Tips and sample questions for chapter 13, Micro.

Factor Markets determine the so-called prices of /or compensations for the economic resources such as:
Labor (Wages),
Land (Economic Rent),
Capital (Interest Rates), and
Residual Compensation of Entrepreneurs (Profit or Loss.)

Chapter 13 focuses on the Labor Market and other three resources are discussed in chapter 16. As you
know a market has two sides of Demand for and the Supply of.

On the Demand Side, start this chapter with making distinguish of demand for a product and the
derived demand for a factor of production. MRP curve in labor market is the firms factor
demand. There are two different ways to calculate MRP:

1) MRP= Change in TR/Change in Quantity of the factor.

2) MRP=MR times MPP.

Verify both methods with the numerical examples in Exhibit 1. Then, make sure to see the difference
between MRP and the VMP. And answer an important question: Is MRP = VMP?

On the Supply Side, the firms factor supply curve is known as MFC (it is a similar concept as MC.)

Equating factor demand MRP = factor supply MFC in Exhibit 4 will determine how many units of a
factor should a business firm buy. When there is more than one factor that a firm should buy, then the
Least Cost-Rule is applied to minimize costs:
(MPP of any factor / its Price) needs to be equal for all of the production factors.

Other related materials in this chapter are:

Shifts in a firms labor demand,
Market demand for labor,
The Elasticity of Demand for Labor.
Shifts in the labor supply curve,
Market supply of labor
Putting Supply and Demand together and determining Wages.
Why do wage rates differ?
Marginal Productivity Theory, and
Labor Markets and Information.
 Sample Questions for Chapter 13
Multiple Choices
Identify the choice that best completes the statement or answers the question.

____ 1. For a factor price taker, the factor supply curve is __________, whereas the market factor supply curve is
__________.
a. horizontal; vertical
b. vertical; horizontal
c. upward sloping; horizontal
d. horizontal; upward sloping
e. upward sloping; upward sloping

Exhibit 27-1

(1) (2) (3) (4)

Units of Quantity Product Marginal Revenue
Factor X of Output Price Product
0 10 $6
1 18 $6 (A)
2 24 $6 (B)
3 29 $6 (C)
4 32 $6 (D)

____ 2. Refer to Exhibit 27-1. What dollar value goes in blank (D)?
a. $192
b. $28
c. $10
d. $18
____ 3. The firm's factor demand curve is the
a. MRP curve if the firm is a price taker (perfectly competitive firm).
b. MRP curve if the firm is a price searcher (monopolist, monopolistic competitor,
oligopolist).
c. VMP curve if the firm is a price taker (perfectly competitive firm).
d. VMP curve if the firm is a price searcher (monopolist, monopolistic competitor,
oligopolist).
e. a, b, and c
____ 4. A measure of the value that one unit of a factor adds to the firm's output is value __________ product.
a. average
b. marginal
c. variable
d. fixed
____ 5. Which of the following will cause a firm's factor demand curve to shift to the left?
a. a decrease in factor costs
b. an increase in factor costs
c. a decrease in marginal physical product
d. an increase in marginal physical product
____ 6. If a firm is a factor price taker in the labor market,
a. it must pay higher wages in order to hire additional workers.
b. it can hire all the workers it wants to at the going wage rate.
c. it must hire all workers who apply for a job.
d. it will continue to hire workers as long as MFC > MRP.

Exhibit 27-2

____ 7. Refer to Exhibit 27-2. What factor quantity should the firm purchase?
a. Q1
b. Q2
c. Q1 + Q2
d. Q3
e. Q3 - Q1
____ 8. The lower the elasticity of demand for a product,
a. the higher the ratio of labor costs to total costs.
b. the lower the ratio of labor costs to total costs.
c. the lower the elasticity of demand for the labor that produces the product.
d. the higher the elasticity of demand for the labor that produces the product.
e. none of the above
____ 9. If, at a particular wage rate in a competitive market, the quantity supplied of labor exceeds the quantity
demanded of labor, then
a. the supply curve will shift to the left, the demand curve will shift to the right, and the
surplus of labor will be eliminated.
b. since wages are so high, the quantity supplied of workers will increase further, and the
quantity demanded will decrease further.
c. some workers will begin to accept lower wages and, as a result, employers will begin to
hire more workers.
d. the supply curve will shift to the right, the demand curve will shift to the left, and the
shortage of labor will be eliminated.
____ 10. Which of the following conditions is not necessary for wage rates to be identical in every labor market in both
the short run and the long run?
a. Demand for labor is identical in each market.
b. Nonpecuniary factors in each job are the same.
c. All labor is homogeneous.
d. All labor has zero costs of mobility.
e. All of the above are necessary conditions.

