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Jay Amin Mr. Robbins AP Micro 30 July 2019 1. Wage determination in a perfectly competitive labor market A. Draw a perfectly competitive firm's labor demand curve and labor supply curve. Label the market equilibrium wage rate and quantity of labor the firm will hire. Label your graph completely. (2 points)

B. Draw the demand and supply curves for labor in a perfectly competitive labor market. Label the equilibrium wage rate and equilibrium quantity of labor. Label your graph completely. (2 points)

C. Why is a perfectly competitive firm a "wage taker"? (1 point) A perfectly competitive firm is a wage taker since there are so many firms that an individual firm cannot control wage. The demand curve for all firms in a perfectly

competitive market is the same, so the factor demand curve for labor will also be the same. D. To maximize its profits, how much labor should a perfectly competitive hire? (1 point) A perfectly competitive firm should hire until the marginal revenue product of the last worker is equal to the marginal cost or the market wage rate of the last worker. E. What is another name for the firm's labor demand curve? (1 point) F. What two things determine the demand for labor for every type of firm? (2 points) The wage and supply of labor determine the demand for labor for every firm type. G. What information does the supply curve for labor provide? (1 point) The supply curve provides how many workers are willing and able to work in an industry at various wages. H. Explain why the perfectly competitive firm's demand curve for labor is downward sloping. Include the role of the price for the final good or service in your answer. (1 point) The demand curve for labor slopes downwards since the price remains constant in a perfectly competitive market and thus the downwards slope reflects the diminishing marginal returns. I. Explain why the supply curve for labor is upward sloping. (1 point) This slopes upwards since as the wages get higher, more people are compelled or attracted to the job since it pays better. 2. Wage determination in a monopsonistic labor market A. Define monopsony in your own words. Give an example. (2 points) A monopsony is a market in which there is only one large employer. An example of this is a town in which coal is prominent and employs all the workers. The monopsony will employ all the coal workers in that market. B. Draw the demand, supply, and marginal resource cost curves for labor for a monopsonist operating in a perfectly competitive product market. Label your graph completely. (3 points)

C. What is another name for the demand curve? (1 point) Another name is the marginal revenue product curve. D. Explain why the monopsonist's marginal-revenue-product curve is downward sloping. Include the role of the price for the final good or service in your answer. (1 point) The MRP is downwards sloping since it is the demand curve. The price remains constant for the final good, so as more workers are employed, the curve slopes downwards due to decreasing marginal returns. E. Why is a monopsonist a wage setter? (1 point) They are a wage setter since they are the only employer in the market and do not have anyone else to follow. The firm gets to decide what the wage is since there is no competition. F. Is a monopsonist a wage taker or a wage setter? Why? (2 points) A monopsonist is a wage setter since there is no competition and no one to model themselves off of. Thus, they must dictate the wage of the market. G. Where does the marginal resource curve lie in relationship to the supply curve? Explain your answer. (2 points) The marginal resource curve lies above the supply curve since to hire more workers, the firm must pay higher wages. The firm must pay everyone the same. H. On the graph that you drew for part B of this question, label the equilibrium wage and quantity if this firm were operating as firm in a competitive labor market (rather than a monopsonistic labor market). (1 point) Shown by Q0 and W1. I. On this same graph, label the wage level the monopsonist would pay and the quantity of labor the monopsonist would hire. Why does the monopsonist choose that wage and quantity? (2 points)

Shown by Q0 and W0. The monopsonist chooses this wage and quantity since the MC is not equal to the MRC. The wage is not equal to the MC since as more workers are hired, the wages are also increased. Thus, the monopsonist will produce at a lower wage than where the MC=MRC. J. For a monopsonist employer that's maximizing profit, the wage will be lower and it will hire fewer workers than a firm operating in a more competitive labor market. (1 point) 3. Labor unions A. Assume the labor market for county transit drivers is currently in equilibrium. However, the transit drivers union has been successful in getting the county's elected officials to pass legislation that will require all drivers to be certified by the county before they can drive. Draw a graph that shows the market in equilibrium before and then after the legislation has passed. Label your graph completely. (4 points)

B. What is the effect of the legislation on the wage level of county transit drivers? (1 point) The effect is that the wage level increases. C. What is the effect of the legislation on the quantity of workers employed? (1 point) The effect is that it may reduce the number of workers employed since the employment level decreases as supply decreases. D. Why would the union want this legislation passed? (2 points) The union would want this passed since it reduces the number of drivers who are qualified to work while also increasing the wage. E. Assume the labor market for airplane mechanics is currently in equilibrium. The airplane mechanics union has started a media campaign on nationwide TV stations. The union claims that union mechanics are better trained and therefore the planes they work on are safer. A survey reveals that this advertising does convince consumers to fly more

often on airlines with union mechanics. Draw a graph that shows the labor market in equilibrium before and after the media campaign. Label your graph completely. (4 points)

F. How does the successful media campaign affect the wage level of airplane mechanics? (1 point) This increases the wage level of the airplane mechanics. G. What is the effect of the media campaign on the quantity of workers employed? (1 point) The effect of the media campaign is that it will increase the quantity of workers employed. H. Why did the union support this media campaign? What did it hope to achieve? (2 points) The union supported this in hopes that it would increase the wages of all the workers in the market and increase employment. 4. Economic rent A. Define economic rent. (1 point) Economic rent is the amount of payment a resource earns above its opportunity costs. B. Name one of your favorite top entertainers or sports stars. Pick an entertainer who earns a lot, a movie star such as Courtney Love, Julia Roberts, or Tom Hanks, or a top sport star such as Kobe Bryant or Mark McGuire. Explain why this person receives so much money for his or her talent. (2 points) An entertainer who earns a lot is Lebron James. Lebron James plays in the NBA and earns so much money due to how specialized of a job he has. He is also superior to many other players and more skilled, so teams are willing to give hima higher salary. 5. Interest rates A. What is interest? (1 point) Interest is the payment paid for the use of loaned money or funds.

B. Draw a graph that represents the market for loanable funds. Label your graph completely. (2 points)

C. Who demands loanable funds? Explain why the demand curve sweeps downward. (2 points) Firms demand loanable funds. The demand curve sweeps downward since as the interest rates increase, shown by the y-axis, fewer firms want to borrow money sicne it is more expensive. D. Who supplies loanable funds? Explain why the supply curve sweeps upward. (2 points) Banks supply loanable funds. The supply curve sweeps upward since as the interest rate increases, banks have more money to supply to firms. E. List any four different types of interest rates. If you need help, look in the business section of a daily newspaper or weekly newsmagazine or search the Internet. (2 points) Four types of interest rates include prime rates, discount rates, variable interest, and fixed interest. F. Explain the difference between the nominal interest rate and the real interest rate. (2 points) The nominal interest rate is the interest rate that you see which doesn’t account for inflation. The real interest rate is the nominal interest rate corrected for inflation. G. What is the advantage of quoting an interest rate in terms of real interest? (1 point) The advantage of quoting in these terms is that it is the real cost of borrowing and allows for comparisons over time. 6. What single factor determines how resources are allocated in a market economy? (1 point) Resources are allocated based off of profit in a market economy....