6.1.5 Practice - Bailey Stringer -2

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1. Resource prices affect an economic system in multiple ways. List and explain three of these effects. (3 points) Resource prices affect an economy in three main ways. First, they decide how the limited resources of the economy are given to different companies that make things. Second, they determine how the money earned from these resources is divided among the people. Lastly, individuals or businesses own productive resources, and land, labor, and capital each earn money in different ways – rent for land, wages for labor, and interest for capital. 2. Derived demand A. Economists call the demand for a resource a derived demand. Explain what term derived means in derived demand. (2 points) The term derived in the derived factor of demand is the demand for the factor of production (in other words output. B. How is the marginal-revenue-product curve related to the derived-factor-demand curve? Why is the derived-factor-demand curve downward sloping with respect to price? (2 points) The marginal revenue product curve relates to the derived factor demand curve as the marginal product curve for factors of production is also the firm’s individual demand curve for that factor of production. The derived factor demand curve is downward sloping with respect to price due to diminishing marginal returns. C. Why is the resource demand curve for a firm operating in an imperfectly competitive industry steeper than the resource demand curve of a firm operating in a perfectly competitive industry? (4 points) The resource demand curve for a company in an imperfectly competitive industry goes up more sharply than for a company in a perfectly competitive industry. This is because, in imperfect competition, the price of the product falls more as the company produces more units. In contrast, in a perfectly competitive industry, the price remains the same for each level of output, making the industry more flexible. So, the resource demand curve is steeper for a company in an imperfectly competitive industry compared to one in a perfectly competitive industry. D. Is the resource demand curve of a firm operating in an imperfectly competitive industry more or less elastic than the resource demand curve of a firm operating in a perfectly competitive industry? Is a firm operating in an imperfectly competitive industry more or less responsive to resource price changes than a firm operating in a perfectly competitive industry? (4 points) The resource demand curve of a firm operating in an imperfectly competitive industry is less elastic than a firm operating in a perfectly competitive industry because the curve is steeper (the steeper the curve is the more inelastic it is). A firm operating in an imperfectly competitive industry is more responsive to price change than a firm operating in a perfectly competitive industry as they have a bit of room to fluctuate with prices, however, in a perfectly competitive industry the price is constant for every level of output, hence can not change its price.

3. At what point will a profit-maximizing firm stop hiring new employees? (4 points) A profit-maximizing firm should continue to employ additional workers until the cost of the last worker employed- the marginal cost- is just equal to the additional revenue gained from the sale of the additional output produced by the last worker - the marginal revenue product. This means until that the marginal cost equals the marginal revenue product the firm should hire new employees. 4. The three determinants of resource demand: 1) demand for the final good or service, 2) technology that affects the productivity of resources, and 3) prices of complement and substitute resources. A. Explain how a change in the demand for a good will change the demand for the resource used to produce the good. Give an example. (4 points) A change in demand affects the resources used to make it. For instance, if there's a high demand for meat, a business might invest in a machine that quickly packages the meat instead of having people do it by hand. This means the company needs fewer workers because the machine does the job faster, reducing the demand for the resources (workers) used to produce the product. B. Changes in technology can cause changes in the productivity of a resource. Technological change can be economy-wide, industry-specific, or can occur within one firm' s production process. Explain how a change in the productivity of a resource changes the demand for the resource. Give an example. (4 points) An example of how a change in the productivity of a resource changes the demand for the resource is before we used computers for word processing, many firms hired secretaries who took shorthand and then transcribed their notes and typed the material on a typewriter. There were businesses that were built around the typewriter, such as for repairs and parts, supplies such as typewriter ribbons, and special papers for typing. Today these businesses no longer provide these services and materials, as few offices still use typewriters The demand for people who can rapid typewriters has decreased almost to zero. C. Suppose labor and capital are substitute resources, and the price of capital decreases. What happens to the demand for labor and capital? Do the producers produce more or less of the final good? Explain your answers. (6 points) If labor and capital are substitute resources, and the price of capital decreases the producers will choose whichever one is the cheapest. For instance, if the price of capital decreases, labor would not be needed anymore so the demand for capital increases, while the demand for labor decreases. The producers will produce the same of the final good because they have found a substitute to replace it, however, the input has changed because it is a substitute. D. Suppose labor and capital are complement resources, and the price of capital decreases. What happens to the demand for labor and capital? Do the producers produce more, less, or the same amount of the final good? (6 points)

