Ch 18 Study Guide

1. Ch 18 Study Guide 9 27 45 8 24 40 7 21 35 6 18 30 5 15 25 4 12 20 3 9 15 2 6 10

2. b. P = $3, Wage = $19 How many should hire? = 3 workers b/c MRP =21 c. Schools that teach pottery skills increase supply of workers and lowers wage to $13. How many should hire now? = 5 workers b/c MRP=15 Represent a shift in D for labor or movement? = movement – only changed value of Y axis …like changing the P of a good 9 27 45 8 24 40 7 21 35 18 6 30 15 25 5 12 4 20 3 9 15 2 6 10

3. d. + e. Increase in D for coffee mugs leads to P increase to $5. Wage is $13. How many hire now? = 7 workers b/c MRP = 15 Represent a movement or a shift? = a shift – changed an outside factor , D curve is MRP (MPL x P) if change MPL or P then change the D curve = shift 9 27 45 8 24 40 7 21 35 18 6 30 15 25 5 12 4 20 3 9 15 2 6 10

4. Study Guide Practice Prob #2 Show impact of an increase in the D for lumber on the market for lumber jacks. = if D lumber increase = increase P of lumber = increase in MRP of lumberjacks = shift D for lumberjacks right = increase Wage b. What did the increase in the P of lumber do to the MRP of lumber jacks ? - see answer to part a.

5. Study Guide Practice Prob #2 When the P of timber increases, it increases the MRP of Land, Labor, and Capital ….the D curve for L,L,K is always = MRP of that factor of production…. …so if the P of the product goes up, not only is the Labor more valuable (that is – for each unit Labor produces, it increases the MRP)…..but then the Land must be more valuable and the Capital must be more valuable,,,so the MRP of Land and Capital will also rise therefore raising the P of Land and Capital • What will happen to the MRP and the rental rate for timberland and for capital that is used for cutting and shipping timber? Land Capital

6. How has this event affected the prosperity of the firm and the owners of the factors of production employed by the firm? • ….increase D for Lumber = increase P and Q = prosperity of firm increases • Who are the owners of the factors of production? • Think circular flow model…… • Households • ….so when P of Lumber increases , it increases the MRP of L, L, K and shifts D right and increases the wages of Labor and prices of Land and Capital … • …so prosperity of all involved will rise

7. Study guide #3 =Increse in Supply = shift right = price of land decreases • Suppose enormous amounts of forest land cleared for agricultural use in Brazil. A. show impact of this event on the market for agricultural land in Brazil What has happened to the Maginal Product of land ? = marginal product of land decreased … Can read this on the D curve …see next slide for explanation

8. How does the Marginal Product of Land Decrease? • Just like labor, there is Diminishing Marginal Product. Instead of each worker competing for limited resources, so ….additional units of land or capital compete for limited resources (like labor) Assume Farmer Bob is working to his fullest capacity and his 5 acres of land are producing crops at full capacity Now we give him 5 more acres, but no additional resources (time, equip, etc..) will this additional land produce the same amount as the original 5 acres? Same idea would hold true if you looked at capital ….ex: tractors

9. Suppose enormous amounts of forest land cleared for agricultural use in Brazil. After considering the market for land, now consider: what happened to the Marginal Product of the labor and the wage? Explain Lets assume that farmer Bob is only working at 90% but is still producing the most he can given the land he has…….so now…more land….. = More production = increase Marginal Product …… D for labor = MRP = MP x P of goods ….so increase MP = D for labor shifts right and wages increase

10. Study Guide #4 Increase in capital (resources) for the workers so increase MP so increase MRP = D for labor shifts right = wages increase = increase D for Hondas = increase P = increase MRP of labor = D shifts right and wages rise Supply of labor increases = S curve shifts right = lower wages