Exhibit 27-3

____ 11. Refer to Exhibit 27-3. The firm must be a

a. price taker in the product market.
b. price searcher in the product market.
c. price taker in the factor market.
d. price searcher in the factor market.
e. a and c
____ 12. A factor price taker is a firm that
a. can sell as many units of its good as it wants without affecting price.
b. sells fewer units of its good at higher prices than lower prices.
c. can buy all of a factor it wants at the equilibrium price.
d. drives up factor price if it buys an additional factor unit.
e. none of the above
____ 13. A perfectly competitive firm will maximize its profits by hiring factors up to the point at which
a. MRP > MFC.
b. VMP > MFC.
c. MRP = MFC.
d. VMP = MFC.
e. c and d
____ 14. If MPPX/PX < MPPY/PY, the firm should buy
a. more of factor X and less of factor Y.
b. less of factor X and more of factor Y.
c. more of factor Y and the same amount of factor X.
d. less of factor X and factor Y.
 e. more of factor X and factor Y.

Exhibit 27-6

____ 15. Refer to Exhibit 27-6. Let AA and MFC represent the value of marginal product curve and the marginal factor
cost curve of a monopolist, respectively. Which of the following is a possible profit-maximizing factor
quantity the monopolist will employ?
a. QA
b. QB
c. QC
d. none of the above is possible
____ 16. When a firm employs 1 unit of factor X it produces 28 units of output and when it employs 2 units of factor X
it produces 57 units of output. It follows that marginal revenue product is
a. $22.00.
b. $29.00.
c. $0.53.
d. $114.
e. There is not enough information to answer the question.
____ 17. Factor X is used in the production of good Y. Which of the following will increase the demand for factor X?
a. a decrease in the demand for Y
b. a rise in the MPP of factor X
c. a fall in the price of good Y
d. a fall in the cost of employing factor X
e. a and b
____ 18. Given a 10 percent increase in wages, firm A cuts back on labor more than firm B. It follows that, ceteris
paribus,
a. firm A has a higher labor cost-total cost ratio than firm B.
b. firm B has a higher labor cost-total cost ratio than firm A.
c. the elasticity of demand for labor is higher for firm B than firm A.
d. firm B has higher fixed costs than firm A.
e. firm A has higher per-unit costs than firm B.
____ 19. Which of the following statements is false?
a. There are no special nonpecuniary aspects to any job.
b. Nonpecuniary aspects of a job refer to the nonmoney aspects of a job.
c. A change in the wage rate can change the quantity demanded and quantity supplied of
labor.
d. A change in the supply of labor can affect the wage rate.
____ 20. For wage rates to be the same in various labor markets, four conditions must exist: (1) demand for every type
of labor must be __________; (2) no special __________ aspects to any job; (3) all labor is ultimately
__________ and can __________ be trained for different types of employment; and (4) all labor is mobile at
__________.
a. heterogeneous; money; homogeneous; costlessly; minimum cost
b. the same; nonpecuniary; homogeneous; costlessly; zero cost
c. high; training; homogeneous; costlessly; zero cost
d. high; nonpecuniary; heterogeneous; costlessly; minimum cost
e. none of the above
____ 21. Part of the cost of committing a crime is the probability of serving a jail sentence __________ the real wage
that would be earned if not serving time in jail.
a. multiplied by
b. divided by
c. added to
d. less
____ 22. The marginal productivity theory states that
a. firms in price searcher product markets pay factors their marginal factor cost.
b. firms in perfect factor markets pay factors their equilibrium wages.
c. firms that are more productive, earn higher profits.
d. firms in perfect product and factor markets pay factors their marginal revenue products.
e. none of the above
____ 23. When a prospective employer asks a graduating senior in college for evidence of his grade point average
(GPA), the employer is
a. discriminating against the graduating senior.
b. screening the graduating senior.
c. probably just trying to intimidate the graduating senior.
d. b and c
____ 24. Which of the following is false?
a. A firm minimizes costs by buying factors in the combination at which the MPP-to-price
ratio for each is the same.
b. Marginal productivity theory states that firms in competitive or perfect product and factor
markets pay factors their marginal revenue products.
c. Marginal factor cost equals the wage rate for a factor price taker.
d. The lower the elasticity of demand for the product labor produces, the higher the elasticity
of demand for labor.
 Exhibit 27-8

(1) (2) (3) (4) (5)

Quantity of Quantity of Product Marginal Marginal
Factor X Output Price Physical Product Revenue Product
0 10 $110
1 18 $110 C
2 24 $110 A D
3 27 $110 B E
4 28 $110 F

____ 25. Refer to Exhibit 27-8. The numbers that go in blanks A and B are, respectively,
a. 19 and 20.
b. 4.58 and 4.07.
c. 10 and 11.
d. 6 and 3.
e. none of the above
(Tips) and sample questions for chapter 13, Micro
Answer Section

MULTIPLE CHOICE

1. ANS: D PTS: 1 DIF: Moderate NAT: Analytic

LOC: Labor markets
2. ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
3. ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
4. ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Labor markets
5. ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
6. ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
7. ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Labor markets
8. ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
9. ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
10. ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
11. ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Labor markets
12. ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
13. ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
14. ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
15. ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
16. ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets NOT: New
17. ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
18. ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
19. ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
20. ANS: B PTS: 1 DIF: Difficult NAT: Analytic
LOC: Labor markets
21. ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
22. ANS: D PTS: 1 DIF: Moderate NAT: Analytic
 LOC: Labor markets
23. ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Labor markets
24. ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets
25. ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Labor markets NOT: New