1. Why is the supply curve horizontal for a factor price taker, yet the industry
ID: 1165034 • Letter: 1
Question
1. Why is the supply curve horizontal for a factor price taker, yet the industry supply curve is upward sloping?
A. The marginal physical product associated with the product is insignificant for the firm; therefore, the supply curve is horizontal. For the industry, however, the diminishing marginal product is inversely related to the supply curve.
B. Each firm buys a relatively small portion of a factor; therefore, it takes the factor at whatever price is offered. For the industry, however, higher factor prices must be offered to entice workers from other industries.
C. The supply curve is horizontal for a factor price searcher, not a factor price taker.
D. A firm will buy a factor as long as the marginal factor cost is less than the marginal revenue product, resulting in a horizontal supply curve. For the industry, the marginal factor cost is greater than the marginal revenue product, so the curve is upward sloping.
2. Why is the market demand curve for labor not simply the horizontal summation of firms’ demand curves for labor?
A. The market demand curve for labor is the horizontal addition of firms’ demand curves for labor.
B. The market demand curve for labor is impacted by the elasticity of demand, whereas the demand for labor for an individual firm will be given to the price taker.
C. As the wage rate rises, firms’ costs of production increase, shifting the product supply curve to the left and raising the product price. As price rises, so does the MRP of labor. The market demand curve for labor is therefore steeper than those of individual firms.
D. Wage rates will impact the market demand curve for labor because an increase in wages will result in a decrease in production; this will cause the market demand curve to be flatter than the individual firm’s curve.
3. Which of the following best explains how the least-cost rule relates to a firm’s objective of minimizing costs while fully utilizing its factors?
A. Firms buy goods in the same way consumers buy factors; firms will choose a combination of goods so that marginal utility divided by the price is equal for all.
B. To minimize costs, the firm will rearrange its purchases of factors until the least-cost rule is surpassed.
C. The least-cost rule helps a firm choose combinations of factors that will maximize their utility until the marginal physical product divided by the price is greater for one good than another.
D. The firm will try to achieve its objective by purchasing combinations of factors such that the ratio of marginal physical product to price for one factor equals the ratio of marginal physical product to price for the other factor.
4. What do substitution and income effects have to do with the supply curve of labor?
A. The income effect, which states that as wage rates rise, the individual will want to work more, causes the individual labor supply curve to shift right.
B. The relative strength of the substitution and income effects will determine whether an individual’s supply curve is upward sloping.
C. The substitution effect, which states that as wage rates rise, the demand for leisure will increase, causes the demand curve for leisure time to shift to the right.
D. The substitution and income effects will cause the labor supply curve to shift for an individual.
Explanation / Answer
1. D. A firm will buy a factor as long as the marginal factor cost is less than the marginal revenue product, resulting in a horizontal supply curve. For the industry, the marginal factor cost is greater than the marginal revenue product, so the curve is upward sloping.
2. D. Wage rates will impact the market demand curve for labor because an increase in wages will result in a decrease in production; this will cause the market demand curve to be flatter than the individual firm’s curve.
3 .D. The firm will try to achieve its objective by purchasing combinations of factors such that the ratio of marginal physical product to price for one factor equals the ratio of marginal physical product to price for the other factor.
4. B. The relative strength of the substitution and income effects will determine whether an individual’s supply curve is upward sloping.
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