Micro Topic 5.

1
Introduction to Factor Markets
Part 1 - Check Your Understanding​-​ Answer the question.
1. Fully explain the difference between the factor market (resource market) and the product market.

Part 2- Practice​- ​Assume that you and your cousin start a business selling belt buckles. The price of a belt
buckle is $6 and the minimum wage is $10. Complete the table and answer the questions.
2. In this scenario, do you
supply or demand labor?

3. What happened to the

marginal revenue product of
each worker as more
workers are hired? What
causes this to happen?

Part 3- Graph It​- ​Graph the MRP and MRC from

the table above and label them MRP​1​ and MRC​1
then answer the questions.
4. How many workers should you hire to
maximize profit? How can you tell?

5. Assume that your fixed costs are $20.

Calculate your profit or loss. Show your work.

6. If the minimum wage increased to $25, how

many workers would you hire to maximize
profit?

7. Assume instead that the price of belt buckles

decreased. How will that affect the MRP of
your workers?

8. Other than a change in the price of belt buckles, what else could cause the MRP of your workers to
change. Explain your answer.

Video Help: ​https://youtu.be/7Bv5YdVHN3E ​©Copyright Jacob Clifford 2020. ​www.ACDCecon.com

Annual license required. Do not use unless you have purchased a license
 Micro Topic 5.2
Changes in Factor Demand and Supply
Part 1 - Article Analysis​- ​Read the excerpt regarding cooks from the ​Occupational Outlook Handbook
published by the Bureau of Labor Statistics and answer the questions.
“Overall employment of cooks is projected to grow 6 percent from 2016 to 2026, about as fast as the
average for all occupations. Individual growth rates will vary by specialty. Population and income
growth are expected to result in greater consumer demand for food at a variety of dining places…
In addition, consumers continue to prefer healthier foods and faster service in restaurants, grocery
stores, and other dining venues. To prepare high quality meals at these places, many managers and
chefs will require experienced cooks, such as restaurant cooks. Employment of fast food cooks is
projected to decline slightly as many establishments attempt to streamline operations by hiring other
workers, such as food preparation and serving workers, who can prepare and also serve food to
customers.”
1. Use the concept of derived demand to explain why cooks are likely to be in demand in the future.
Underline a sentence in the excerpt that supports your conclusion.

2. Explain why the growth rate of cooks will “vary by specialty”.

3. Explain why an experienced cook would likely earn a higher wage than an inexperienced cook.

4. Identify a specific profession, other than cooks, that would be negatively affected by consumers
preferring healthier foods. Fully explain your answer.

5. Identify a specific profession, other than cooks, that would be positively affected by consumers
preferring healthier foods. Fully explain your answer.

Part 2 - Stretch Your Thinking​- G ​ o to the Occupational Outlook Handbook (​www.bls.gov/ooh​) and pick a
job. ​Read the job outlook for the profession and answer the questions below.
6. Is the occupation likely to grow or decline in the future. Use demand and supply to explain why.

7. Is the occupation that you picked a job that you would want to have in the future? Why or why not?

Video Help: ​https://youtu.be/V0tIOqU7m-c ​©Copyright Jacob Clifford 2020. ​www.ACDCecon.com

Annual license required. Do not use unless you have purchased a license
 Micro Topic 5.2
Changes in Factor Demand and Supply
Part 3 - Graph It​- ​Show how each market is affected by the following scenario. Label the initial equilibrium
price P​1 (or
​ wage W​1)​ and the original quantity Q​1.​ Label the new equilibrium price P​2​ (or wage W​2)​ and the
quantity Q2​ .​
Scenario: Assume that engineers develop self-flying planes and airlines adopt a policy of having
only one human pilot instead of two. Also assume that unused pilot training schools are often
converted into skydiving schools that require skydiving instructors.
8. Airline pilots 9. Pilot training schools

10. Skydiving schools 11. Skydiving instructors

Part 4 - More Practice​- ​Use the demand and supply graph for lawyers to answer the questions.
12. What will happen to the wage and quantity of lawyers if the
government requires 5 years of school to practice law? Explain.

13. Assume instead that low-cost software allows individuals to create

their own legal documents without hiring a lawyer. What will happen to
the wage and quantity of lawyers? Explain.

14. Now assume both of these events take place at the same time. What
will happen to the wage and quantity of lawyers? Explain.

Video Help: ​https://youtu.be/V0tIOqU7m-c ​©Copyright Jacob Clifford 2020. ​www.ACDCecon.com

Annual license required. Do not use unless you have purchased a license
 Micro Topic 5.3
Profit-Maximizing in Factor Markets
Part 1- Practice​- ​Assume that you sell churros in a perfectly competitive product market and hire workers
in a perfectly competitive labor market. The price of churros is $4 and the wage is $10. Complete the table
and answer the questions:
1. Why are your workers
considered “wage takers”?

2. How many workers should you

hire to maximize profit?

3. Assume that your fixed costs

are $20. Calculate your profit or
loss. Show your work.

Part 2 - Graph It​- ​Draw correctly labeled side-by-side graphs for the labor market and for your firm. Label
the equilibrium wage and quantity W​1​ and Q​M1​ and the quantity of labor for your firm Q​F1.​

4. Show what will happen on both graphs if there is a decrease in the supply of workers. Label the new
equilibrium wage and quantity W​2​ and Q​M2​ and the quantity of labor for your firm Q​F2​.

5. As a result of the decrease in supply, will the MRP of the last worker hired by your firm increase,
decrease, or stay the same? Explain.

​ nswer the question.

Part 3 - Stretch Your Thinking​- A
6. In real life, why is it difficult for a firm to accurately determine the marginal revenue product (MRP) of
their workers?

