity of resource demand? 6b. What effect will each of the following have on the elasticity or the location of the demand for resource C, which is being used to produce commodity X?

a. Ease of resource substitutability, elasticity of product demand, and the ratio of resource costs to total costs b. - increase in demand - uncertainty as to the outcome - increase in elasticity - increase in demand - increase in demand - decrease in elasticity

A software company in Silicon Valley uses programmers (labor) and computers (capital) to produce apps for mobile devices. The firm estimates that when it comes to labor, MPL = 5 apps per month while PL = $1,000 per month. And when it comes to capital, MPC = 8 apps per month while PC = $1,000 per month. If the company wants to maximize its profits, it should:

decrease labor while increasing capital

Florida citrus growers say that the recent crackdown on illegal immigration is increasing the market wage rates necessary to get their oranges picked. Some are turning to $100,000 to $300,000 mechanical harvesters known as "trunk, shake, and catch" pickers, which vigorously shake oranges from trees. If widely adopted, this will

decrease the demand for human orange pickers, implying the substitution effect is greater than the output effect.

Resource pricing

determines people's incomes.

The demand for a resource is a derived demand. This is because

if there were no demand for output, there would be no demand for input.

Resource demand curves slope downward because

of the diminishing marginal product of the resource.

The factors determining resource demand differ from those determining product demand. This is because

product demand depends on income and tastes, whereas resource demand is a derived demand.