Brue, McConnell, Flynn
Essentials of Economics 3e
Web Chapter A
Wage Determination
QUESTIONS
Question 1
Explain the meaning and significance of the fact that the demand for labor is a derived
demand. Why do labor demand curves slope downward?
Answer
Factors of production are not hired or bought because their employer or buyer desires
them for themselves. The demand for resources is entirely derived from what the firm
believes the resources can produce. If there were no demand for output, there would be
no demand for input.
The demand for a resource depends, then, on how productive it is in producing output
and on the price of the output. The demand for a resource is downward sloping because
of the diminishing marginal product of the resource (because of the law of diminishing
returns) and, in imperfectly competitive markets, also because the greater the output, the
lower its price.
Question 2
Complete the labor demand table for a firm that is hiring labor competitively and selling
its product in a purely competitive market.
,a. 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. b. Show in schedule form and graphically the labor demand curve of
this firm.
Answer
Marginal
Units Total Marginal Product Total
revenue
of labor product product price revenue
product
0 0 $2 $ 0
1 17 17 2 34 $34
2 31 14 2 62 28
3 43 12 2 86 24
4 53 10 2 106 20
5 60 7 2 120 14
6 65 5 2 130 10
a. Two workers at $27.95 because the MRP of the first worker is $34 and the MRP of the
second worker is $28, both exceeding the $27.95 wage. Four workers at $19.95 because
workers 1 through 4 have MRPs exceeding the $19.95 wage. The fifth worker’s MRP is
only $14 so he or she will not be hired.
b. The demand schedule consists of the first and last columns of the table:
,Question 3
In 2009 General Motors (GM) announced that it would reduce employment by 21,000
workers. What does this decision reveal about how GM viewed its marginal revenue
product (MRP) and marginal resource cost (MRC)? Why didn’t GM reduce employment
by more than 21,000 workers? By less than 21,000 workers?
Answer
GM’s decision suggests that the MRC of those 21,000 workers was greater than the
MRP. GM didn’t reduce employment further because the MRP of the remaining workers
exceeds the MRC. Reducing employment by less than 21,000 workers would have left
GM with some employees for whom the MRC exceeded the MRP, reducing the
company’s profits.
Question 4
How will each of the following affect the demand for resource A, which is being used to
produce commodity Z? Where there is any uncertainty as to the outcome, specify the
causes of that uncertainty.
a. An increase in the demand for product Z.
b. An increase in the price of substitute resource B.
c. A technological improvement in the capital equipment with which resource A is
combined.
d. A fall in the price of complementary resource C.
e. A decline in the elasticity of demand for product Z due to a decline in the
competitiveness of product market Z.
Answer
(a) Increase in the demand for resource A. (b) Uncertainty relative to the change in
demand for resource A; answer depends upon which is larger—the substitution effect or
the output effect. (c) Increase in the demand for resource A. (d) Increase in the demand
for resource A. (e) Uncertain about change in the demand for resource A.
, Question 5
What effect would each of the following factors have on elasticity of demand for resource
A, which is used to produce product Z?
a. There is an increase in the number of resources substitutable for A in producing Z.
b. Due to technological change, much less of resource A is used relative to resources B
and C in the production process.
c. The elasticity of demand for product Z greatly increases.
Answer
Elasticity of demand for a resource is determined by: (1) ease of resource substitutability;
(2) elasticity of product demand; and (3) ratio of resource costs to total costs.
a. Increase in the demand elasticity for resource A.
b. Increase in the demand elasticity for resource A.
c. Increase in the demand elasticity for resource A.
Question 6
Florida citrus growers say that the recent crackdown on illegal immigration is increasing
the market wage rates necessary to get their oranges picked. Some are turning to
$100,000 to $300,000 mechanical harvesting machines known as “trunk, shake, and
catch” pickers, which vigorously shake oranges from the trees. If widely adopted, how
will this substitution affect the demand for human orange pickers? What does that imply
about the relative strengths of the substitution and output effects?
Answer
The effect of the adoption of the mechanical pickers will be to decrease the demand for
human pickers. If this occurs, the substitution effect will have been greater than the
output effect.
Question 7
Why is a firm in a purely competitive labor market a wage taker? What would happen if
it decided to pay less than the going market wage rate?
Answer
A firm in a purely competitive labor market is a wage taker because there are a large
number of firms wanting to buy the labor services of the workers in that market and a
large number of workers with identical skills wanting to sell their labor services. As a
result, the individual firm has no control over the price of labor. If a firm attempted to
pay a wage below the going wage, no workers would offer their services to that firm.
