OM3080 - QUIZ 6 Questions and Answers PDF

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OM3080 - QUIZ 6 Questions and Answers...

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1 1.) The factors determining resource demand differ from those determining product demand because the demand for products Answer: depends on income and tastes, but the demand for resources is a derived demand Explanation: Demand for products is a question of income and tastes. But resource demand is more passive in the sense that it is derived from the demand for the products the resource can produce. If a resource can't be used in the production of a desired product, there will not be any demand for it. Additionally, resources are often less mobile than products, so their geographic location relative to demand for the output they produce may be an important factor determining demand for resources in particular geographic areas. 2.) Resource demand curves slope downward because Answer: of the diminishing marginal product of the resource Explanation: The demand for a resource is downward sloping because of the diminishing marginal product of the resource (because of the law of diminishing returns) and because in imperfectly competitive markets, the greater the output, the lower its price. 3.) a. In 2009 General Motors (GM) announced that it would reduce employment by 21,000 workers. What does this decision reveal about how GM viewed its marginal revenue product (MRP) and marginal resource cost (MRC)? This decision indicated that for those 21,000 workers... b. GM didn't reduce employment by more than 21,000 workers because... Answer: a. the MRC was greater than the MRP b. it wanted to set the labor level where MRC equaled MRP to maximize profit Explanation: a. GM's decision suggests that the MRC of those 21,000 workers was greater than the MRP. b. GM didn't reduce employment further because the MRP of the remaining workers exceeded the MRC. Reducing employment by less than 21,000 workers would have left GM with some employees for whom the MRC exceeded the MRP, reducing the company's profits. 4.) A delivery company is considering adding another vehicle to its delivery fleet; each vehicle is rented for $200 per day. Assume that the additional vehicle would be capable of delivering 1,750 packages per day and that each package that is delivered brings in $0.20 in revenue. Also assume that adding the delivery vehicle would not affect any other costs. a. - What are the MRP and MRC? - Should the firm add this delivery vehicle? b. - Now suppose that the cost of renting a vehicle doubles to $400 per day. What are the MRP and MRC? - Should the firm add a delivery vehicle under these circumstances? c. - Next suppose that the cost of renting a vehicle falls back down to $200 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? - Would adding a vehicle under these circumstances increase the firm's profits? Answer: a. -MRP = $350 -MRC = $200 Yes b. -MRP = $350

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2 -MRC = $400 No c. -MRP = $150 -MRC = $200 No Explanation: a. To find the marginal revenue product (MRP) of an additional truck, calculate the additional revenue this truck will generate for the company. Since the truck delivers 1,750 packages and each package generates $0.2 in revenue, the truck generates $350 (= $0.2 × 1,750) in total revenue. Thus, the MRP of the truck is $350. The marginal resource cost is the cost of renting the truck for the day, which is $200. If MRP MRC, then you should add the delivery truck. If MRP < MRC, then you should not add the delivery truck. b. If MRP

MRC, then you should add the delivery truck. If MRP < MRC, then you should not add the delivery truck.

c. Since the cost of renting the vehicle is $200 again, the MRC = $200. However, the truck only delivers 750 packages per day now and each package delivered still brings $0.2 in revenue. Thus, the truck generates $150 (= $0.2 × 750) in total revenue. If MRP MRC, then you should add the delivery truck. If MRP < MRC, then you should not add the delivery truck. 5.) Suppose that marginal product stayed the same while product price doubles in the table below. (table below is already answered type blank one a. What would be the new values in the table? b. What would be the net impact on the location of the resource demand curve given below? - The resource demand schedule will...... Answer: a. (answered chart is attached to this flashcard) b. shift right. (graph for "b" is on quiz 6 question 5) Explanation: a. Marginal product is the additional output from each additional unit of labor. Total revenue equals output x product price. Marginal revenue product is the change in total revenue divided by the unit change in resource quantity. b. If the new marginal revenue product is higher for each unit of the resource compared to the original, it will cause the resource demand schedule to shift to the right. If the new marginal revenue product is lower for each unit of the resource compared to the original, it will cause the resource demand schedule to shift to the left. If the new marginal revenue product is unchanged for each unit of the resource compared to the original, it will cause the resource demand schedule to remain unchanged. 6.) Suppose that a monopoly firm finds that its MR is $70 for the first unit sold each day, $69 for the second unit sold each day, $68 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. What is the firm's MRP for each of the first five workers? Worker | MRP, Unregulated 1 ? 2 ? 3 ? 4 ? 5 ? b. Suppose that the monopolist is subjected to rate regulation and the regulator stipulates that it must charge exactly $60 per unit for all units sold. At that price, what is the firm's MRP for each of the first five workers? Worker | MRP, Regulated

