Page 760 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Free-Response Questions
1. For each of the following situations in which similar workers
Answer (6 points)
are paid different wages, provide the most likely reason for the
differences and explain why that reason applies. 1 point: Compensating differentials
a. Test pilots for new jet aircraft earn higher wages than airline
1 point: Being a test pilot is more dangerous.
pilots.
b. College graduates usually have higher earnings in their first 1 point: Differences in human capital
year on the job than workers without college degrees have in 1 point: Education leads to higher productivity.
their first year on the job.
c. Experienced AP teachers command higher salaries than new 1 point: Differences in human capital
AP teachers for teaching the same class. 1 point: On-the-job experience increases the marginal product of experienced
teachers.

2. List three different economic concepts that explain wage
differences when the marginal productivity theory of income
distribution does not. Explain each.

Section 13 Review

Summary

1. Just as there are markets for goods and services, there are leisure and work. An increase in the hourly wage rate
markets for factors of production, including labor, land, tends to increase work hours via the substitution effect
and both physical capital and human capital. These but decrease work hours via the income effect. If the net
markets determine the factor distribution of income. result is that a worker increases the quantity of labor
2. A profit-maximizing, price-taking firm will keep em- supplied in response to a higher wage, the individual
ploying more units of a factor until the factor’s price is labor supply curve slopes upward. If the net result is
equal to the value of the marginal product—the mar- that a worker decreases work hours, the individual
ginal product of the factor multiplied by the price of labor supply curve—unlike supply curves for goods and
the output it produces. The value of the marginal services—slopes downward.
product curve is therefore the price-taking firm’s de- 6. The market labor supply curve is the horizontal sum of
mand curve for a factor. Factor demand is often referred the individual labor supply curves of all workers in that
to as a derived demand because it is derived from the market. It shifts for four main reasons: changes in pref-
demand for the producer’s output. erences and social norms, changes in population,
3. The market demand curve for labor is the horizontal changes in opportunities, and changes in wealth.
sum of the individual demand curves of firms in that 7. When a firm is not a price-taker in a factor market, the
market. It shifts for three main reasons: changes in out- firm will consider the marginal revenue product and
put price, changes in the supply of other factors, and the marginal factor cost when determining how much
technological changes. of a factor to hire. These concepts are equivalent to the
4. When a competitive labor market is in equilibrium, the value of the marginal product and the wage (or the
market wage is equal to the equilibrium value of the price of the factor) in a perfectly competitive market.
marginal product of labor, the additional value pro- 8. A monopsonist is the single buyer of a factor. A market
duced by the last worker hired in the labor market as a in which there is a monopsonist is a monopsony.
whole. The same principle applies to other factors of 9. Firms will determine the optimal input combination
production: the rental rate of land or capital is equal to using the cost-minimization rule: When a firm
the equilibrium value of the marginal product. This in- uses the cost-minimizing combination of inputs, the
sight leads to the marginal productivity theory of in- marginal product of labor divided by the wage rate is
come distribution, according to which each factor is equal to the marginal product of capital divided by the
paid the value of the marginal product of the last unit rental rate.
of that factor employed in the factor market as a whole.
10. Large disparities in wages raise questions about the va-
5. Labor supply is the result of decisions about time allo- lidity of the marginal productivity theory of income dis-
cation, with each worker facing a trade-off between tribution. Many disparities can be explained by
718 section 13 Factor Markets