Because resource demand is derived from product demand, the strength of the demand for any resource will depend on
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The productivity of the resource in helping to create a good or service.
The market value or price of the good or service it helps produce.
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In a purely competitive labor market, market supply and market demand establish the wage rate. Because each firm hires such a small fraction of market supply, it cannot influence the market wage rate; it is a wage taker, not a wage maker. This means
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that for each additional unit of labor hired, each firm's total resource cost increases by exactly the amount of the constant market wage rate. More specifically, the MRC of labor exactly equals the market wage rate.
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To maximize profit, a firm will purchase or hire a resource in an amount at which
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the resource's marginal revenue product equals its marginal resource cost (MRP = MRC)
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Application of the MRP = MRC rule to a firm's MRP curve demonstrates that the MRP curve is the firm's resource demand curve. In a purely competitive resource market, resource price (the wage rate) equals MRC T o F
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True
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The resource demand curve of a purely competitive seller is downsloping solely because the marginal product of the resource diminishes; the resource demand curve of an imperfectly competitive seller is downsloping because
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marginal product diminishes and product price falls as output is increased.
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Explain the significance of resource pricing. Studying resource pricing is important for several reasons:
The productivity of any resource may be altered over the long run in several ways:
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Quantities of other resources
Technological advance
Quality of the variable resource
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The degree to which resources are substitutable is a fundamental determinant of elasticity. More specifically, the greater the substitutability of other resources, the more elastic is the demand for a particular resource. T O F
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True
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A resource demand curve will shift
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because of changes in product demand, changes in the productivity of the resource, and changes in the prices of other inputs
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If resources A and B are substitutable, a decline in the price of A will decrease the demand for B provided the substitution effect exceeds the output effect. But if the output effect exceeds the substitution effect, the demand for B will
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increase.
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If resources C and D are complements, a decline in the price of C will
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increase the demand for D
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Elasticity of resource demand measures the extent to which producers change the quantity of a resource they hire when its price changes. T o F
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True
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For any particular resource, the elasticity of resource demand will be ____ the greater the difficulty of substituting other resources for the resource, the smaller the elasticity of product demand, and the smaller the proportion of total cost accounted for by the resource.
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less
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Any specific level of output will be produced with the least-costly combination of variable resources when
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the marginal product per dollar's worth of each input is the same.
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A firm is employing the profit-maximizing combination of resources when each resource is
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used to the point where its marginal revenue product equals its price.
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The marginal productivity theory of income distribution holds that all resources are paid according to their
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marginal contributions to output.
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There are several reasons for that high productivity:
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Plentiful capital
Access to abundant natural resources
Advanced technology
Labor quality
Other factors
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A labor market monopsony has the following characteristics:
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*There is only a single buyer of a particular type of labor.
*The workers providing this type of labor have few employment options other than working for the monopsony because they are either geographically immobile or because finding alternative employment would mean having to acquire new skills.
*The firm is a "wage maker" because the wage rate it must pay varies directly with the number of workers it employs.
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Real wages have increased over time in the United States because labor demand has increased relative to labor supply. T o F
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True
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Over the long term, real wages per worker have increased at approximately the same rate as worker productivity. T o F
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True
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The competitive employer is a wage taker and employs workers at the point where the wage rate (= MRC) equals MRP. T o F
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True
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The labor supply curve to a monopsonist is upsloping, causing MRC to exceed the wage rate for each worker. Other things equal, the monopsonist, hiring where MRC = MRP, will employ fewer workers and pay a lower wage rate than would a purely competitive employer.
T o F
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True
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In the demand-enhancement union model, a union increases the wage rate by increasing labor demand through actions that increase product demand or alter the prices of related inputs. T o F
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True
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In the exclusive (craft) union model, a union increases wage rates by artificially restricting labor supply, through, say, long apprenticeships or occupational licensing. T o F
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True
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In the inclusive (industrial) union model, a union raises the wage rate by gaining control over a firm's labor supply and threatening to withhold labor via a strike unless a negotiated wage is obtained. T o F
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True
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Bilateral monopoly occurs in a labor market where a monopsonist bargains with an inclusive, or industrial, union. Wage and employment outcomes are determined by
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collective bargaining in this situation.