Essentials of Economics 3e
Web Chapter A
Wage Determination
QUESTIONS
Question 1
Explain the meaning and significance of the fact that the demand for labor is a derived
demand. Why do labor demand curves slope downward?
Answer
Factors of production are not hired or bought because their employer or buyer desires
them for themselves. The demand for resources is entirely derived from what the firm
believes the resources can produce. If there were no demand for output, there would be
no demand for input.
The demand for a resource depends, then, on how productive it is in producing output
and on the price of the output. The demand for a resource is downward sloping because
of the diminishing marginal product of the resource (because of the law of diminishing
returns) and, in imperfectly competitive markets, also because the greater the output, the
lower its price.
Question 2
Complete the labor demand table for a firm that is hiring labor competitively and selling
its product in a purely competitive market.
,a. 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. b. Show in schedule form and graphically the labor demand curve of
this firm.
Answer
Marginal
Units Total Marginal Product Total
revenue
of labor product product price revenue
product
0 0 $2 $ 0
1 17 17 2 34 $34
2 31 14 2 62 28
3 43 12 2 86 24
4 53 10 2 106 20
5 60 7 2 120 14
6 65 5 2 130 10
a. Two workers at $27.95 because the MRP of the first worker is $34 and the MRP of the
second worker is $28, both exceeding the $27.95 wage. Four workers at $19.95 because
workers 1 through 4 have MRPs exceeding the $19.95 wage. The fifth worker’s MRP is
only $14 so he or she will not be hired.
b. The demand schedule consists of the first and last columns of the table:
,Question 3
In 2009 General Motors (GM) announced that it would reduce employment by 21,000
workers. What does this decision reveal about how GM viewed its marginal revenue
product (MRP) and marginal resource cost (MRC)? Why didn’t GM reduce employment
by more than 21,000 workers? By less than 21,000 workers?
Answer
GM’s decision suggests that the MRC of those 21,000 workers was greater than the
MRP. GM didn’t reduce employment further because the MRP of the remaining workers
exceeds the MRC. Reducing employment by less than 21,000 workers would have left
GM with some employees for whom the MRC exceeded the MRP, reducing the
company’s profits.
Question 4
How will each of the following affect the demand for resource A, which is being used to
produce commodity Z? Where there is any uncertainty as to the outcome, specify the
causes of that uncertainty.
a. An increase in the demand for product Z.
b. An increase in the price of substitute resource B.
c. A technological improvement in the capital equipment with which resource A is
combined.
d. A fall in the price of complementary resource C.
e. A decline in the elasticity of demand for product Z due to a decline in the
competitiveness of product market Z.
Answer
(a) Increase in the demand for resource A. (b) Uncertainty relative to the change in
demand for resource A; answer depends upon which is larger—the substitution effect or
the output effect. (c) Increase in the demand for resource A. (d) Increase in the demand
for resource A. (e) Uncertain about change in the demand for resource A.
, Question 5
What effect would each of the following factors have on elasticity of demand for resource
A, which is used to produce product Z?
a. There is an increase in the number of resources substitutable for A in producing Z.
b. Due to technological change, much less of resource A is used relative to resources B
and C in the production process.
c. The elasticity of demand for product Z greatly increases.
Answer
Elasticity of demand for a resource is determined by: (1) ease of resource substitutability;
(2) elasticity of product demand; and (3) ratio of resource costs to total costs.
a. Increase in the demand elasticity for resource A.
b. Increase in the demand elasticity for resource A.
c. Increase in the demand elasticity for resource A.
Question 6
Florida citrus growers say that the recent crackdown on illegal immigration is increasing
the market wage rates necessary to get their oranges picked. Some are turning to
$100,000 to $300,000 mechanical harvesting machines known as “trunk, shake, and
catch” pickers, which vigorously shake oranges from the trees. If widely adopted, how
will this substitution affect the demand for human orange pickers? What does that imply
about the relative strengths of the substitution and output effects?
Answer
The effect of the adoption of the mechanical pickers will be to decrease the demand for
human pickers. If this occurs, the substitution effect will have been greater than the
output effect.
Question 7
Why is a firm in a purely competitive labor market a wage taker? What would happen if
it decided to pay less than the going market wage rate?
Answer
A firm in a purely competitive labor market is a wage taker because there are a large
number of firms wanting to buy the labor services of the workers in that market and a
large number of workers with identical skills wanting to sell their labor services. As a
result, the individual firm has no control over the price of labor. If a firm attempted to
pay a wage below the going wage, no workers would offer their services to that firm.
