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Factor Markets aka Resource Markets… aka Input Markets

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question: Factors of Production If you decide to open a pizza shop in Millersville, what factors of production will you need? Labor Land Capital (Physical & Human) If demand increases for your pizza, how will that affect your demand for any of these factors??

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony The Factor Market The following terms describe the PRICE paid by firms to hire each type of factor/resource: Labor - WAGES Land - RENT Capital - INTEREST

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony The Labor Market **The AP Exam will usually use Labor in their examples, so we will often use labor as well. But know that these ideas would be the same for hiring Capital or Land as well.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony The Labor Market When firms decide what combination of resources to use to create their product, they must “hire” these resources from a factor market. One big difference between the labor market and the product market is, in the LABOR MARKET: households are the ‘sellers’ firms are the ‘buyers’

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Labor Market Graph

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Adjusting for Inflation Wage – The price of labor defined as currency per unit of labor worked. NOMINAL Wage – The price of labor not adjusted for inflation. REAL wage – The price of labor adjusted for inflation; Economists use the CPI to adjust numbers from prices/wages from different times into a consistent unit of measure (ie. “2010 dollars”)

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Average Wage (1964-2006)

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Wage Trends Other US labor market trends: 1)Workers with higher skills are paid more than unskilled workers. This gap is increasing. 2)College graduates earn more than high school graduates and the gap has been increasing. 3)Women, on average, are paid lower than men, although the gap has become more narrow over the years.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Derived Factor Demand The factor market is a DERIVED MARKET. This means that the demand for the product determines the demand for the factor (ie. labor). For example: If consumers demand more pizza, firms will demand more labor, ovens, etc. to produce the pizza. However, if consumers demand less pizza, firms will demand less labor, ovens, etc. to produce the pizza.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Draw: Market & Factor Graphs Product Market for Pizzas Factor Market for ________________

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony MRP = MRC Rule MRP (Marginal Revenue Product) MRP = ∆ TR / ∆ Q of Factor MRP = MP x MR (or MP x P … in Perf. Competitive Labor Market) Definition: Additional REVENUE created by hiring one additional unit of a resource (land, LABOR, capital) MFC (Marginal Factor Cost) [aka MRC] MFC = ∆ TC of that factor / ∆ Q of Factor Also: MFC = Wage (W) of additional worker when dealing with LABOR. Definition: The cost of hiring an additional unit of a resource. (WAGE, interest, …)

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Optimal Employment Rule When only ONE resource is variable AP Exam will use *LABOR* most often. Firms will ALWAYS profit-maximize when it hires until MRP = MFC (or as close as they can get). But never when MFC is greater than MRP In other words, firms will continue to hire labor as long as the MFC is not greater than its MRP.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Least-Cost Rule A firm is always minimizing its cost at a specific output when the last dollar spent on one factor and the last dollar spent on another factor both result in the same Marginal product. For example, using Labor ( L ) & Capital ( K ) MP L /P L = MP K /P K

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Practice Question Taken from 2000 Exam:

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Individual Labor Supply Curve (backward bending) Shows trade-off between income and leisure. Why does it bend backwards when wage is above W 2 ? For you… what do you think your W 2 is? S

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony MRP (Marginal Revenue Product) As a firm increases the # of workers per day, it can produce more widgets per day. Assume that the fixed cost = $10, and labor is the only Variable Cost. Selling Price = $2/widget, and each worker is paid $100/day. #workers (Q) TPMPTRMRP 00 180 2180 3250 4310 5350

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony MRP (Marginal Revenue Product) As a firm increases the # of workers per day, it can produce more widgets per day. Assume that the fixed cost = $10, and labor is the only Variable Cost. Selling Price = $2/widget, and each worker is paid $100/day. #workers (Q) TPMPTRMRP 00-- 180 2180100 325070 431060 535040

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony MRP (Marginal Revenue Product) As a firm increases the # of workers per day, it can produce more widgets per day. Assume that the fixed cost = $10, and labor is the only Variable Cost. Selling Price = $2/widget, and each worker is paid $100/day. #workers (Q) TPMPTRMRP 00--0 180 160 2180100360 325070500 431060620 535040700

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony MRP (Marginal Revenue Product) As a firm increases the # of workers per day, it can produce more widgets per day. Assume that the fixed cost = $10, and labor is the only Variable Cost. Selling Price = $2/widget, and each worker is paid $100/day. #workers (Q) TPMPTRMRP 00--00 180 160 2180100360200 325070500140 431060620120 53504070080

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony MRP (Marginal Revenue Product) Now, assume that the selling price remains at $2/widget, but the wage for each worker increases to $125 per day. How many workers should this profit-maximizing firm hire? #workers (Q) TPMPTRMRP 00-- 180 2180100 325070 431060 535040

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Labor Market: Perfectly Competitive Product MarketFactor Market

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Labor Market: Monopsony Product MarketFactor Market

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #1 Which of the following situations illustrates the concept of derived demand? A.If P of orange juice increases, D for apple juice increases B.If D for shoes increases, then D for shoelaces increases. C.If P of cars increases, D for gasoline increases. D.If D for taxi rides increases, D for taxi drivers increases. E.If S of hot dogs increases, D for hot dog buns increases.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #2 Each worker hired adds less to total output than the worker before, according to the: A.Law of Demand B.Law of Diminishing Returns C.Law of Diminishing Marginal Utility D.Least-Cost Rule E.Principle of Derived Demand