If labor and capital are complement resources and the price of capital decreases there will a shift of the factor demand curve and the demand for labor may increase. If there is a demand increase for both then there will be an increase in the amount of the final good. 5. Elasticity A. Blue Chair Press publishes art books. The demand for art books published by Blue Chair Press is highly elastic. Labor is a significant input in the production of art books. Show on a demand and supply graph for Blue Chair Press art books the effect of an increase in the wage rate. What can you conclude about the elasticity of demand for labor? (4 points) Because the demand for art books is very responsive to changes, the curve showing how much labor is needed (the resource demand curve) is also very responsive. Even a small increase in wages can make a big difference in how much labor is required to produce a specific quantity of goods. B. Blue Chair Press uses a lot of labor when it edits and publishes texts. Its labor costs are 80% of its total costs. Compare the elasticity of demand for labor in this situation with the elasticity of labor demand if labor accounted for only 20% of Blue Chair Press's total costs. (4 points) When labor expenses constitute 80% of the overall costs, the labor elasticity is highly elastic. This is due to the fact that even a slight alteration in the curve can lead to substantial impacts on the company. Conversely, when labor costs make up only 20% of the total expenses, the labor elasticity is less elastic. This is because adjustments in labor wages do not exert a significant influence on the overall cost structure, resulting in a less pronounced effect.

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C. Since Blue Chair Press requires very specific artistic skills from the labor it hires, there are few substitutes for the type of labor the firm requires. How does this affect the elasticity of demand for labor? (2 points) Since Blue Chair Press requires a very specific artistic skill from the labor it hires and having a few substitutes, this makes them even more elastic, this is because if the company were to lose their artistically skilled employee it would require them more time to replace that employee as they are very specific on the skills the employee needs; making it difficult to find a replacement. D. True or False: The higher the elasticity of demand for the product, art books, the more inelastic is the demand for the resource, labor, that produces the art books. Explain your answer. (2 points) This is false because if the demand for the product is very elastic, then the resources needed to make that product will also be elastic. E. True or False: If the ratio of labor costs to total costs is low, then the elasticity of demand for labor is low and a given wage increase results in fewer laborers losing jobs than if the elasticity of demand is higher. Explain your answer. (2 points)

This is true because the higher the ratio between the two costs the greater the elasticity for the factor demand curve. Hence, if the ratio of labor costs to total costs is low, then the demand for labor is low which leads to an inelasticity allowing firms to fluctuate prices and increase wages. 6. Marginal Analysis A. Explain how marginal analysis is used to determine the least-cost combination of labor and capital used to produce a given level of output. (2 points) The least-cost combination of labor determines what combination of resources and how much of each resource to use when given either the market price or the quantity the firm wants to sell. We find the least-cost combination of factors by determining the quantity of each factor that causes the marginal physical product per dollar spent on each factor to be the same for each factor used. If one input’s MPP per dollar is greater than the MPP for another input, the firm should increase the amount of the input that increases productivity more and decrease the other input. B. Explain how marginal analysis is used to determine the profit-maximizing combination of labor (L) and capital (K) used to produce a given level of output. Give your answers in words and in an equation. (2 points) Marginal analysis is used to determine the profit-maximizing combination of labor (L) and capital (K) to produce a given level of output, by looking at the marginal product revenue instead of the marginal physical product. For a particular factor, marginal revenue equals the marginal cost that is when the marginal revenue product is equal to the marginal resource cost. Profit is maximized when MR=MC For a particular factor MR = MC when MRP = MRCP Marginal Revenue Product /Marginal Resource Cost= 1 C. Is the least-cost combination of resources also the profit-maximizing level of resources? Explain your answer. (3 points) No, the least-cost combination of resources is not also the profit-maximizing level of resources. The least-cost combination helps firms determine what combination of resources and how much of each resource to use when given either the market price or the quantity the firm wants to sell. On the other hand, the profit-maximizing level of resources is to determine what combination of resources, and how much of each resource to use, but instead of using marginal physical product it uses marginal revenue product. It can also be said that the last unit of a resource employed adds the same amount of revenue as it costs.

6.1.5 Practice - Bailey Stringer -2

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