Markets for Factors of Production

18 Markets for Factors of Production CHECKPOINTS

Checkpoint 18.1 Checkpoint 18.2 Checkpoint 18.3 Clicker version Problem 1 Problem 1 Problem 1 Clicker version Problem 2 Problem 2 Problem 2 Problem 3 Problem 3 Clicker version Problem 3 Problem 4 Problem 4 Clicker version Problem 5 Problem 5

Practice Problem 1 Kaiser’s Ice Cream Parlour hires workers to produce smoothies. The market for smoothies is perfectly competitive, and the price is $4.00 a smoothie. The labor market is competitive, and the wage rate is $40 a day. What is the marginal product and the value of the marginal product of the fourth worker? CHECKPOINT 18.1 • The table shows the workers’ total product schedule.

Solution The MP of hiring the fourth worker equals the TP of 4 workers (43 smoothies) minus the TP of 3 workers (33 smoothies), which is 10 smoothies. The VMP if the fourth worker equals the MP of the fourth worker (10 smoothies) multiplied by the price of a smoothie ($4), which is $40. CHECKPOINT 18.1 • The table shows the workers’ total product schedule.

Practice Problem 2 Kaiser’s Ice Cream Parlour hires workers to produce smoothies. The market for smoothies is perfectly competitive, and the price is $4.00 a smoothie. The labor market is competitive, and the wage rate is $40 a day. How many workers will Kaiser’s hire to maximize its profit and how many smoothies a day will Kaiser’s produce? CHECKPOINT 18.1 • The table shows the workers’ total product schedule.

Solution Kaiser’s maximizes profit by hiring the number of workers that makes VMP equal to the wage rate ($40 a day). The VMP if the fourth worker equals the MP of the fourth worker (10 smoothies) multiplied by the price of a smoothie ($4), which is $40. Kaiser’s hires 4 workers, and they produce 43 smoothies. CHECKPOINT 18.1 • The table shows the workers’ total product schedule.

Practice Problem 3 Kaiser’s Ice Cream Parlour hires workers to produce smoothies. The market for smoothies is perfectly competitive, and the price is $4.00 a smoothie. The labor market is competitive, and the wage rate is $40 a day. If the price rises to $5 a smoothie, how many workers will Kaiser’s hire? CHECKPOINT 18.1 • The table shows the workers’ total product schedule.

Solution Kaiser’s maximizes its profit by hiring 5 workers. When Kaiser’s hires 5 workers a day, the MP of the 5th worker is 8 smoothies. The price of a smoothie is $5, so VMP is $40 a day equal to the wage rate. CHECKPOINT 18.1 • The table shows the workers’ total product schedule.

Practice Problem 4 Kaiser’s Ice Cream Parlour hires workers to produce smoothies. The market for smoothies is perfectly competitive, and the price is $4.00 a smoothie. The labor market is competitive, and the wage rate is $40 a day. Kaiser’s installs a new machine that increases the productivity of workers by 50 percent. CHECKPOINT 18.1 • The table shows the workers’ total product schedule.

Kaiser’s installs a new machine that increases the productivity of workers by 50 percent. If the price remains at $4 a smoothie and the wage rises to $48 a day, how many workers does Kaiser’s hire? CHECKPOINT 18.1 • The table shows the workers’ total product schedule.

Solution Kaiser’s maximizes its profit by hiring 5 workers. When Kaiser’s hires 5 workers, the MP of the 5th worker is 12 smoothies. The price of a smoothie is $4, so VMP is $48 a day, equal to the wage rate. CHECKPOINT 18.1 • The table shows the workers’ total product schedule.

Practice Problem 5 What higher wages mean for small business The Economic Policy Institute reports that retailers and fast-food restaurants will be required to raise the pay of millions of workers to at least $7.25 an hour. Many small businesses worry that such a requirement will force them to close. Source: The Wall Street Journal, July 27, 2009 Explain the effect of the pay raise on the number of workers employed. Why would a small business close? CHECKPOINT 18.1

Solution A profit-maximizing firm pays the wage rate equal to the value of marginal product (VMP), which equals the marginal product multiplied by the price of the good produced. Marginal product diminishes as more workers are hired. A firm that pays $7.25 an hour will hire the number of workers that makes marginal product equal to $7.25 divided by the price of the good produced. A business will close if $7.25 an hour exceeds VMP of its workers. CHECKPOINT 18.1

Practice Problem 1 In Greenville, where fast-food outlets hire teenagers and seniors, the following events occur one at a time and other things remain the same. Explain the influence of the following event on the market for fast food workers. Seniors flock to Greenville and make it their home. CHECKPOINT 18.2

Solution An increase in the number of seniors increases the supply of fast-food labor. The supply curve shifts rightward from S0to S2. The wage rate falls, and the number of fast-food workers employed increases. CHECKPOINT 18.2

Study Plan Problem In Greenville, fast-food outlets hire teenagers and seniors. Seniors flock to Greenville and make it their home. The _____ labor in the fast-food market ______, the wage rate _____, and the number of fast-food workers employed ____. A. supply of; increases; falls; increases B. supply of; decreases; rises; decreases C. supply of; increases; falls; increases D. demand for; increases; rises; decreases E. demand for; decreases; rises; increases CHECKPOINT 18.2

Practice Problem 2 In Greenville, where fast-food outlets hire teenagers and seniors, the following events occur one at a time and other things remain the same. Explain the influence of the following event on the market for fast food workers. Greenville becomes a major tourist center attracting thousands of additional visitors every day. CHECKPOINT 18.2

