Economics (McConnell), 18th Edition

Chapter 12: The Demand for Resources

Key Questions

1. Complete the labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market.

How many workers will the firm hire if the market wage rate is $27.95? $19.95? Explain why the firm will not hire a larger or smaller number of units of labor at each of these wage rates.
Show in schedule form and graphically the labor demand curve of this firm.
Now again determine the firm's demand curve for labor, assuming that it is selling in an imperfectly competitive market and that, although it can sell 17 units at $2.20 per unit, it must lower product price by 5 cents in order to sell the marginal product of each successive labor unit. Compare this demand curve with that derived in question 2b. Which curve is more elastic? Explain.

2. What factors determine the elasticity of resource demand? What effect will each of the following have on the elasticity or the location of the demand for resource C, which is being used to produce commodity X? Where there is any uncertainty as to the outcome, specify the causes of that uncertainty.

An increase in the demand for product X.
An increase in the price of substitute resource D.
An increase in the number of resources substitutable for C in producing X.
A technological improvement in the capital equipment with which resource C is combined.
A fall in the price of complementary resource E.
A decline in the elasticity of demand for product X due to a decline in the competitiveness of product market X.

3. Suppose the productivity of capital and labor are as shown in the accompanying table. The output of these resources sells in a purely competitive market for $1 per unit. Both capital and labor are hired under purely competitive conditions at $3 and $1, respectively.

What is the least-cost combination of labor and capital the firm should employ in producing 80 units of output? Explain.
What is the profit-maximizing combination of labor and capital the firm should use? Explain. What is the resulting level of output? What is the economic profit? Is this the least costly way of producing the profit-maximizing output?

4. In each of the following four cases, MRP_L and MRP_C refer to the marginal revenue products of labor and capital, respectively, and P_L and P_C refer to their prices. Indicate in each case whether the conditions are consistent with maximum profits for the firm. If not, state which resource(s) should be used in larger amounts and which resource(s) should be used in smaller amounts.