Page 746 - Krugmans Economics for AP Text Book_Neat

the marginal factor cost curve is above the labor supply curve. The equilibrium quan-
tity of labor is found where the marginal revenue product equals the marginal factor
cost, as represented by L* on the graph. The firm will pay the wage required to hire L*
workers, which is found on the supply curve above L*. The labor supply curve shows
that the quantity of labor supplied is equal to L* at a wage of W*. The equilibrium
wage in the market is thus W*. Note that, unlike the wage in a perfectly competitive
labor market, the wage in the imperfectly competitive labor market is less than the
marginal factor cost of labor.
In Modules 69–71 we have learned how firms determine the optimal amount of
land, labor, or capital to hire in factor markets. But often there are different combina-
tions of factors that a firm can use to produce the same level of output. In the next
module, we look at how a firm chooses between alternative input combinations for
producing a given level of output.

Module 71 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. Formerly, Clive was free to work as many or as few hours per 2. Explain in terms of the income and substitution effects how a
week as he wanted. But a new law limits the maximum number fall in Clive’s wage rate can induce him to work more hours
of hours he can work per week to 35. Explain under what than before.
circumstances, if any, he is made
a. worse off.
b. equally well off.
c. better off.

Tackle the Test: Multiple-Choice Questions
1. Which of the following is necessarily true if you work more d. a decrease in the opportunity cost of leisure
when your wage rate increases? e. an increase in labor market opportunities for women
a. The income effect is large.
4. An increase in the wage rate will
b. The substitution effect is small.
a. shift the labor supply curve to the right.
c. The income effect dominates the substitution effect.
b. shift the labor supply curve to the left.
d. The substitution effect dominates the income effect.
c. cause an upward movement along the labor supply curve.
e. The income effect equals the substitution effect.
d. cause a downward movement along the labor supply curve.
2. Which of the following will cause you to work more as your e. have no effect on the quantity of labor supplied.
wage rate decreases?
5. The factor demand curve for a firm in an imperfectly
I. the income effect
competitive factor market is the same as which of the following
II. the substitution effect
curves?
III. a desire for leisure
a. VMP
a. I only
b. MPP
b. II only
c. MFC
c. III only
d. MRP
d. I and II only
e. MP
e. I, II, and III
3. Which of the following will shift the supply curve for labor to
the right?
a. a decrease in the labor force participation rate of women
b. a decrease in population
c. an increase in wealth
704 section 13 Factor Markets