Solution A boost in visitor numbers increases the demand for fast food, which in turn increases the demand for fast-food workers. The demand curve shifts rightward from D0 to D1. The wage rate rises, and the number of fast-food workers employed increases. CHECKPOINT 18.2

Study Plan Problem In Greenville, fast-food outlets hire teenagers and seniors. Greenville becomes a major tourist center, attracting thousands of additional visitors every day. The ______ labor in the fast-food market ______, the wage rate _____ ,and the number of fast-food workers employed _____. A. demand for; decreases; falls; decreases B. supply of; decreases; rises; decreases C. supply of; decreases; rises; increases D. demand for; increases; rises; increases E. demand for; increases; falls; increases CHECKPOINT 18.2

Practice Problem 3 In Greenville, where fast-food outlets hire teenagers and seniors, the following events occur one at a time and other things remain the same. Explain the influence of the following event on the market for fast food workers. The price of fast food falls. CHECKPOINT 18.2

Solution A fall in the price of fast food decrease the demand for fast-food workers. The demand curve shifts leftward from D0to D2. The wage rage falls, and the number of fast-food workers employed decreases. CHECKPOINT 18.2

Study Plan Problem In Greenville, fast-food outlets hire teenagers and seniors. The price of fast food falls. The ______ labor in the fast-food market ______, the wage rate _____ ,and the number of fast-food workers employed _____. A. demand for; increases; rises; decreases B. demand for; decreases; falls; decreases C. supply of; decreases; rises; increases D. demand for; decreases; rises; increases E. supply of; increases; falls; increases CHECKPOINT 18.2

Practice Problem 4 In Greenville, where fast-food outlets hire teenagers and seniors, the following events occur one at a time and other things remain the same. Explain the influence of the following event on the market for fast food workers. A labor union organizes fast-food workers and gets a law passed that raises the minimum age and lowers the maximum age at which a person can work in the fast- food industry. CHECKPOINT 18.2

Solution A rise in the minimum age and a fall in the maximum age at which a person can work in the fast-food industry decreases the supply of labor. The supply curve shifts leftward from S0to S1. The wage rate rises, and the number of fast-food workers decreases. CHECKPOINT 18.2

Study Plan Problem In Greenville, fast-food outlets hire teenagers and seniors. A law raises the minimum age and lowers the maximum age of a fast-food workers. The ______ labor in the fast-food market ______, the wage rate _____ ,and the number of fast-food workers employed _____. A. supply of; decreases; falls; increases B. demand for; decreases; rises; increases C. supply of; decreases; rises; decreases D. demand for; decreases; rises; decreases E. demand for; increases; rises; decreases CHECKPOINT 18.2

Practice Problem 5 As charter schools unionize, many debate effect With long hours, lots of turnover of teachers and, in some cases, wage rates lower than those of public school teachers, an increasing number of teachers at charter schools are unionizing. Source: The New York Times, February 5, 2009 How do you think the union will influence work hours, turnover of teachers, and wage rates? CHECKPOINT 18.2

Solution A union will try to raise the wage rates of its members and to improve the conditions of employment. If the union can increase the value of marginal product of its members, then wage rates will rise. But if the union tries to increase wage rates without an increase in the value of marginal product, the charter school will cut the number of teachers hired. If shorter hours and less turnover result, then marginal product of teachers is likely to increase. In this case, higher wage rates will result. CHECKPOINT 18.2

Practice Problem 1 Which of the following items are nonrenewable natural resources, which are renewable natural resources, and which are not natural resources? Explain your answers. Beaches in Florida Lake Powell The Empire State Building Silver mines in Arizona The Great Lakes CHECKPOINT 18.3 • The Great Lakes • National Parks • Redwood forests • The Statue of Liberty

Solution Natural resources include all the gifts of nature. A nonrenewable natural resource is one that once used cannot be used again. A renewable natural resource is one that can be used repeatedly. Nonrenewable natural resources include silver mines in Arizona. CHECKPOINT 18.3

Renewable natural resources include beaches in Florida, Lake Powell, the Great Lakes, national parks, and redwood forests. The Empire State Building and the Statue of Liberty are national landmarks, but they are not natural resources. Labor and capital were used to build the Empire State Building. The Statue of Liberty was a gift from France and not a gift of nature. CHECKPOINT 18.3

Practice Problem 2 Farmland more valuable than ever Growing demand for grain for food, fuel, and export has doubled the average price of farmland since 2000. The prices of farmland in Iowa, Nebraska, South Dakota, and Wyoming rose by more than 20 percent in 2007. Source: USA Today, February 5, 2008 Explain how the growing demand for grain affects the market for farmland. CHECKPOINT 18.3

Solution As the demand for grain grows with no change in grain output, the price of grain rises. Farmland is a renewable resource—a factor of production. The demand for a factor of production is a derived demand, which is determined by the factor’s value of marginal product (VMP). An increase in the price of grain increases the farmland’s VMP and increases the demand for farmland. The price of farmland rises. CHECKPOINT 18.3

Practice Problem 3 Farmland more valuable than ever Growing demand for grain for food, fuel, and export has doubled the average price of farmland since 2000. The prices of farmland in Iowa, Nebraska, South Dakota, and Wyoming rose by more than 20 percent in 2007. Source: USA Today, February 5, 2008 How might farmers meet the growing demand for farm products without having to use a greater quantity of land? CHECKPOINT 18.3

Solution To increase farm output without using more land, farms will have to become more productive. That is, they will have to use a better technology. With better technology, the marginal product of the land will increase, which will increase the land’s VMP. CHECKPOINT 18.3

Markets for Factors of Production