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Market Imperfections
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Lack of Job Information
Geographic Immobility
Unions and Government Restraints
Discrimination
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Proponents of the minimum wage argue that it is needed to assist the working poor and to counter monopsony where it might exist; critics say that it is poorly targeted to
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reduce poverty and that it reduces employment.
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Wage differentials are attributable in general to the forces of supply and demand, influenced by differences in workers' marginal revenue productivity, education, and skills and by nonmonetary differences in jobs. But several labor market imperfections also play a role. T o F
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True
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As it applies to labor, the principal-agent problem is one of workers pursuing their own interests to the detriment of the employer's
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profit objective
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Pay-for-performance plans (piece rates, commissions, royalties, bonuses, stock options, profit sharing, and efficiency wages) are designed to
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improve worker productivity by overcoming the principal-agent problem.
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Ownership of property resources is highly __________.
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unequal
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The determinants of the elasticity of resource demand are:
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1. Ease of resource substitutability
2. ratio of resource cost to total cost
3. elasticity of product demand
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The derived demand for resources by producers for a product will be low when:
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the product is selling poorly
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In the ____ run, firms can vary the amounts of all the resources they use.
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long
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Resource demand curves slope downward because
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of the diminishing marginal product of the resource.
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As one more additional variable input such as labor is applied to fixed capital such as plant and equipment, the marginal product or additional output, will fall, descries the law of:
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Diminishing returns
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Other things equal, an increase in the demand of a product will _____ increase the demand for a resource used in its production, whereas a decrease in product demand will ______ the demand for that resources.
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1. Increase
2. Decrease
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In the resource market, the output effect means that the firm will purchase _____ of one particular input when the price of the other input falls and ______ of that particular input when the price of the other input rises.
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1. More
2. Less
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A firms demand schedule for labor or any input to produce a good or service can also be known as its:
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Marginal revenue product schedule
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The firm in a competitive product market is a price taker and a wage taker in the competitive _____.
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resource market
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____________ states that the cost of any product output is minimized when the ratios for each of the used inputs marginal product to price are equal for each resource.
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The least-cost rule
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When economists say that the demand for labor is a derived demand, they mean that it is:
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related to the demand for the product or service labor is producing.
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A competitive employer should hire additional labor as long as:
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the MRP exceeds the wage rate.
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For a firm selling its product in a purely competitive market, the marginal revenue product of labor can be found by:
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multiplying marginal product by product price
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If two resources are highly substitutable for one another:
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an increase in the price of one will increase the demand for the other.
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A firm is hiring resources X, Y, and Z in the profit-maximizing amounts when:
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MRPx/Px equals MRPy/Py equals MRPz/Pz equals 1.
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The equation MPL/PL = MPC/PC:
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is a necessary, but not sufficient, condition for the maximization of profits.
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(Last Word) The rapid spread of ATMs has:
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reduced the demand for bank tellers.
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If the minimum wage is set too high, in some labor markets we can expect to see:
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a surplus of labor.
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Compensating differences in wages:
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are wage differences that compensate for differences in the desirability of jobs.
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When economists say that the demand for labor is a derived demand, they mean that it is:
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related to the demand for the product or service labor is producing.
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The demand for airline pilots results from the demand for air travel. This fact is an example of:
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the derived demand for labor.
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The marginal revenue product schedule is:
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the firm's resource demand schedule.
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Marginal product is:
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the amount an additional worker adds to the firm's total output.
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A firm will find it profitable to hire workers up to the point at which their:
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marginal resource cost is equal to their MRP.
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Marginal resource cost is:
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the increase in total resource cost associated with the hire of one more unit of the resource.
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The change in a firm's total revenue that results from hiring an additional worker is measured by:
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the marginal revenue product.
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Which of the following will not cause a shift in the demand for resource X?
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A decline in the price of resource X.
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A decline in the price of resource A will:
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increase the demand for complementary resource B.
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Employers will hire more units of a resource if the:
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productivity of the resource increases.
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(Consider This) In the market for superstars:
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small differences in talent get magnified into huge differences in pay.
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(Last Word) "The Case of ATMs" best illustrates the:
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the substitutability of resources.
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Which of the following statements best illustrates the concept of derived demand?
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A decline in the demand for shoes will cause the demand for leather to decline
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The demand for a resource depends primarily on:
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the demand for the product or service that it helps produce
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