Video Help: ​https://youtu.be/7Bv5YdVHN3E ​©Copyright Jacob Clifford 2020. ​www.ACDCecon.com

Annual license required. Do not use unless you have purchased a license
 Micro Topic 5.3
Profit-Maximizing in Factor Markets
Part 1: Check for Understanding​- ​Assume that you and your cousin, Tommy, own a factory. Below are
two inaccurate statements made by Tommy. Write a sentence that corrects his misunderstanding.
1. “We should hire workers if they cost less than robots.”

2. “If robots are more productive than workers we should buy as many robots as we can.”

Part 2 - Practice​- ​Assume that you and Tommy are trying to decide how many workers and automated
forklifts you need at your loading dock. The table below shows the total number of boxes that workers can
load onto trucks per hour. Assume that forklifts are exactly three times more productive than workers and
that workers cost $10 per hour and forklifts cost $15 per hour.

3. Complete the table using the given information.

4. Explain why the marginal product of workers and forklifts decreases as more of each resource is hired.

5. Assume that you decide to spend a total of $80 on workers and forklifts. Tommy suggests that you hire
five workers and two forklifts. Use the least-cost rule to explain why his suggestion is a mistake.

6. How many workers and how many forklifts should you hire to maximize your total output? Explain how
you determined your answer.

7. How many total boxes would be loaded per hour if you hire the combination you identified in question
#6? Show your work.

Video Help: ​https://youtu.be/kNwtvbMcqZI ​©Copyright Jacob Clifford 2020. ​www.ACDCecon.com

Annual license required. Do not use unless you have purchased a license
 Micro Topic 5.3
Profit-Maximizing in Factor Markets
Part 3 - More Practice​- ​Assume that your firm
also hires labor and capital to produce brake pads.
The price of labor is $10 per unit and the price of
capital is $20 per unit. The table to the right shows
different marginal products for the last unit of labor
and and the last unit of capital. For each situation,
identify if your firm should hire more ​(​↑​)​, less ​(​↓​)​, or
the same (-) amount of labor and capital.

Part 4 - Even More Practice​-

Now assume that your firm always hires the
cost-minimizing combination of labor and capital.
The table to the left shows different marginal
products for the last unit of labor and and the last
unit of capital and the price of those inputs.
Complete the table using the given information.

​ nswer the questions

Part 5 - Stretch Your Thinking​- A
18. Applying the least-cost rule is similar to applying the utility maximizing rule. Identify two similarities and
two differences regarding these two rules.

19. In recent years the price of robots has fallen dramatically and will likely continue to fall in the future.
Identify two advantages and two disadvantages of using robots in the production process.

Video Help: ​https://youtu.be/kNwtvbMcqZI ​©Copyright Jacob Clifford 2020. ​www.ACDCecon.com

Annual license required. Do not use unless you have purchased a license
 Micro Topic 5.4
Monopsonistic Markets
Part 1 – Check Your Understanding- The following is an excerpt from an October 2018 article entitled
“Monopsony: When there's only one employer in town” from www.marketplace.org. Read the passage and
answer the questions below.
“As giant firms like Amazon hire more people, becoming the dominant employer in some cities,
economists have expressed concern that they could be suppressing wages. Despite low
unemployment in the United States, wage growth has stagnated in the country. There's a word for a
scenario where there are a lot of workers who are facing only one possible employer: monopsony.
“It’s the labor market equivalent of a monopoly,” said Kate Bahn, an economist at the Washington
Center for Equitable Growth. “So when an employer knows that they’re not competing for workers,
they can pay less than they would if they were in a competitive market.” William Boal, a professor of
economics at Drake University, said that people use the expression more broadly for any situation
where it’s difficult for employees to find another employer.”

1. Identify three different characteristics of a monopsony.

2. Explain why a monopsony can “suppress wages” but a firm in a perfectly competitive labor market
cannot.

3. Assume that Amazon says that they can prove that they are not a monopsony in the labor market.
What specific information might they need to find to support their claim?

4. The full article includes three examples of potential monopsonies. Find the article online and explain
why one of these examples is a monopsony.

5. In 2017, Amazon began looking for second company headquarters (HQ2) to supplement their existing
headquarters in Seattle, Washington. Would you want Amazon’s headquarters in your town? Fully
explain your reasoning.

Video Help: https://youtu.be/5bFS2WyAo8s ©Copyright Jacob Clifford 2020. www.ACDCecon.com

Annual license required. Do not use unless you have purchased a license
 Micro Topic 5.4
Monopsonistic Markets
Part 2: Monopsony Practice- Use the graph for a non-wage discriminating monopsony to answer the
following questions.
6. Identify the wage and quantity that
would exist if this were a perfectly
competitive market.

7. Assume instead that this firm is a

monopsony. Identify the profit
maximizing wage and quantity.

8. What is the total labor cost for this

monopsonist?

9. Unlike the monopoly graph, this

graph does not directly show profit.
What additional information would
you need to figure out how much
profit this firm is earning?

10. Assume that the government

establishes a minimum wage at $9.
How many workers would this
monopsonist hire?

11. Assume that the productivity of these workers increased significantly. What will happen to the
equilibrium wage and quantity? Explain.

12. Explain why the marginal resource cost (MRC) for a monopsonist is greater than the supply of labor.

Part 3 - Stretch Your Thinking- Answer the question.

13. Some people consider college athletics an example of a monopsony. Do you think that college athletes,
like college football players, should be paid by their universities? Justify your opinion.

Video Help: https://youtu.be/5bFS2WyAo8s ©Copyright Jacob Clifford 2020. www.ACDCecon.com

Annual license required. Do not use unless you have purchased a license