Economics

Michael Parkin

Chapter 18

Markets for Factors of Production - all with Video Answers

Educators

Chapter Questions

Problem 1

Tim is opening a new online store. He plans to hire two workers at $\$ 10$ an hour. Tim is also considering buying or leasing some new computers. The purchase price of a computer is $\$ 900$ and after three years it is worthless. The annual cost of leasing a computer is $\$ 450$
a. In which factor markets does Tim operate?
b. What is the price of the capital equipment and the rental rate of capital?

Samit Deshmukh

Samit Deshmukh

Numerade Educator

Problem 2

Wanda's is a fish store that hires students to pack the fish. Students can pack the following amounts of fish:
$$\begin{array}{cc}
\begin{array}{c}
\text { Number of } \\
\text { students }
\end{array} & \begin{array}{c}
\text { Quantity of fish packed } \\
\text { (pounds) }
\end{array} \\
\hline 1 & 20 \\
2 & 50 \\
3 & 90 \\
4 & 120 \\
5 & 145 \\
6 & 165 \\
7 & 180 \\
8 & 190
\end{array}$$
The fish market is competitive and the price of fish is $50 \mathrm{c}$ a pound. The market for packers is competitive and their market wage rate is $\$ 7.50$ an hour.
Calculate the value of marginal product of labor and draw the value of marginal product curve.

Samit Deshmukh

Numerade Educator

Problem 3

Wanda's is a fish store that hires students to pack the fish. Students can pack the following amounts of fish:
$$\begin{array}{cc}
\begin{array}{c}
\text { Number of } \\
\text { students }
\end{array} & \begin{array}{c}
\text { Quantity of fish packed } \\
\text { (pounds) }
\end{array} \\
\hline 1 & 20 \\
2 & 50 \\
3 & 90 \\
4 & 120 \\
5 & 145 \\
6 & 165 \\
7 & 180 \\
8 & 190
\end{array}$$
The fish market is competitive and the price of fish is $50 \mathrm{c}$ a pound. The market for packers is competitive and their market wage rate is $\$ 7.50$ an hour.
a. Find Wanda's demand for labor curve.
b. How many students does Wanda's employ?

Andrew Davis

Numerade Educator

Problem 4

The market price of fish falls to 33.33 \& a pound, but the packers' wage rate remains at $\$ 7.50$ an hour.
How does the students' marginal product change? How does the value of marginal product of labor change?

Samit Deshmukh

Numerade Educator

Problem 5

The market price of fish falls to 33.33 \& a pound, but the packers' wage rate remains at $\$ 7.50$ an hour.
How does Wanda's demand for labor change? What happens to the number of students that Wanda employs?

Samit Deshmukh

Numerade Educator

Problem 6

At Wanda's fish store, packers' wages increase to $\$ 10$ an hour, but the price of fish remains at 504
a pound.
a. What happens to the value of marginal product of labor?
b. What happens to Wanda's demand for labor curve?
c. How many students does Wanda's employ?

Samit Deshmukh

Numerade Educator

Problem 7

In New York's low-income neighborhoods, labor unions have virtually no presence. But after a year-long struggle, 95 workers at a chain of 10 sneaker stores have formed a union. After months of negotiations, the two sides signed a three-year contract that sets the wage rate at $\$ 7.25$ an hour.
Why are labor unions scarce in New York's lowincome neighborhoods?

Samit Deshmukh

Numerade Educator

Problem 8

In New York's low-income neighborhoods, labor unions have virtually no presence. But after a year-long struggle, 95 workers at a chain of 10 sneaker stores have formed a union. After months of negotiations, the two sides signed a three-year contract that sets the wage rate at $\$ 7.25$ an hour.
Who wins from this union contract? Who loses?

Samit Deshmukh

Numerade Educator

Problem 9

In New York's low-income neighborhoods, labor unions have virtually no presence. But after a year-long struggle, 95 workers at a chain of 10 sneaker stores have formed a union. After months of negotiations, the two sides signed a three-year contract that sets the wage rate at $\$ 7.25$ an hour.
How can this union try to change the demand for labor?

Samit Deshmukh

Numerade Educator

Problem 10

Land Prices Reflect High Commodity Prices As their family grows, the Steens are finding it more difficult for the next generation to stay in ranching. "The problem is they don't create any more land," Steen said. As the prices for cattle, corn, and other commodities climb, so does the value of land in South Dakota.

Source: Rapid City Journal, January 30, 2012
a. Why does the price of land in South Dakota keep rising? In your answer include a discussion of the demand for and supply of land.
b. Use a graph to show why the price of land in South Dakota increased over the past decade.
c. Is the supply of land in South Dakota perfectly inelastic?

