Written Assignment 4

Written Assignment 4/Jimmy Morgan-Principles of Microeconomics – N. Gregory Mankiw- Fifth Edition – ISBN 0324-58998-0) Written Assignment 4

Answer all of the following questions. Title your assignment "Written Assignment 3," unless your mentor directs otherwise. This assignment covers text chapters 15 through 22. 1. Labor is the only input used by a perfectly competitive firm. It It hires workers for $50 a day. The firm's production function is as shown in the following following Table. Each unit of output sells for $10. a. Complete the table to show the marginal product of labor and the value of the marginal product of labor. b. How many days of labor should the firm hire? Explain. The firm should hire no more than four days of labor because on the fifth day of labor, the firm earns a loss in profit of $20.00. The fifth day yields a marginal product of labor of only $30.00 hence paying a wage of $50.00 will end with a marginal profit of -$20.00. correct Days of

Units of Daily

Marginal Product

Value of the

Labor

Output

of Labor

Marginal Product of Labor

0 1 2 3 4 5 6

0 7 13 19 25 28 29

7 * 10 6 * 10 6 * 10 6 * 10 3 * 10 1 * 10

70 60 60 60 30 10

2. Describe the factors of production. What are the returns to these factors (their price)? Describe the marginal products of each factor and how the value of the marginal product of each factor is determined. . Factors of production are the the resources used to produce a good or service like “land, labor, and capital” (Mankiw, 5 th Ed. Pg 392.), just to name a few. Factors of production allow or facilitate the production of goods or services however they are not part of the final product like a piece of metal for an an example. Labor is the human mental and or physical exertion into the production of a product whereas a certain wage is paid for this effort. Land is everything in the the world that is not created by a human. This includes the air, sunlight, trees, water and minerals. Capital is the the physical products that are produced by the labor that is exerted during the production of the goods and services. The price/return of labor is the wages that are paid to to the workers who exert the energy to produce the goods and service. The price of land is the amount paid to rent or buy the office space

Written Assignment 4/Jimmy Morgan-Principles of Microeconomics – N. Gregory Mankiw- Fifth Edition – ISBN 0324-58998-0)

or building used in the production or sale of the product or service. Lastly, capital price is the money spent on the desks, chairs and other equipment needed in the production of the final product. All three earn their marginal contribution to the production process. The marginal product of labor is determined by the amount total output that will be produced by increasing the amount of workers. A firm will base its decision to hire additional units of labor using the marginal decision making rule that is, if the extra output that is produced by hiring one more unit of labor adds more to total revenue than it adds to total cost, the firm will increase profit by increasing its use of labor. Therefore, it is profitable for the firm to hire more labor since additional labor. The marginal product of land and capital are determined by the supply and demand. Meaning the rental price of land and the rental price of the capital should equal the value of the marginal product correct 3. Describe the process by which the market for capital and the market for labor reach equilibrium. What happens to each if demand for the final product were to increase? Why? During the equilibrium process of market for capital and labor, the wage and quantity of labor adjusts to balance supply and demand. What this means is each firm will hirer as many workers as necessary as long as it is profitable to do so at the equilibrium wage or until the marginal product equals the wage that workers are paid. If the demand of the final product were to increase, this would cause the equilibrium wage and the value of the marginal product to increase by the same amount so they can be equal. In other words, an increase in the demand for a product increases its price and increases the demand for factors that produce the product. For an example, a higher price for airplanes increases the marginal revenue product of labor of airplane assembly workers and therefore increases the demand for these workers and the material needed to manufacture airplanes.

correct

4. Do consumers play a role in perpetuating discrimination in labor markets? If so, how? If not, explain the reasoning for your answer. Yes, one way of interpreting this is that consumers with discriminatory preferences have a willingness to pay to avoid contact with a particular type of worker, which in turn can cause firms to hire only a certain type of employee. If white male consumers dislike purchasing goods and services from minorities or females, then the consumer discrimination will reduce the demand for goods and services sold by these workers. Because labor input is a derived


input, if the demand for the final product decreases, so to does the demand for the labor input to decline thereby decreasing the wages paid to minorities and females. correct 5. Explain the concept of diminishing marginal utility. Since all goods are scarce, does diminishing marginal utility contradict the statement that individuals always want more of all goods? Diminishing marginal utility is the concept that describes decreasing desire for more of the same product or service. At any given point, the more one has of a given product, the less satisfaction one receives from each additional unit of that product. For an example, I love Popeye’s Chicken. Whenever I crave it, I immediately find a way to acquire at least three pieces with coleslaw. After the first piece, I am usually not really craving the second as much as I was the first because my taste buds have been satisfied. According to many economists, diminishing marginal utility does contradict a consumer wanting more of the same product or service because in many cases although all goods are scarce, many consumers are quick to throw away or discard scarce good as if they are all plentiful.

