Order How Factor Markets Work

Order How Factor Markets Work
Order How Factor Markets Work
Question 2
The following are among the expected changes in the derived demands:
a) The demand for pipelines, compressors, engineers, geologists, and so on.
b) The demand for doctors, nurses, technicians, hospital construction, prescription drugs,
and so on.
c) The demand for automobiles, roads, buses, gasoline, diesel oil, aircraft, pilots, bus
drivers, hotels, and so on.
d) The demand for computers, computer programmers, computer-science degrees, and so
Question 4
a) demand curve b) inelastic c) inelastic
d) shift to the right
e) marginal product (MP); shift up (or to the right); shift up (or to the right)
Question 6
a) See the diagram below. (Note that the MRP is shown at the mid-points of the number
of workers to show that it is associated with the change in the factor input.)
© 2005 Pearson Education Canada Inc.
b) At a wage of $10 per hour, the firm should hire up to the 10th worker but should stop at
that point.
c) At a wage of $5 per hour, the firm should hire up to the 11th worker, but stop at that
Order How Factor Markets Work
d) At a wage of $20 per hour, the firm should hire up to the 8th worker (who has an MRP
of exactly $20).
e) Since the firm’s profit-maximizing rule is to hire labour up to the point where MRP
equals the wage, the MRP curve shows the firm’s optimal level of employment at any
given level of the wage. Thus the MRP curve is the firm’s labour-demand curve.
Question 8
b) Canada is a relatively small share of the world market for ocean liners. A rise in the price
paid in Canada would cause some ocean liners to redirect their supply away from other
countries toward Canada. The third figure shows this.
c) An individual Canadian firm is tiny relative to the overall market and so that firm faces a
given price of ocean liners. It can purchase all the ocean liners it can afford at that world
price. This perfectly elastic supply is shown in the first figure.
d) The more mobile is a factor toward a particular use, the more elastic is the supply of that
factor for that particular use.
Question 10
a) Probably most of the rental payment received by a landlord is not an economic rent. He
probably needs most of this to induce him to keep the building in repair and to replace it
when it wears out.
b) Probably most of the salary of the prime minister is an economic rent. This supposes
that politicians who have sought to be prime minister would be willing to serve even if the
salary were much lower.
c) For this question the perspective is important. Imagine that we are interested in knowing
how much of a professional athlete’s or recording artist’s fee for one particular event is
economic rent. In this case, the individual has many alternatives (different days, different
cities, different events) and so perhaps very little of his or her fee is economic rent.
However, if we take a broader perspective and ask how much of their total income as an
athlete or musician is economic rent, then we have to know what that person’s next best
alternative profession is. If Shania Twain’s best alternative was to be, for example, a
lawyer, then even if she was an outstanding lawyer she would make far less than she earns
© 2005 Pearson Education Canada Inc.
as a musician, and thus most of her annual earnings would be economic rent. This is similar
for Tiger Woods.
Order How Factor Markets Work
d) Evidently the window cleaner thinks that, considering monetary and non-monetary
benefits, he is better off in his present occupation than in the alternative that he sees.
Perhaps, therefore, some of his earnings are rent, but it is probable that much of his pay
should be regarded as necessary to keep him in his present occupation. The general point,
of course, is that what constitutes a transfer earning for a particular factor owner depends
on the alternative uses of the factor that he or she is selling and on the non-monetary
benefits as well as the monetary ones.
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