Q: If a competitive firm faces a wage rate of $$w = 12$$ and the marginal product of labor is $$MP_L = 4$$, and the price of output is $$p = 3$$, how many workers should the firm hire to maximize profit?

Hire workers until $$MRP_L = p \times MP_L = w$$, so $$3 \times 4 = 12$$; the firm should hire 4 workers.

Q: In the short run, a firm's capital is fixed at $$K = 32. If $$its production function is $$q = K$$^{0.5}$$ L$$^{0.5}$$ and the price of output is p = 5$, what is the marginal revenue product of labor ($$MRP_L$$)?

$$MRP_L = 5 \times 0.5 \times 32$$^{0.5}$$ L$$^{-0.5}$$

Question 1

In a competitive factor market, what condition must be met for a firm to maximize its profit with respect to labor?

Accepted Answer

The marginal revenue product of labor equals the wage rate: $$MRP_L = w$$

Question 2

Suppose a firm faces a perfectly competitive output market. What is the marginal revenue product of labor ($$MRP_L) in $$terms of price ($$p) $$and marginal product of labor ($$MP_L$$)?

Accepted Answer

$$MRP_L = p 	imes MP_L$$

Question 3

A monopsony is best described as:

Accepted Answer

A market with only one buyer of a good

Question 4

If a competitive firm faces a wage rate of $$w = 12$$ and the marginal product of labor is $$MP_L = 4$$, and the price of output is $$p = 3$$, how many workers should the firm hire to maximize profit?

Accepted Answer

Hire workers until $$MRP_L = p 	imes MP_L = w$$, so $$3 	imes 4 = 12$$; the firm should hire 4 workers.

Question 5

What is the effect of a specific tax $$t$$ imposed on each unit of output on a competitive firm's demand for labor?

Accepted Answer

It decreases the price received for output, lowering $$MRP_L$$ and shifting labor demand left.

Question 6

In the short run, a firm's capital is fixed at $$K = 32. If $$its production function is $$q = K$$^{0.5}$$ L$$^{0.5}$$ and the price of output is p = 5$, what is the marginal revenue product of labor ($$MRP_L$$)?

Accepted Answer

$$MRP_L = 5 	imes 0.5 	imes 32$$^{0.5}$$ L$$^{-0.5}$$

Question 7

Which of the following best describes the labor demand curve for a competitive firm?

Accepted Answer

It is the marginal revenue product of labor curve.

Question 8

If the output market is monopolized, how does the labor demand function change compared to a competitive output market?

Accepted Answer

The labor demand curve becomes steeper, reflecting the monopoly's marginal revenue curve.

Question 9

A firm faces the output demand curve $$p = 80 - Q$$ and the marginal product of labor is $$MP_L = 1. $$What is the firm's labor demand function?

Accepted Answer

$$w = 80 - L$$

Question 10

In a market where both the labor and output markets are monopolized, what happens to the equilibrium wage and quantity of labor compared to a competitive market?

Accepted Answer

Wage increases and quantity of labor decreases due to double monopoly markup.

Question 11

If a labor monopoly sets its marginal revenue equal to its marginal cost, and the competitive output market's labor demand curve is $$MR = 80 - 2L$$, what is the equilibrium quantity of labor if $$MC = 30$$?

Accepted Answer

Set $$80 - 2L = 30$$; $$L = 25$$

Question 12

What is the welfare effect of a monopsony in the labor market compared to a competitive market?

Accepted Answer

It creates a wedge between the value to the monopsony and the value to suppliers, causing a welfare loss.

Question 13

The markup of marginal expenditure over wage in a monopsony is inversely proportional to which of the following?

Accepted Answer

The elasticity of supply at the optimum.

Question 14

If a minimum wage is set above the competitive equilibrium wage in a monopsony labor market, what is the likely effect?

Accepted Answer

Employment increases and the wage rises to the minimum wage.

Question 15

Which of the following is true about the relationship between the output profit-maximizing condition and the labor profit-maximizing condition?

Accepted Answer

Dividing the labor profit-maximizing condition by $$MP_L$$ yields the output profit-maximizing condition: $$\frac{w}{MP_L} = MC$$

Question 16

In a competitive factor market, equilibrium is determined by:

Accepted Answer

The intersection of the factor market demand curve and the factor market supply curve.

Question 17

If the supply of labor is less elastic, how does this affect the monopsony markup over the wage?

Accepted Answer

The markup increases.

Question 18

Suppose a firm is the sole employer in a town (a monopsony). To maximize profit, it hires labor up to the point where:

Accepted Answer

The marginal value of the last unit of labor equals the firm's marginal expenditure.

Factor Markets in Microeconomics: Competitive Markets, Monopolies, and Monopsony

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