AK Microeconomics – Chapter 12
CHAPTER TWELVE
Answers to Self-Test Questions
1. a) See table below:
Hours of Labour
Total Product
Marginal Product
0
1
2
3
4
5
6
7
8
0
3
7
13
18
22
25
27
28
/
3
4
6
5
4
3
2
1
Marginal Revenue
Product ($)
/
9
12
18
15
12
9
6
3
b) 6 hours of labour (where MRPL = the wage rate = $9) and 25 units of output.
2. a) 220 hours since the equilibrium wage rate is $16.
b) The firm would hire 40 more hours of labour (for a total of 260) since the
equilibrium wage rate falls to $14.
3. a) See completed table:
(1)
(2)
(3)
(4)
(5)
Number of workers Hourly Total Wage Marginal Wage Marginal Revenue
Wage
Cost
Cost
Product (= Demand)
1
16
16
16
28
2
17
34
18
27
3
18
54
20
26
4
19
76
22
25
5
20
100
24
24
6
21
126
26
23
7
22
154
28
22
8
23
184
30
21
b) 5 workers (where the MWC = MRP at $24); Hourly wage = $20
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AK Microeconomics – Chapter 12
4. a) b) and c)
See figure below:
d) Higher.
e) The new quantity, Q2, could be higher, lower or exactly equal to Q1 depending on
the magnitudes of the shifts in D2 and S2.
f) The demand for labour could increase because labour productivity rises or because
total output for the economy increase while the decrease in the supply of labour
could be caused by a decrease in population or in the labour force participation rate.
5. See figure below:
Since the supply of labour curve is perfectly inelastic, all of the pay that labour receives
is economic rent.
6. It was not a wise decision. The income we derived from the oil is $52.50 ($50 invested
at 5% interest). If instead we had not extracted it till this year we would receive an
income of $54.
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AK Microeconomics – Chapter 12
7. a) 9 units of the resource. ( If P = 0, then the quantity is where the demand intersects
the P of 0.)
b) See completed figure.
8. Since the MPK
PK
=
60
100
and
MPL =
PL
10
25
we have 0.60 > 0.40 and capital should be substituted for labour.
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AK Microeconomics – Chapter 12
Answers to Study Guide Questions
1. False: supply and demand can be used to analyze both markets.
2. True.
3. False: until the marginal revenue product of labour equals the wage rate.
4. True.
5. True.
6. True.
7. False: it has been between 1% and 3%.
8. False: it is equal to the nominal wage divided by the price level.
9. True.
10. True.
11. a
12. c
13. b
14. d
15. a
16. b
17. d
18. d
19. c
20. c
21. d
22. b
23. b
24. b
25. b
26. d
27. d
28. b
29. b
30. b
31. d
32. e
33. a
34. c
35. b
36A. Key Problem
a) See the following table:
Table 12.6 (completed)
Hours of
Labour
0
1
2
3
4
5
6
Output
0
24
44
60
72
80
84
Marginal
Product
/
24
20
16
12
8
4
Total Revenue 1
/
$48
88
120
144
160
168
Marginal Revenue
Product 1
/
$48
40
32
24
16
8
b) 5 hours of labour to each workstation.
(With the cost of labour at $16 an hour the firm should assign this number because the
hourly marginal revenue product of the 5th worker is also $16.)
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AK Microeconomics – Chapter 12
c) See the following figure:
Figure 12.17 (completed)
d) 4 workers should be assigned to each workstation for a total of 24 workers.
(With the increase in the cost of labour to $24, the firm should reduce the number of
workers at each workstation to 4 since the hourly marginal revenue product of the 4th
worker is also $24. Since there are 6 workstations, the total quantity of labour hired
would be 24.
e) See Figure 12.17 (Completed)
f) See following table:
Table 12.6 (completed)
Hours of
Labour
Output
Marginal
Product
Total
Revenue 1
0
1
2
3
4
5
6
0
24
44
60
72
80
84
/
24
20
16
12
8
4
/
$48
88
120
144
160
168
Marginal
Revenue
Product 1
/
$48
40
32
24
16
8
Total
Revenue
2
/
$72
132
180
216
240
252
Marginal
Revenue
Product 2
/
72
60
48
36
24
12
The increase in the price of soap shifts the demand curve for labour to the right. We
have labelled the new demand curve D2 on Figure 12.17 (Completed).
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AK Microeconomics – Chapter 12
g) 30 workers hired per hour would be hired. (6 workstations and 5 workers at each).
