Q: If the price of output ($$P_X) $$increases, what happens to the marginal revenue product of labor ($$MRPL$$)?

It increases, since $$MRPL = MPL \times P_X.$$

Q: Which equation represents the profit-maximizing condition for labor in a perfectly competitive firm?

$$PL = MRPL = (MPL \times PX)$$

Question 1

What is meant by 'derived demand' in the context of input markets?

Accepted Answer

The demand for resources that is dependent on the demand for the outputs those resources produce.

Question 2

A firm in a competitive labor market will hire labor up to the point where:

Accepted Answer

The marginal revenue product of labor equals the wage rate, $$MRPL = W.$$

Question 3

If the price of output ($$P_X) $$increases, what happens to the marginal revenue product of labor ($$MRPL$$)?

Accepted Answer

It increases, since $$MRPL = MPL 	imes P_X.$$

Question 4

Which of the following best describes the factor substitution effect?

Accepted Answer

Firms substitute away from a factor whose price has risen and toward a factor whose price has fallen.

Question 5

Suppose a firm faces an increase in wage rates. What is the likely effect on the firm's demand for labor and capital?

Accepted Answer

The firm will decrease its demand for labor and may increase its demand for capital due to the substitution effect.

Question 6

In the short run, which input is typically considered fixed for a firm?

Accepted Answer

Capital

Question 7

A firm’s short-run demand curve for labor is represented by:

Accepted Answer

The marginal revenue product of labor ($$MRPL) $$curve.

Question 8

If a firm employs two variable factors of production, what must it consider when the price of one factor changes?

Accepted Answer

The impact on the demand for both factors, not just the one whose price changed.

Question 9

Which equation represents the profit-maximizing condition for labor in a perfectly competitive firm?

Accepted Answer

$$PL = MRPL = (MPL 	imes PX)$$

Question 10

A firm producing 100 units of output experiences an increase in wages. According to the substitution effect, what is the most likely outcome?

Accepted Answer

The firm will substitute capital for labor to maintain output.

Question 11

If the wage rate decreases, what happens to the firm’s cost of production and its demand for labor?

Accepted Answer

Cost of production decreases and demand for labor increases.

Question 12

Which of the following is NOT a plausible result of the output effect when the wage rate falls?

Accepted Answer

The firm decreases its output.

Question 13

A firm is a price taker in both the product and labor markets. What does this imply?

Accepted Answer

The firm cannot influence the price of its output or the wage rate.

Question 14

If a firm’s marginal product of labor ($$MPL) is 5 $$units and the price of output ($$PX) is$$ $$10, what is the marginal revenue product of labor ($$MRPL$)?

Accepted Answer

$$MRPL = MPL 	imes PX = 5 	imes 10 = 50$$

Question 15

Which of the following statements about the labor demand curve is correct?

Accepted Answer

It slopes downward because lower wage rates increase the quantity of labor demanded.

Question 16

If a firm decreases its output in response to a factor price increase, what happens to its demand for all factors?

Accepted Answer

Demand for all factors decreases.

Question 17

A firm’s marginal expense of labor ($$MEL) is $$equal to the wage rate ($$W) in a $$competitive labor market. What is the profit-maximizing hiring rule?

Accepted Answer

Hire labor until $$MRPL = MEL = W$$

Question 18

Which of the following best describes the productivity of an input?

Accepted Answer

The amount of output produced per unit of that input.

Question 19

If a firm can vary both labor and capital, and the wage rate falls, what is the likely effect on the use of labor and capital?

Accepted Answer

The firm will substitute labor for capital and increase output, raising demand for both labor and capital.

Input Demand: The Labor and Land Markets – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards