AP/IB Economics
Mankiw Part 6 Review Questions: The Economics of Labor Markets
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What is derived demand? What two factors determine the demand for
labor?
What is marginal physical product? Explain why marginal physical product
would diminish as more secretaries are hired in an office.
What is marginal revenue product? How is marginal revenue product
calculated? Explain why marginal revenue product declines as labor input
increases.
Draw a graph showing how a firm determines the number of workers to hire.
In hiring labor, what general rule will be followed by employers who wish to
maximize profits? Why?
What does the supply curve in the labor market represent? Why is the supply
curve for an individual firm in a competitive labor market horizontal?
Suppose there is an increase in college enrollment, which causes an increase in
the demand for textbooks. What should happen in the markets for labor and
capital employed in the manufacturing of textbooks? Explain.
Henry Ford once said, “It is not the employer who pays wages – he only
handles the money. It is the product that pays wages.” Explain.
In a competitive industry, suppose the MRP of the last donut baker hired is
$35 and the MRP of the last bagel maker hired is $15. A bakery must pay
donut bakers $40 per day and bagel makers $10 per day. What should the
bakery do to maximize profits?
Why is the market demand curve for labor downward-sloping? What are the
determinants of the demand for labor?
Why is the market supply curve for labor upward-sloping? What are the
determinants of the supply of labor?
Draw side-by-side diagrams showing the relationship between the perfectly
competitive labor market and an individual firm hiring workers.
Ski instructors are skilled workers. How would that labor market change if
a) ski holidays became more popular?
b) new skis were invented that were much easier to use than current ones?
More and more people are using the internet for commerce. What are two
types of labor for which the demand will continue to increase and two types
for which the demand will continue to decrease? Explain your answers.
Use side-by-side diagrams to explain the effect of ATMs in the labor market
for human bank tellers and on the typical bank hiring tellers.
Use side-by-side diagrams to explain why domestic workers might fight
against an open immigration policy.
Write down the cost-minimization rule for labor and capital.
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If the marginal product of capital per dollar is greater than the marginal
product of labor per dollar, what should a firm do?
19. The price of labor is $2 and the price of capital is $1. The marginal product
of labor is 200 and the marginal product of capital is 50. What should the
firm do? Why?
20. A producer of gadgets pays $5 for each hour of labor and $10 for each hour
of capital employed. Table 10.4 describes the marginal products of each at
various levels of employment. If you must produce Q = 360 gadgets, find the
least-cost combination of labor and capital.
21.
Woodland is a small town in which
everyone works for TreeMart, the
local lumber company. TreeMart is
a monopsonist in the labor market
and a perfect competitor in the
lumber market. In the short run,
labor is the only variable input.
The labor market for TreeMart is
given in the graph.
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b)
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Identify the profit-maximizing quantity of labor for TreeMart.
Identify the wage rate TreeMart pays to hire the profit-maximizing
quantity of labor.
Identify the quantity of labor hired in each of the following situations:
i) TreeMart operates in a competitive labor market.
ii) The government imposes a minimum wage of $12.5. Explain.
22. Distinguish between equity and equality.
23. What is the meaning of quintiles? How do we use them to measure income
distribution?
24. Draw a basic Lorenz curve. Explain how you use the Lorenz curve to
determine which country has a more equal distribution of income.
25. Define the Gini Coefficient. How do we derive it from the Lorenz curve?
What is its possible range of values? How do we interpret these values with
regard to income equality and inequality?
26. Using the data from the table, explain which country has a more equal income
distribution: a) Pakistan or Phillipines b) Ghana or Vietnam.
Gini Coefficient
Ghana
0.43
Pakistan
0.31
Philippines
0.44
Vietnam
0.38
27. How does redistribution of income through progressive taxes change the
position of a country’s Lorenz curve? How would it change the Gini
coefficient? How would the result be different if the taxation were
regressive?