With the increase in the price of soap and the resulting shift to the right in the demand
curve for labour, the firm will again hire 5 workers per station even at the higher wage
rate of $24 since the (new) hourly marginal revenue product of the 5th worker is $24.
h) The effect of the increase in labour productivity is given in the table below:
Table 12.7 (completed)
Hours of
Labour
Output per
Hour
Marginal
Product
Total Revenue
0
1
2
3
4
5
6
0
30
55
75
90
100
105
/
30
25
20
15
10
5
$0
60
110
150
180
200
210
Marginal
Revenue
Product
$60
50
40
30
20
10
i) See Figure 12.15 (completed).
j) The change that occurred in d) was a movement along the demand curve D1 which was
caused by an increase in the price of labour. The change in both f) and i) are shifts in
the demand curve. The D1 to D2 shift is caused by an increase in the price of the soap
being produced and the D1 to D3 shift is caused by an increase in the productivity of
labour.
37A.
See the following table:
Table 12.8 (Completed)
Quantity of labour
Total product
Marginal product
Price
Total revenue
Marginal revenue product
38A.
a)
b)
c)
d)
1
10
10
$6
$60
$60
2
28
18
$6
$168
$108
2
4
5
6
119
3
45
17
$6
$270
$102
4
60
15
$6
$360
$90
5
70
10
$6
$420
$60
6
78
8
$6
$468
$48
AK Microeconomics – Chapter 12
(In all cases, firms will hire up to the point that the wage rate is equal to the MRP.)
39A.
a)
$15 ($18/1.2);
40A.
a) See the following table:
b) $16.50 ($19.8/1.2) c) $13.64 ($18/1.32)
Table 12.10 (completed)
(1)
Units of Labour
1
2
3
4
5
6
(2)
MPL
10
9
8
7
5
3
b) Situation A: 2 workers; Situation B:
the wage equals the MRP.)
(3)
MRP1
240
216
192
168
120
72
(4)
MRP2
270
243
216
189
135
81
3 workers (In both cases, it’s where
c) The demand for labour has increased and the demand curve has shifted right.
41A.
a) wage rate: $12 (Where demand equals supply in Graph A.); quantity of workers
hired: 120 (The number of workers hired at a wage of $12 in Graph B.)
b) surplus: 1200 workers (1600 workers hired in market, 2800 workers wanting
work; quantity of workers hired: 80 (quantity of labour at $16 in Graph B.)
42A. MRP stands for marginal revenue product. It is the increase in a firm’s total
revenue that results from the use of one more unit of input. It is calculated by
multiplying the marginal product by the price of the product. Alternatively, it can be
calculated by dividing the change in total revenue by the change in input (labour) units.
43A. The nominal wage is the wage rate expressed as a dollar-and-cents figure. It is the
actual amount received per period of time. The real wage is the purchasing power of
the nominal wage. It is calculated by dividing the nominal wage rate by the price level.
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AK Microeconomics – Chapter 12
44A.
5 workers.
A table will help answer the question:
Number of
Workers
1
2
3
4
5
6
7
8
Total Production
Marginal product
5
12
18
23
26
28
29
29
5
7
6
5
3
2
1
0
Marginal Revenue
Product
$20
28
24
20
12
8
4
0
The firm will hire workers up to the point where the wage rate ($12) is equal to the MRP.
45A.
a) See following figure:
Figure 12.19 (completed)
b) $4000. (200 x $20)
c) Transfer earnings: $2000 (The triangle below the supply curve which has an
area of ½ x $20 x 200.);
economic rent: $2000 (The triangle above the supply
curve and below the price line which also has an area of ½ x $20 x 200).
d) decrease. (If the supply increases, the wage rate will drop. Say S increases by
100, so wage drops to $15. Total earnings would be $3750 (250 x $15)).
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AK Microeconomics – Chapter 12
46A.
a) 5:2. (The firm would employ capital and labour up to the point at which their
MPs are equal. This would occur with the employment of 5 units of capital and 2
units of labour. The MPs would both equal 10.)
b) 6:2. (The firm would employ capital and labour up to the point at which their
MPs per dollar costs are equal. This would occur with the employment of 6 units of
capital and 2 units of labour. The MPs per dollar cost would both equal 5.)
c) 6:2. (Again employ both till the MPs are equal. This occurs with the
employment of 6 units of capital and 2 units of labour.)