Samit Deshmukh

Numerade Educator

Problem 11

Mariam is opening a pizza joint. She plans to hire
a cook to make pizzas at $\$ 10$ an hour. She is also considering purchasing or leasing a convection oven. The purchase price of the oven is $\$ 500$ and after 3 years it is worthless. The annual cost of leasing the oven is $\$ 150$
a. In which factor markets does Mariam operate?
b. What is the price of the capital equipment and rental rate of capital?

Samit Deshmukh

Numerade Educator

Problem 12

Kaiser's Ice Cream Parlor hires workers to produce milk shakes. The market for milk shakes is perfectly competitive, and the price of a milk shake is $\$ 4 .$ The labor market is competitive, and the wage rate is $\$ 40$ a day. The table shows the workers' total product schedule.
Calculate the marginal product of hiring the fourth worker and the fourth worker's value of marginal product.

Samit Deshmukh

Numerade Educator

Problem 13

Kaiser's Ice Cream Parlor hires workers to produce milk shakes. The market for milk shakes is perfectly competitive, and the price of a milk shake is $\$ 4 .$ The labor market is competitive, and the wage rate is $\$ 40$ a day. The table shows the workers' total product schedule.
How many workers will Kaiser's hire to maximize its profit and how many milk shakes a day will Kaiser's produce?

Samit Deshmukh

Numerade Educator

Problem 14

Kaiser's Ice Cream Parlor hires workers to produce milk shakes. The market for milk shakes is perfectly competitive, and the price of a milk shake is $\$ 4 .$ The labor market is competitive, and the wage rate is $\$ 40$ a day. The table shows the workers' total product schedule.
If the price of a milk shake rises to $\$ 5,$ how many workers will Kaiser's hire?

Samit Deshmukh

Numerade Educator

Problem 15

Kaiser's Ice Cream Parlor hires workers to produce milk shakes. The market for milk shakes is perfectly competitive, and the price of a milk shake is $\$ 4 .$ The labor market is competitive, and the wage rate is $\$ 40$ a day. The table shows the workers' total product schedule.
Kaiser's installs a new machine for making milk shakes that increases the productivity of workers by 50 percent. If the price of a milk shake remains at $\$ 4$ and the wage rises to $\$ 48$ a day, how many workers does Kaiser's hire?

Samit Deshmukh

Numerade Educator

Problem 16

Chocolate Prices Rise Due To Asia's Increased Appetite Chocolate prices could soar due to an increased demand for chocolate in Asia-the consumption in China alone has doubled in the last decade. Another reason for higher prices is smaller harvests in key cocoa-growing nations.

Source: BBC News, December 19,2013
a. Explain how rising chocolate prices influence the market for labor employed in the chocolate industry.
b. Draw a graph to illustrate the effects of rising chocolate prices on the market for labor employed in the chocolate industry.

Samit Deshmukh

Numerade Educator

Problem 17

Miner Sacks $1 /, 000$ Workers Uver Pay Dispute Impala Platinum has sacked 17,000 South African miners at its Rustenburg mine because they took part in an illegal strike. The miners refused to have their union negotiate in the two-week pay dispute with the world's second largest platinum producer. Mining provides a quarter of all jobs in Rustenburg.
How would the wage rate and employment for the Rustenburg miners be determined in a competitive market?

Samit Deshmukh

Numerade Educator

Problem 18

Miner Sacks $1 /, 000$ Workers Uver Pay Dispute Impala Platinum has sacked 17,000 South African miners at its Rustenburg mine because they took part in an illegal strike. The miners refused to have their union negotiate in the two-week pay dispute with the world's second largest platinum producer. Mining provides a quarter of all jobs in Rustenburg.
a. Explain how it is possible that the mine workers were being paid less than the wage that would be paid in a competitive labor market.
b. What would be the effect of a minimum wage law in the market for miners?

Samit Deshmukh

Numerade Educator

Problem 19

Today, Wal-Mart employs more people- 1.7 million than any other private employer in the world. With size comes power: Wal-Mart's prices are lower and United Food and Commercial Workers International Union argues that Wal-Mart's wages are also lower than its competitors. Last year, the workers at a Canadian outlet joined the union and Wal-Mart immediately closed the outlet. But does Wal-Mart behave any worse than its competitors? When it comes to payroll, Wal-Mart's median hourly wage tracks the national median wage for general retail jobs.

a. Assuming that Wal-Mart has market power in a labor market, explain how the firm could use that market power in setting wages.
b. Draw a graph to illustrate how Wal-Mart might use labor market power to set wages.

Samit Deshmukh

Numerade Educator

Problem 20

Today, Wal-Mart employs more people- 1.7 million than any other private employer in the world. With size comes power: Wal-Mart's prices are lower and United Food and Commercial Workers International Union argues that Wal-Mart's wages are also lower than its competitors. Last year, the workers at a Canadian outlet joined the union and Wal-Mart immediately closed the outlet. But does Wal-Mart behave any worse than its competitors? When it comes to payroll, Wal-Mart's median hourly wage tracks the national median wage for general retail jobs.
a. Explain how a union of Wal-Mart's employees would attempt to counteract Wal-Mart's wage offers (a bilateral monopoly).
b. Explain the response by the Canadian WalMart to the unionization of employees.

