Page 747 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Free-Response Questions
1. Assume the demand curve for a firm’s product is as shown
Answer (8 points)
below and that the firm can hire as many workers as it wants for
a wage of $80 per day. 1 point: The firm hires labor in a perfectly competitive labor market. Section 13 Factor Markets

Price 1 point: The firm is a price-taker in the labor market. (It can hire all that it
wants for $80 per day.)
1 point: The firm sells its good in a perfectly competitive product market.
1 point: The horizontal demand curve indicates that the firm is a price-taker
Firm demand in the product market (it can sell all the output it wants at the market price
$5 of $5).
1 point: the additional cost of hiring one more unit of a factor
1 point: $80
1 point: $100

0 Quantity of output 1 point: MRPL = MPL × MR, MPL = 20, MR = $5, so MRPL = 20 × $5 = $100.
a. What is the market structure of the factor market in which
2. a. Draw a correctly labeled graph showing a perfectly
the firm hires labor? Explain.
competitive labor market in equilibrium. On your graph, be
b. What is the market structure of the product market in which
sure to label the labor demand curve, the labor supply curve,
the firm sells its good? Explain.
marginal revenue product of labor, the equilibrium wage
c. Define marginal factor cost. What is the marginal factor cost
(W*), and the equilibrium quantity of labor (L*).
of labor for this firm?
b. On your graph, illustrate how a decrease in the price of the
d. If the last worker hired produces an additional 20 units of
product made by the firm would affect the equilibrium wage
output, what is the last worker’s MRPL? Explain.
and quantity of labor. Label the resulting wage rate W 2 and
the resulting quantity of labor L 2 .

module 71 The Market for Labor 705