Namrata Vannemreddy

Jan. 7, 2021
Pd. 2

4 Microeconomics
UNIT

LESSON 3 I ACTIVITY 47

Factor Market Pricing

Suppose that the Acme Belt Company (ABC) is a price taker in both the input and output markets—
that is, it sells belts in a perfectly competitive market and purchases labor in a perfectly competitive
market.

Part A
1. Fill in the blank spaces in Figure 47.1. Note that marginal data are placed between levels of
employment.

Figure 47.1
Labor Demand for the Perfectly Competitive Firm
Employment Total Output Marginal Physical Marginal Revenue Product
Number of Workers Per Day Product (MPP) (MPP × P)
(L) (Q) (ΔQ / ΔL) PB = $2.00 PB = $2.50
0 0 — —
1 10 10 $20.00 25.00
25
2 30 20 40.00 50
3 70 40 $80 100.00
4 105 35 70.00 87
5 135 30 60.00 75
6 160 25 $50 62.50
7 180 20 40.00 50.00
8 195 15 $30 37.50
9 205 10 20.00 25
10 205 0 $0 0
11 195 –10 -$20 -25

An individual firm’s factor demand curve is restricted to a range of the MRPL curve that is down-
ward sloping, beginning at L = 3 for ABC.

2. If the marginal resource cost, or wage, faced by ABC is $20 and the price of belts is $2 per belt,
9
then the quantity of labor demanded by ABC is __________ .

3. If the marginal resource cost, or wage, faced by ABC is $20 and the price of belts is $2.50 per belt,
9
then the quantity of labor demanded by ABC is __________ .

Activity written by Kelly A. Chaston, Davidson College, Davidson, N.C.

Advanced Placement Economics Microeconomics: Student Activities © National Council on Economic Education, New York, N.Y. 235
 4 Microeconomics LESSON 2 I ACTIVITY 47
UNIT

(continued)

Part B
Now suppose that ABC is one of 1,000 identical firms that purchase labor in this perfectly competi-
tive labor market. To get the market demand curve for labor, we need to sum over each individual
firm’s MRPL curve at each given wage. Given our assumption that the firms are identical, we can
simply multiply the quantity of labor demanded by a single firm by the number of firms in the
market. In Figure 47.2, data are for P = $2.00 and P = $2.50.

Figure 47.2
The Labor Market
P = $2.00
______________________________________ P = $2.50
________________________________________
Number of Number of Number of Number of
Workers Workers Workers Workers
Demanded Demanded Demanded Demanded
By Firm In the Number of By Firm In the Number of
ABC Market Workers ABC Market Workers
Wage (Pb = $2) (Pb = $2) Supplied Wage (Pb = $2.50) (Pb = $2.50) Supplied
$20 9 9,000 3,000 $25.00 9 9,000 3,500
30 8 8,000 4,000 37.50 8 8,000 4,750
40 7 7,000 5,000 50.00 7 7,000 6,000
50 6 6,000 6,000 55.00 6.5 6,500 6,500
60 5 5,000 7,000 62.50 6 6,000 7,250
70 4 4,000 8,000 75.00 5 5,000 8,500
80 3 3,000 9,000 87.50 4 4,000 9,750
100.00 3 3,000 11,000

4. If the wage is $20 and the price of belts is $2 per belt, then the quantity of labor demanded in the
9
market is 1,000 x ___________ 9000
= ___________________ units of labor.

236 Advanced Placement Economics Microeconomics: Student Activities © National Council on Economic Education, New York, N.Y.
 4 Microeconomics LESSON 2 I ACTIVITY 47
UNIT

(continued)

Figure 47.3 shows the market labor supply curve as well as the firm and market demand curves when
PB = $2. The supply curve shows that, ceteris paribus, as the wage increases, more workers are willing
to supply their labor to this market, and existing workers in this market are willing to supply more
labor.

Figure 47.3
Market and Firm Demand for Labor
Market Firm ABC

$80 SL $80
WAGE RATE

WAGE RATE
50 50

Dmkt(PB = $2) MRPL(PB = $2)

1 2 3 4 5 6 7 8 9 1011 1 2 3 4 5 6 7 8 9 1011
THOUSANDS OF WORKERS NUMBER OF WORKERS

5. On the graphs in Figure 47.3 and the table in Figure 47.2, the equilibrium wage in the market is
$50 . The equilibrium quantity of labor in this market is __________
_______ 6000 workers.

6. Given that this is a competitive labor market, ABC faces a marginal resource cost, or wage, of
$50 .
_______

7. Because ABC can purchase as much or as little labor as it wants without affecting the market, it is
said to face a perfectly elastic labor supply curve. Draw the labor supply faced by the firm in the
Firm ABC graph above.

8. Using a different color pen or pencil, graph ABC’s and the market’s labor demand curves in Fig-
ure 47.3, given that the price of a belt has increased to $2.50.

9. Designate the new market equilibrium based on Figure 47.2. The equilibrium wage in the market
$55 . The equilibrium quantity of labor in this market is now _________
is now _______ 6500 workers.

10. What has happened to the labor supply curve faced by the firm? Shifts up to a higher wage rate.

Advanced Placement Economics Microeconomics: Student Activities © National Council on Economic Education, New York, N.Y. 237