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c. - If the daily wage paid to workers is $250 per day, how many workers will the unregulated monopoly demand? - If the daily wage paid to workers is $250 per day, how many workers will the regulated monopoly demand? - Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage? d. - If the daily wage paid to workers falls to $117 per day, how many workers will the unregulated monopoly demand? - If the daily wage paid to workers falls to $117 per day, how many workers will the regulated monopoly demand? - Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage? e. - Comparing your answers to parts c and d, does regulating a monopoly's output price always increase its demand for resources? Answer: a. Worker | MRP, Unregulated 1 340 2 254 3 180 4 115 5 56 b. Worker | MRP, Regulated 1 300 2 240 3 180 4 120 5 60 c. - 2 workers - 1 worker - unregulated monopoly d. - 3 workers - 4 workers - regulated monopoly e. - no Explanation: a, b: Worker | MRP, Unregulated | MRP, Regulated 1 $340 $300 2 254 240 3 180 180

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4 4 115 120 5 56 60 To find the marginal revenue product for the first unit of labor in the unregulated economy, we need to add up the marginal revenue for each sequential worker given that the first unit can be sold for $70, the second for $69, and so on. Since the first worker can produce 5 units and each of these sequential units sells for $70, $69, $68, $67, and $66, the MRP for the first worker is $340 (= $70 + $69 + $68 + $67 + $66). Since the second worker can produce 4 units and each of these sequential units sells for $65, $64, $63, and $62, the MRP for the second worker is $254 (= $65 + $64 + $63 + $62). The same procedure is applied to the next 3 workers, where the third worker produces 3 units, the fourth 2 units, and the fifth 1 unit. Be sure to reduce the price by $1 for each additional unit sold. To find the marginal revenue product for the first unit of labor in the regulated economy, we just multiply the regulated wage, $60, by the number of units the first worker produces, which is 5. Thus, the MRP for this worker is $300 (= $60 × 5). The second worker has an MRP = $240 (= $60 × 4), the third's MRP = $180 (= $60 × 3), and so on. All the values are in the table above for the unregulated and regulated economies. c. Now assume the daily wage rate is $250. The firm will employ additional workers as long as the marginal revenue product (MRP) is greater than or equal to the marginal resource cost (MRC). In this case, the MRC is $250, the wage rate. Based on this MRC, the unregulated firm will employ the first worker where the MRP = $340 and the second worker where the MRP = $254. This unregulated firm will not employ the third worker because the MRP = $180. The unregulated firm will demand 2 workers. We can apply the same process to the regulated firm (price regulated at $60). The regulated firm will employ the first worker where MRP = $300, but will not employ the second worker because the MRP = $240. The regulated firm will demand 1 worker. Thus, the unregulated firm will demand more workers. d, e: Now assume the daily wage rate is $117. Using the same logic applied in part c, we see that the unregulated firm will employ the first 3 workers where MRP MRC = $117. The regulated firm will employ the first 4 workers where MRP MRC = $117. In this case, the regulated firm will employ more workers. So we can conclude that regulating a monopoly does not always increase the demand for resources. The direction will depend on the resource price. 7.) 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 $62,000. If he adds one more tractor, monthly revenue will increase from $50,000 to $68,000. Each additional worker costs $6,000 per month, while an additional tractor would also cost $6,000 per month. a. - What is the marginal revenue product of labor? - The marginal revenue product of capital? b. - What is the ratio of the marginal revenue product of labor to the price of labor (MRPL/PL)? - What is the ratio of the marginal revenue product of capital to the price of capital (MRPK/PK)? c. In this case, is the firm combining inputs in a way that minimizes costs? d. Does adding an additional worker or adding an additional tractor yield a larger increase in total revenue for each dollar spent? Answer: a. - $12,000 - $18,000 b. - 2 - 3 c. no d. Adding an additional tractor

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5 Explanation: a. The marginal (revenue) product of labor is the increase in total revenue generated by the additional worker. MPL = $12,000 (= $62,000 - $50,000). The marginal product of capital can be found the same way. The change in total revenue generated by the additional tractor is $18,000 (= $68,000 - $50,000). So, we have MRPL = $12,000 and MRPK = $18,000. b. The ratio of the marginal revenue product of labor to the price of labor is: MRPL/PL = $12,000/$6,000 = 2. The ratio of the marginal revenue product of capital to the price of capital is: MRPK/PK = $18,000/$6,000 = 3. c, d. If MRPL/PL ≠MRPK/PK, then the least-cost combination of inputs has not been found. If MRPL/PL MRPK/PK, total revenue is increased by spending money on an additional worker rather than an additional piece of capital. If MRPL/PL < MRPK/PK, total revenue is increased by spending money on additional capital rather than an additional worker. 8.) Suppose that the marginal product of labor (MPL) for a local brewery is 72 units per day and the price of labor (PL) is $8 per day. a. What does the least-cost rule say that the ratio of the marginal product of capital (MPC) to the price of capital (PC) should be? b. Now suppose that the marginal product of labor (MPL) is 72 units per day, the price of labor (PL) is $8 per day, and the price of capital (PC) is $8 per day. What does the least-cost rule say that the marginal product of capital (MPC) should be? Answer: a. 9 b. 72 Explanation: a. The ratio of the MPL to the price of labor should be equal to the ratio of the MPC to the price of capital. That is, the ratio of MPL to the price of labor is 72/8, which should then also be the ratio of the MPC to the price of capital. b. The MPC is equal to the price of capital times the ratio of the MPL to the price of labor. (This comes from setting the ratio of the MPC to the price of capital equal to the ratio of the MPL to the price of labor.) The ratio of the MPL to the price of labor is 72/8, and multiplying that by the price of capital ($8) gives the MPC of 72 (9 × 8). 9.) a. The general level of wages is higher in the United States and other industrially advanced countries because b. The single most important factor underlying the long-run increase in average real-wage rates in the United States is c. An important factor influencing labor productivity in the United States is Answer: a. of the high demand for labor in relation to supply. b. labor productivity. c. high capital per worker. Explanation: a. The general level of wages is higher in the United States and other industrially advanced nations because of the high demand for labor in relation to supply. b. The most important single factor underlying the long-run increase in average real-wage rates in the United States is the increase in output per worker, that is, in productivity. c. Labor productivity is high in the United States and other industrially advanced countries because: (1) capital per worker is very high; (2) natural resources are abundant relative to the size of the labor force, particularly in the United States; (3) technology is advanced in the United States and other industrially advanced countries relative to much of the rest of the world; (4) labor quality is high because of health, vigor, training, and work attitudes compared to labor; and (5) other factors contributing to high American productivity are the efficiency and flexibility of American management; the business, social, and

