1.

Answer each of the following questions about the labor market:

a. Which economic decision makers determine the demand for labor? What is their goal, and
what decision criteria do they use in trying to reach that goal?
Demand of labour is determined by firms. A firm's goal is to maximize its profit. In order to
maximize their profit, firms will increase their labor size until the marginal revenue from the last
labour exceeds the marginal cost of employing the labor

b. Which economic decision makers determine the supply of labor? What is their goal and
what decision criteria do they use in trying to reach that goal?

If the marginal revenue product (MRP) of labor is equal to the market wage, the firms will be at
an optimal point of labor consumption of labour, As MRP ( marginal revenue product) is less
than the wage in case of buying more labor buying less labor would mean that the marginal
revenue product is greater than the wage. If the marginal revenue product (MRP) of labor is
lower than the market wage, then the firms are consuming too much labor, and these firms will
probably cut back on the hours they buy until the MRP (marginal revenue product) of labor is
equal to the wage.

c. In what sense is the demand for labor a derived demand?

Labor is often traded in the factor markets, the demand for the factors of production increases
whenever there is a demand of the product in the market, i.e, whenever the demand for
products increases, it increases the factors employed for supplying that out put which is
demanded, therefore the demand for labor is not a direct demand but rather, a derived
demand from the product market. Whenever the demand for products decreases, during the
time of recession, than there will be cyclic unemployment.

2. How is the demand for lumber affected by the demand for housing?
Since lumber is a resource that is used to produce housing, lumber is a derived demand from
housing which means that the demand for lumber depends on what it produces which is
housing.

3. Explain why the market supply curve of a resource slopes upward.

Resource supply curves slope upward because resource owners are more willing and able to
increase quantity supplied as their rewards for doing so increase.

4. Distinguish between how the market reacts to a temporary difference in prices for the same
resource and how the market reacts to a permanent difference for similar resources. Why do
the reactions differ?
Temporary Differences: Some price differences are temporary because they spark shifts of
resource supply away from lower-paid uses and toward higher paid uses.
Permanent Differences: A lack of resource mobility, differences in inherent quality of the
resource, differences in time and money involved in developing necessary skills, or
nonmonetary differences explain permanent price differences for otherwise similar resources.
The reactions are different since temporary differences because the resource has mobility
which means that its current value can be shifted into a higher value depending on its uses
meanwhile permanent differences have no ability to change its current value to higher value
due to the resource needing various processes in order to use.

5. On-the-job experience typically enhances a person’s productivity in that particular job. If the
person’s salary increases to reflect increased experience but the additional experience has no
relevance for other jobs, does this higher salary reflect an increase in opportunity cost or in
economic rent?
The person’s experience is considered an inelastic factor since the experience he has for his
current work cannot be applied to other jobs, it will not affect his salary when he changes his
job and has no alternative use. This means that there is no opportunity cost, all earnings are
economic rent. Fixed supply determines the equilibrium quantity, but demand determines the
equilibrium price.

6. How does the law of diminishing marginal returns affect a firm’s demand for labor?

The law of diminishing marginal returns states that adding an additional factor of production
results in smaller increases in output. After some optimal level of capacity utilization, the
addition of any larger amounts of a factor of production will inevitably yield decreased per-unit
incremental returns.
7. Many countries are predominantly agricultural. How would changes in the supply of fertilizer
affect the marginal product, and thus the income, of farmers in such countries?

Since the changes in the supply of fertilizer directly affect the marginal product and has no
other uses for the farmers the marginal product will be produced less and the income of the
farmers will decrease due to the inelasticity of the resource that affects the revenue and output
of the farmers

8. Explain the rule for determining optimal resource use when a firm employs more than one
resource.

For every resource employed:

If MRP > MRC • A firm can increase profit or reduce a loss by employing more of that resource –
If MRP = MRC • Maximize profit (or minimize loss)

9.

a.)
(1) (2) (3) (4) (5) (6)

Output Total Product Marginal Product Price Total Marginal

Product Revenue Revenue

0 0 - $3 $0 -

1 7 7 $3 $21 $21

2 13 6 $3 $39 $18

3 18 5 $3 $54 $15

4 22 4 $3 $66 $12

5 25 3 $3 $75 $9
b.)

c.)
The wage rate of $15 equals to 5 units so the firm should hire 5 more units of labor

(1)  (2)  (3)  (4)  (5)  (6)  (7) 

Labor  Total Product  Marginal Product Total Marginal Labor Cost 
Product  Price  Revenue  Revenue 

0  0  -  $3  $0  -  $0 

1  7  7  $3  $21  $21  $15 

2  13  6  $3  $39  $18  $30 

3  18  5  $3  $54  $15  $45 

4  22  4  $3  $66  $12  $60 

5  25  3  $3  $75  $9  $75 

d.) When price is $5, MRP changes and now when wage rate is $15, a total of 5 units of labor is
hired. This shows that when market price of the product rises, this causes firm to hire more
labor.

10.
110 - 100 = 10 increase in output
Wage/Labor Cost = Total Revenue
Wage = $25 x 10
Wage = $250