Samit Deshmukh

Numerade Educator

Problem 21

Today, Wal-Mart employs more people- 1.7 million than any other private employer in the world. With size comes power: Wal-Mart's prices are lower and United Food and Commercial Workers International Union argues that Wal-Mart's wages are also lower than its competitors. Last year, the workers at a Canadian outlet joined the union and Wal-Mart immediately closed the outlet. But does Wal-Mart behave any worse than its competitors? When it comes to payroll, Wal-Mart's median hourly wage tracks the national median wage for general retail jobs.
Based upon evidence presented in this article, does Wal-Mart function as a monopsony in labor markets, or is the market for retail labor more competitive? Explain.

Samit Deshmukh

Numerade Educator

Problem 22

Today, Wal-Mart employs more people- 1.7 million than any other private employer in the world. With size comes power: Wal-Mart's prices are lower and United Food and Commercial Workers International Union argues that Wal-Mart's wages are also lower than its competitors. Last year, the workers at a Canadian outlet joined the union and Wal-Mart immediately closed the outlet. But does Wal-Mart behave any worse than its competitors? When it comes to payroll, Wal-Mart's median hourly wage tracks the national median wage for general retail jobs.
If the market for retail labor is compctitive, explain the potential effect of a union on the wage rates. Draw a graph to illustrate your answer.

Samit Deshmukh

Numerade Educator

Problem 23

New X-ray technology has been discovered in Australia which can detect any form of gold. This technology is efficient in terms of speed and accuracy.
a. What effect do you think the new X-ray technology will have on the price of gold in Australia?
b. Who will benefit from this new technology? Explain your answer.

Samit Deshmukh

Numerade Educator

Problem 24

The U.S. produces corn in abundance whereas Japan faces a shortage of corn.
a. If the U.S. starts to export corn in large quantities to Japan, what do you predict will be the effect on the price of corn in Japan?
b. Will the U.S. eventually run out of corn?
c. Do you think the Hotelling Principle applies to America's corn? Why or why not?

Samit Deshmukh

Numerade Educator

Problem 25

Estimates reveal that the Arctic Circle has buried beneath it tons of oil, natural gas liquids, and natural gas. Unlike Antarctica, there is no treaty prohibiting territorial claims over the Arctic Circle. Russia, Canada, the United States- all have a stake in the Arctic's icy real estate for exploration and for extracting natural resources such as oil. Amid concerns of pollution and environmental damage, who will drill and what is drilled for in the Arctic will depend on the global economy. Drilling makes sense when oil is selling at $\$ 150$ a barrel and not so when it is at $\$ 40$ a barrel.
Source: CNN, January 2, 2009
a. Explain why the demand for access to the Arctic Circle has increased.
b. Why is it better to drill in the Arctic Circle when oil is selling at $\$ 150$ a barrel than at $\$ 40 ?$
c. What could cause price of natural gas to fall in future?

Samit Deshmukh

Numerade Educator

Problem 26

After you have studied Economics in the News on
pp. $474-475,$ answer the following questions.
a. Is the average difference in the salaries of charter school and regular public school teachers greater or smaller than the difference at the top end of the pay scales?
b. What are the influences on the demand for the highest-paid teachers that explain their high wage rates?
c. What are the influences on the supply of the highest-paid teachers that explain their high wage rates?
d. Draw a graph of the market for the highestpaid teachers.
e. If all charter school teachers became unionized, how would the market for these teachers change? Illustrate your answer with a graph.
f. How would you expect unionization of charter school teachers to influence the unionized market for regular public school teachers?
g. If the public school systems were able to break the teachers' union, how would the market for regular public school teachers change? Illustrate your answer with a graph.

Samit Deshmukh

Numerade Educator

Problem 27

Keshia is opening a new bookkeeping service. She is considering buying or leasing some new laptop computers. The purchase price of a laptop is $\$ 1,500$ and after three years it is worthless. The annual lease rate is $\$ 550$ per laptop. The value of marginal product of one laptop is $\$ 700$ a year. The value of marginal product of a second laptop is $\$ 625$ a year. The value of marginal product of a third laptop is $\$ 575$ a year. And the value of marginal product of a fourth laptop is $\$ 500$ a year.
a. How many laptops will Keshia lease or buy?
b. If the interest rate is 4 percent a year, will Keshia lease or buy her laptops?
c. If the interest rate is 6 percent a year, will Keshia lease or buy her laptops?

Sriram Soundarrajan

Sriram Soundarrajan

Numerade Educator