47A.
a) Less than $26.46. (If the oil was extracted now and the money invested at 5
percent it would then be worth $26.46.)
b) They will not extract now; they will delay it to later. (If the price in two years
time is expected to be greater than $26.46, extraction should be left till then. If the
price is expected to be less than $26.46, than it should be extracted now.)
48A.
A union might be able to increase the wage rate received by its members by
attempting the following:

increasing the demand for their members by advertising the employer’s products or
their members’ skills

restricting the supply of labour into certain types of jobs

negotiating a fixed wage rate above equilibrium
49A To Schumpeter the key to economic growth is the innovation of the entrepreneur.
New innovation create unique situations in which profits can be made. This will lead to a
swarm of imitators each in their own way boosting production and therefore economic
growth.
50A.
a) $16. (where quantity demanded 1 is equal to quantity supplied.)
b) The quantity of labour hired would be less and the wage rate would be higher.
(A monopsonist faces an escalating wage bill because in order to attract more
employees it will have to pay higher wages to all its employees. This results in
fewer being employed.)
c) $18. (where quantity demanded 2 is equal to quantity supplied.)
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AK Microeconomics – Chapter 12
51A.
a) See the following table:
Table 12.14 (completed)
Quantity of Daily
Labour
1
2
3
4
5
6
7
8
Wage Rate
MRP
Total Wage Cost
$60
70
80
90
100
110
120
130
$160
170
160
150
140
120
90
50
$60
140
240
360
500
660
840
1040
Marginal Wage
Cost
$60
80
100
120
140
160
180
200
b) Quantity employed: 5 (The monopsonist will recruit labour up to the point at
which the additional cost of employing them (the marginal wage cost) is equal to
the extra revenue they produce (MRP).);
wage rate: $100
52A. a)
Economic rent: $180 000 000 (Area of the triangle between the supply curve
and the price line = ½ x $60 000 x 6 000.)
Transfer earnings: $180 000 000. (Area under the supply curve. Same
amount as the economic rent.)
b) Economic rent: $90 000 000 (Area of the triangle between the supply curve
and the price line = ½ x $30 000 x 6 000.)
Transfer earnings: $270 000 000. (Area of triangle area under the supply
curve. Same amount as the economic rent. In addition, the area of the
rectangle under that triangle = $30 000 x 6000). Alternatively, the total
revenue at $60 000 is $360 000 000 ($60 000 x 6000). Since economic rent is
$90 000 000, the difference of $270 000 000 must be transfer earnings.
c) S1 is more inelastic.
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AK Microeconomics – Chapter 12
53A
a) See the following figure
Figure 12.21 (Completed)
b) Daily wage: $180;
supply curves)
c)
Number of workers: 7 (The intersection of the demand and
See the following table:
Table 12.15 (Completed)
(1)
Number of Workers
(2)
(3)
Daily Wage
(4)
Total Wage Cost Marginal Wage Cost
1
$150
150
150
2
3
155
160
310
480
160
170
4
165
660
180
5
170
850
190
6
175
1050
200
7
180
1260
210
8
185
1480
220
d)
See Figure 12.21 (Completed)
e)
Daily wage: $170;
Number of workers: 5 (The quantity is found at the
intersection of the MWC curve and the demand curve. The daily wage is found by
taking an (imaginary) line from 5 up to the supply curve.
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AK Microeconomics – Chapter 12
54A.
Before Friday appears, Robinson’s real wage (and thus his standard of living) was
equal to what he was able to produce for himself. If we apply Adam Smith’s
concept of the advantages of the division of labour to our analysis, we can conclude
that the appearance of Friday would enable the combined production of the two to
increase by more than twice what it was when Robinson was living and working
alone. If this were the case, Robinson’s standard of living would decrease.
55A.
The Canadian Medical Association (CMA) is not a legal trade union in the sense of
holding certifications under any labour legislation. It does, however, enjoy the
benefits of other legislation that gives it some of the economic leverage that a
powerful union would have. First, it is a “closed shop” since only members of the
CMA are allowed to practice medicine in the sense of prescribing drugs. Second,
the CMA has some control over the total supply of MDs because its members are
active in the process of determining how many spaces are created for the training of
new MDs. Third, the individual MD has some control over the demand for her/his
services in the routine relationship with patients. (“Well, it looks pretty good, but
just to make sure I would like to see you again in a couple of weeks”.) Finally, the
various medical associations and the respective governments routinely engage in
collective bargaining over fee schedules.
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