Even if a farmer owns her tractor her opportunity cost of using it is the rental rate because if she didnt use it she could rent it out to another farmer at that rate The rental rate ID: 1028013
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1. When to Rent and Buy
2. Demand in the Markets for Land & CapitalEven if a farmer owns her tractor, her opportunity cost of using it is the rental rate because if she didn’t use it, she could rent it out to another farmer at that rate. The rental rate of either land or capital is the cost, explicit or implicit, of using a unit of that asset for a given period of time.
3. Equilibrium in Capital MarketsThe equilibrium marginal revenue product of a factor is the additional revenue generated by the last unit of that factor employed in the factor market as a whole. When studying competitive factor markets remember that all inputs are paid the equilibrium marginal revenue product in that market.
4. Economic RentEconomic rent is the payment to a factor of production in excess of the minimum payment necessary to employ that factor. As we will see in the next figure, Economic rent is similar to producer surplus, but it is applied to factor markets (whereas producer surplus applies only to product markets).
5. Economic RentSo if you owned this building and were willing to rent it for $10,000 a month but someone offered you $15,000Your Economic rent would be $5,000
6. Marginal Productivity TheoryIf the labor market for pastry chefs is in equilibrium, the wage rate earned by pastry chefs equals the market’s equilibrium marginal revenue product (the marginal revenue product of the last pastry chef hired in that market). According to the marginal productivity theory of income distribution, every factor of production is paid the equilibrium marginal revenue product.
7. How much would you have to be paid to do this jobThe Market for Labor
8. Wages and Labor SupplyThe supply of labor is subject to the following two effects when wages change:Substitution effect: at a higher wage, work becomes more valuable than leisure, so workers work moreIncome effect: at a higher wage, leisure is more affordable, so workers work less
9. Work Versus LeisureLeisure is time available for purposes other than earning money to buy marketed goods. Since there are only 24 hours in a day, supplying labor requires workers to forego leisure. For this and other reasons, the labor market differs from markets for goods and services.
10. Shifts of the Labor Supply CurveA change in any factor other than the wage that alters workers’ willingness to supply labor shifts the market labor supply curve. Changes that shift the market labor supply curve include:Changes in preferences and social normsChanges in populationChanges in opportunitiesChanges in wealth
11. Equilibrium in the Labor MarketSo labor is paid its equilibrium marginal revenue product (the marginal revenue product of the last worker hired in the labor market as a whole). The equilibrium wage is W*, the equilibrium employment level is L*, and producers hire labor up to the point at which MRPL = MRC.
12. When the Labor Market Isn’t Perfectly CompetitiveA monopsonist is a single buyer in a factor market. A market in which there is a monopsonist is a monopsony.
13. When the Labor Market Isn’t Perfectly Competitivethe firm must raise wages and pay everyone more in order to hire more workers in an imperfectly competitive labor market (such as a monopsony). This makes the additional cost of hiring another worker higher than the wage rate.
14. Equilibrium in an Imperfectly Competitive Labor MktThe equilibrium quantity of labor is found where the marginal revenue product of labor equals the marginal factor cost, at L*. The equilibrium wage, W*, is found on the vertical axis at the height of the market supply curve directly above L*.
15. Equilibrium in an Imperfectly Competitive Labor Mkt
16. Summary and ReviewLeisure.1) _____ is time available for purposes other than earning money to buy marketed goods. SubstitutionIncome2) When wages change, labor supply is subject to what two effects? Work becomes more valuable than leisure, so workers work more. 3) Describe the substitution effect of a higher wage.4) Describe the income effect of a higher wage.Leisure is more affordable, so workers work less.
17. Summary and Review6) What are four types of changes that shift the market labor supply curve?How the quantity of labor supplied by an individual depends on that individual’s wage rate. 5) What does the individual labor supply curve show? Changes in preferences and social normsChanges in populationChanges in opportunitiesChanges in wealth
18. Summary and Review7) What is the additional cost of employing an additional unit of a factor of production called? The marginal factor cost. 8) What is a single buyer in a factor market called?Monopsonist. 9) Why is the marginal factor cost of labor curve above the market supply curve in an imperfectly competitive labor market (like monopsony)?Because a firm must raise wages for everyone to hire more workers .
19. Walkthrough: Free-Response Question 11 point: The firm is a price-taker in the labor market. (It can hire all that it wants for $80 per day.)1. Assume the demand curve for a firm’s product is as shown below and that the firm can hire as many workers as it wants for a wage of $80 per day. a. What is the market structure of the factor market in which the firm hires labor? Explain. b. What is the market structure of the product market in which the firm sells its output? Explain. c. Define marginal factor cost. What is the marginal factor cost of labor for this firm? d. If the last worker hired produces an additional 20 units of output, what is the last worker’s MRPL? Explain. (8 points) 1 point: The firm hires labor in a perfectly competitive labor market. 1 point: The firm sells its output in a perfectly competitive product market. 1 point: The horizontal demand curve indicates that the firm is a price-taker in the product market (it can sell all the output it wants at the market price of $5). 1 point: the additional cost of hiring one more unit of a factor 1 point: $801 point: $1001 point: MRPL = MPL × MR, MPL = 20, MR = $5, so MRPL = 20 × $5 = $100.
20. Summary and ReviewThe explicit or implicit cost of using a unit of an asset for a given period of time. 1) Define the rental rate of land or capital.The additional revenue generated by the last unit of a factor employed in the factor market as a whole. 2) Define the equilibrium marginal revenue product.Economic rent. 3) What is the payment to a factor of production in excess of the minimum payment necessary to employ that factor?
21. Summary and Review4) What does the marginal productivity theory of income distribution say? Every factor of production is paid the equilibrium marginal revenue product.
22. Walkthrough: Free-Response Question 11. Refer to the table below. Assume that the rental rate for capital is $100 per unit and the price of the product is $10. a. What is the MRP of the 2nd unit of capital? b. Will the firm employ the 2nd unit of capital? Explain. c. How many units of capital will the firm hire? Explain. (5 points) 1 point: MRP = 25 × $10 = $2501 point: Yes, they will employ the second unit.1 point: Because the MRP of $250 is greater than the rental rate of $100 1 point: 31 point: Because the MRP exceeds the rental rate for the first 3 units