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6 political environment that greatly emphasizes production and productivity; and the vast domestic market, which facilitates the gaining of economies of scale. 10.) An increase in the minimum wage could Answer: reduce employment and increase income. Explanation: An increase in the minimum wage could reduce employment; however, there could be income gains for those retaining employment. 11.) Workers are compensated by firms with "benefits" in addition to wages and salaries. The most prominent benefit offered by many firms is health insurance. Suppose that in 2000, workers at one steel plant were paid $30 per hour and in addition received health benefits at the rate of $6 per hour. Also suppose that by 2010 workers at that plant were paid $31.5 per hour but received $13.5 in health insurance benefits. a. By what percentage did total compensation (wages plus benefits) change at this plant from 2000 to 2010? Total compensation ______________ by: ______________ % What was the approximate average annual percentage change in total compensation? _____________% b. By what % did wages change at this plant from 2000 to 2010? Wages ___________ by: ___________% What was the approximate average annual % change in wages? ____________% c. If workers value a dollar of health benefits as much as they value a dollar of wages, by what total percentage will they feel that their incomes have risen over this time period? ___________% What if they only consider wages when calculating their incomes? Incomes ______ by:_____%. d. Is it possible for workers to feel as though their wages are stagnating even if total compensation is rising? _______ Answer: a. - Total compensation increased by: 25.00 % - 2.50 % b. - Wages increased by: 5% - 0.5% c. - 25% - Incomes rise by: 5% d. Yes Explanation: a. Total compensation for 2000 is $36 (= $30 (wage rate) + $6 (health benefits)) and in 2010 total compensation is $45 (= $31.5 + $13.5). The percentage increase in total compensation is (45 - 36)/36 = 9/36 × 100 = 25 percent. This implies the approximate average annual percentage change in total compensation = (total compensation)/(number of years) = 25/10 = 2.5 percent per year.

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b. The percentage increase in wages alone is (31.5 - 30)/30 × 100 = 1.5/30 × 100 = 5 percent. This implies the approximate average annual percentage change in wages is 5/10 = 0.5 percent. c. If workers value a dollar of health benefits as much as they value a dollar of wages, they feel that their incomes have risen by 25 percent (part a) over this time period. If they only consider wages when calculating their incomes, they feel that their incomes have risen by 5 percent (part b) over this time period. d. Yes, if workers only look at their wages, they may feel as if their wages are stagnating. 12.) Complete the following labor supply table for a firm hiring labor competitively: a. - Show graphically the labor supply and marginal resource (labor) cost curves for this firm. Graph on Quiz 6 Question #12 - Are the labor supply and MRC curves the same or different? If they are different, which one is higher? b. - What is the equilibrium wage rate? - What is the equilibrium level of employment? Answer: a. - Graph on Quiz 6 Question #12 - They are the same b. - $14 - 5 Explanation: a. The labor supply curve and MRC curve coincide as a single horizontal line at the market wage rate of $14. The firm can employ as much labor as it wants, each unit costing $14. Wage rate = MRC because the wage rate is constant to the firm. b. Graph: Equilibrium is at the intersection of the MRP and MRC curves. Equilibrium wage rate = $14; equilibrium level of employment = 5 units of labor. From the tables: MRP exceeds MRC for each of the first four units of labor; MRP = MRC for the fifth unit; MRP is less than MRC for the sixth unit. 13.) Assume a firm is a monopsonist that can hire its first worker for $6 but must increase the wage rate by $3 to attract each successive worker (so that the second worker must be paid $9, the third $12, and so on). The marginal revenue product of labor is given in the table below. Units of Labor | Marginal Revenue Product 0 1 $30 2 24 3 18 4 15 5 12 6 10 a. - Draw the firm's labor supply and marginal resource cost curves. - Are the labor supply and MRC curves the same or different? If they are different, which one is higher? b. - What is the competitive equilibrium wage rate? - What is the equilibrium level of employment?...