Assignment #5 – Questions

Question 1 – 35%
The Apple Pie Factory produces apple pies. The firm sells its product and hires its workers in
competitive markets. The market price (p) for a pie is $4 and the wage rate (w) is $10 per hour.
The table below shows the total hourly production (Q) for varying amounts of workers (L).
(Remember that for a price-taking firm, p = MR.)

L Q w p MP MRP
4 40
5 48
6 55
7 61
8 66
9 70
10 73
11 75
12 76

a. Fill in the p and w columns. (6 marks total – 3 marks each column)

b. Calculate the MP and the MRP for each amount of labour employed. (6 marks total – 3
marks each column)
c. What is the logic of the firm’s profit-maximizing condition for hiring labour? (2 marks)
d. How many workers should this profit-maximizing firm hire? Why? (4 marks)

Question 2 – 35%
Refer back to the production schedule for the Apple Pie Factory in Question 1.
a. On a diagram, with MRP on the vertical axis and the number of workers on the horizontal
axis, plot the MRP curve. (Make sure 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.). (11 marks)
b. If the wage is $10 per hour, how many workers will be hired? Why? (2 marks)
c. If the wage is $5 per hour, how many workers will be hired? Why? (2 marks)
d. If the wage is $20 per hour, how many workers will be hired? Why? (2 marks)
Question 3 – 30%
Economists argue that temporary factor-price differentials tend to be eroded by factor mobility.
Consider the two markets for sheet-iron workers and steel-pipe workers in the same region.
Suppose both markets are competitive. We begin in a situation in which both sheet-iron
workers and steel-pipe workers earn $20 per hour. Assume that workers can switch easily
between the two jobs.
a. Draw 2 separate diagrams showing the supply and demand for labour in each of the two
markets – sheet-iron market and steep-pipe market.(4 marks total – 2 marks each)
b. Now suppose there is a sharp increase in the demand for steel pipe. Explain in words and
also illustrate on your graph in part (a) what happens in the market for steel-pipe workers. (4
marks)
c. If the employment of steel-pipe workers increased in part (b), explain where the extra
workers came from. (2 marks)
d. What effect does the event in part (b) have on the market for sheet-iron workers? Explain
your answer in words and illustrate on your graph drawn in part (a). (4 marks)
e. What is the long-run effect of the shock on the relative wages in the two types of jobs? (1
marks)