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #3 Marginal Revenue Product measures the additional: A.Output produced from hiring one more worker. B.Income to the firm from producing one more product. C.Cost to the firm for producing one more product. D.Wage required to hire one more worker. E.Income to the firm from hiring one more worker.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #4 In order to maximize profit, the firm should hire the number of workers where the: A.Marginal cost equals the marginal revenue B.Marginal revenue product equals the marginal cost C.Wage equals the product price D.Marginal factor cost equals the marginal revenue product E.Marginal revenue equals the marginal factor cost.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #5 What is the marginal product of the third worker? A.15 units B.60 units C.35 units D.20 units E.30 units # of workers TP 125 245 360 470 575

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #6 If the firm sells its products for $10 each, and the wage per worker is $100/day, how many workers should the firm hire to maximize profits? # of workers TP 125 245 360 470 575

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #7 A firm selling products in a monopoly product market finds its marginal revenue product falling much more quickly than a firm selling in a perfectly competitive product market, because in addition to diminishing returns, A.The government is required to regulate the product. B.The firm becomes inefficient by trying to sell too many units of output. C.The firm must lower the price of all products in order to sell more units. D.Workers tend to earn higher wages in monopoly product firms. E.Consumers prefer not to buy from monopolies.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #8 The demand for Tyrone’s auto repair shop would increase if: A.The cost of capital for a complementary good significantly fell. B.The cost of capital for a substitute good significantly fell. C.Wages of auto repair workers significantly fell. D.Mild weather resulted in fewer car crashes this winter. E.Workers at the auto repair shop became less productive.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #9 When the wage increases 5 percent, the quantity of workers hired falls 1 percent. This indicates that the demand for labor is A.Perfectly inelastic B.Relatively inelastic C.Unit elastic D.Relatively elastic E.Perfectly elastic

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #10 According to the profit-maximizing rule for hiring resources, the firm should hire labor and capital until the marginal revenue product for each equals the: A.Market price of the product. B.Quantity of labor and capital hired. C.Price ceiling for the product. D.Profit per unit for each. E.Marginal Resource Cost

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #1 Which of the following situations illustrates the concept of derived demand? A.If P of orange juice increases, D for apple juice increases B.If D for shoes increases, then D for shoelaces increases. C.If P of cars increases, D for gasoline increases. D.If D for taxi rides increases, D for taxi drivers increases. E.If S of hot dogs increases, D for hot dog buns increases.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #2 Each worker hired adds less to total output than the worker before, according to the: A.Law of Demand B.Law of Diminishing Returns C.Law of Diminishing Marginal Utility D.Least-Cost Rule E.Principle of Derived Demand

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #3 Marginal Revenue Product measures the additional: A.Output produced from hiring one more worker. B.Revenue to the firm from producing one more product. C.Cost to the firm for producing one more product. D.Wage required to hire one more worker. E.Revenue to the firm from hiring one more worker.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #4 In order to maximize profit, the firm should hire the number of workers where the: A.Marginal cost equals the marginal revenue B.Marginal revenue product equals the marginal cost C.Wage equals the product price D.Marginal factor cost equals the marginal revenue product E.Marginal factor equals the marginal resource cost.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #5 What is the marginal product of the third worker? A.15 units B.60 units C.35 units D.20 units E.30 units # of workers TP 125 245 360 470 575

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #6 If the firm sells its products for $10 each, and the wage per worker is $100/day, how many workers should the firm hire to maximize profits? 4 Workers Because… MRP= 10 X $10 MFC = $100 # of workers TP 125 245 360 470 575

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #7 A firm selling products in a monopoly product market finds its marginal revenue product falling much more quickly than a firm selling in a perfectly competitive product market, because in addition to diminishing returns, A.The government is required to regulate the product. B.The firm becomes inefficient by trying to sell too many units of output. C.The firm must lower the price of all products in order to sell more units. D.Workers tend to earn higher wages in monopoly product firms. E.Consumers prefer not to buy from monopolies.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #8 The demand for Tyrone’s auto repair shop would increase if: A.The cost of capital for a complementary good significantly fell. B.The cost of capital for a substitute good significantly fell. C.Wages of auto repair workers significantly fell. D.Mild weather resulted in fewer car crashes this winter. E.Workers at the auto repair shop became less productive.

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #9 When the wage increases 5 percent, the quantity of workers hired falls 1 percent. This indicates that the demand for labor is A.Perfectly inelastic B.Relatively inelastic C.Unit elastic D.Relatively elastic E.Perfectly elastic

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Factor Markets: KEY CONCEPTS 1. Factor Demand is Derived from Product Demand 2. MRP = Marginal Revenue Product MFC = Marginal Factor Cost 3. Optimal Employment Rule: Hire until MRP=MRC 4. Least Cost Rule (MP/P) L = (MP/P) K… 5. Indiv. Labor Supply 6. Perfectly Competitive Labor Market vs. Monopsony Question #10 According to the profit-maximizing rule for hiring resources, the firm should hire labor and capital until the marginal revenue product for each equals the: A.Market price of the product. B.Quantity of labor and capital hired. C.Price ceiling for the product. D.Profit per unit for each. E.Marginal Factor Cost

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