05 Jul A+ Solution
. Wage determination in a perfectly competitive labor market 1. Draw a perfectly competitive firm’s labor demand curve and labor supply curve. Label the market
equilibrium wage rate and quantity of labor the firm will hire. Label your graph completely. (2
points) 1. Draw the demand and supply curves for labor in a perfectly competitive labor market. Label the
equilibrium wage rate and equilibrium quantity of labor. Label your graph completely. (2 points) 1. Why is a perfectly competitive firm a "wage taker"? (1 point)
1. To maximize its profits, how much labor should a perfectly competitive hire? (1 point)
1. What is another name for the firm’s labor demand curve? (1 point)
1. What two things determine the demand for labor for every type of firm? (2 points)
1. What information does the supply curve for labor provide? (1 point)
1. Explain why the perfectly competitive firm’s demand curve for labor is downward sloping. Include
the role of the price for the final good or service in your answer. (1 point) 1. Explain why the supply curve for labor is upward sloping. (1 point) 2. Wage determination in a monopsonistic labor market 1. Define monopsony in your own words. Give an example. (2 points)
1. Draw the demand, supply, and marginal resource cost curves for labor for a monopsonist
operating in a perfectly competitive product market. Label your graph completely. (3 points) 1. What is another name for the demand curve? (1 point)
1. Explain why the monopsonist’s marginal-revenue-product curve is downward sloping. Include the
role of the price for the final good or service in your answer. (1 point) 1. Why is a monopsonist a wage setter? (1 point)
1. Is a monopsonist a wage taker or a wage setter? Why? (2 points) 1. Where does the marginal resource curve lie in relationship to the supply curve? Explain your
answer. (2 points) 1. On the graph that you drew for part B of this question, label the equilibrium wage and quantity if
this firm were operating as firm in a competitive labor market (rather than a monopsonistic labor
market). (1 point) 1. On this same graph, label the wage level the monopsonist would pay and the quantity of labor the
monopsonist would hire. Why does the monopsonist choose that wage and quantity? (2 points) 1. For a monopsonist employer that’s maximizing profit, the wage will be _____ (higher/lower) and it
will hire _____ (more/fewer) workers than a firm operating in a more competitive labor market. (1
point) 3. Labor unions 1. Assume the labor market for county transit drivers is currently in equilibrium. However, the transit
drivers union has been successful in getting the county’s elected officials to pass legislation that
will require all drivers to be certified by the county before they can drive. Draw a graph that shows
the market in equilibrium before and then after the legislation has passed. Label your graph
completely. (4 points) 1. What is the effect of the legislation on the wage level of county transit drivers? (1 point)
1. What is the effect of the legislation on the quantity of workers employed? (1 point)
1. Why would the union want this legislation passed? (2 points)
1. Assume the labor market for airplane mechanics is currently in equilibrium. The airplane
mechanics union has started a media campaign on nationwide TV stations. The union claims that
union mechanics are better trained and therefore the planes they work on are safer. A survey
reveals that this advertising does convince consumers to fly more often on airlines with union
mechanics. Draw a graph that shows the labor market in equilibrium before and after the media
campaign. Label your graph completely. (4 points) 1. How does the successful media campaign affect the wage level of airplane mechanics? (1 point)
1. What is the effect of the media campaign on the quantity of workers employed? (1 point)
1. Why did the union support this media campaign? What did it hope to achieve? (2 points) 4. Economic rent 1. Define economic rent. (1 point)
1. Name one of your favorite top entertainers or sports stars. Pick an entertainer who earns a lot, a
movie star such as Courtney Love, Julia Roberts, or Tom Hanks, or a top sport star such as Kobe Bryant or Mark McGuire. Explain why this person receives so much money for his or her talent. (2
points) 5. Interest rates 1. What is interest? (1 point)
1. Draw a graph that represents the market for loanable funds. Label your graph completely. (2
points) 1. Who demands loanable funds? Explain why the demand curve sweeps downward. (2 points)
1. Who supplies loanable funds? Explain why the supply curve sweeps upward. (2 points)
1. List any four different types of interest rates. If you need help, look in the business section of a
daily newspaper or weekly newsmagazine or search the Internet. (2 points) 1. Explain the difference between the nominal interest rate and the real interest rate. (2 points)
1. What is the advantage of quoting an interest rate in terms of real interest? (1 point) 6. What single factor determines how resources are allocated in a market economy? (1 point)
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