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6. Describe each of the four properties of indifference curves. Property indifference curve one represents how consumers usually prefer more of a product than less of it, which place places consumers on a higher indifference curve. Property indifference curve number two represents how a consumer is willing to give one product only if they get more of the other product in so the consumer can be equally satisfied. This means if the quantity of one product is reduced, the quantity of another product has to increase and for this reason, most indifference curves slope downward. This indifference curve demonstrates how consumers are normally happy at all points along a given indifference curve. Property indifference curve three demonstrates how the indifference curves do not cross. For an example, at points A, B, and C the consumer should be equally happy even if point C has more of both products compared to point A. Property indifference four implies that people are more willing to trade away products that they have an abundance of and less willing to trade away goods of which they have little. This property indifference causes the curve to bow inward. correct 7. Describe and explain the budget constraint. How does a consumer maximize utility under a given budget constraint? How do consumers know if they are not maximizing utility? Budget constraint demonstrates the combination of goods and services a consumer can afford with a limited budget at given prices. Change in a consumer’s income will cause the budget constraint to shift, while a change in price will cause the budget constraint to rotate. The consumer maximizes utility by choosing the point on his or her budget constraint curve that lies on the highest indifference curve, which is the optimum point. This is where the slope of the indifference curve equals the slope on the


budget constraint curve. A consumer will know if he or she is not maximizing their utility if with every additional good purchased, their total utility becomes negative. correct 8. Explain what is meant by "asymmetric information." Identify and explain the two basic types of problems that arise when there is asymmetric information. Asymmetric information is defined as one group involved in a transaction has more or superior information than another. This normally happens when a seller of a product knows more than the buyer of the product. On occasions, these situations can be dangerous because the seller can take advantage of the buyer’s lack of knowledge about the product. One of the problems that arise from this is immoral behavior takes affect before a transaction is completed. Example is a person who is in need of purchasing an automobile may be more inclined to quickly purchase a lemon before a person who already owns a vehicle and is only searching for a second mode of transportation. Then there is the immoral behavior that takes affect after a transaction. For example, if a person has fire insurance, they are more likely to commit arson on their home or unwanted auto to reap the benefits of the insurance.

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9. Explain the Condorcet Paradox, the failure of majority rule to produce transitive preferences for society. Explain Arrow’s impossibility theorem. What does this say about society's choices? Condorcet believed that the purpose of voting was to make a choice was best for society. According to Condorcet, one choice was first best; another choice was second best, another choice was third best, and so on. The Condorcet Voting Paradox demonstrates how the democracy voting systems do not always choose the outcome that the society really wants. He determined that collective choices could be cyclic even if the choices of individual voters are not. For an example, suppose we have three candidates, D, E, and F and there are three voters with preferences as like (Voter 1: D, E, F); (Voter 2: E, F, D), and (Voter 3: F, D, E). If F is chosen as the winner, there can be an argument that E should be instead, since two voters (1 and 2) prefer E to F and only one voter, prefers F to E. At the same time, an argument could be that D is preferred to E, and F is preferred to D, by margin of two to one on each occasion. This is a paradox because the majority wishes are in conflict with each other. This occurs because the majorities are made up of different groups of individuals. Arrow’s Impossibility Theorem proved “mathematically and incontrovertibly” (Mankiw, 5 th Ed.), that when there are three or more candidates for an example, there is no procedure (voting system) that satisfies all four of the axioms (unanimity, transitivity, independence of irrelevant alternatives, and no dictators). What this means is that no voting system can convert the ranked preferences of


individuals into a community-wide ranking while also meeting a certain set of criteria when they have three or more options from which to choose. Both theories demonstrate our society’s inability to make the correct choice if given more than two choices to choose from that would be best for the entire society. correct 10. When prices change, the income effect and substitution effect both contribute to the impact on quantities consumed. Explain how both affect a consumer's utility maximization. According to the law of demand, when the price of goods changes, the amount of the good a consumer is willing to buy changes as well in the opposite direction. What this means is when the price of a good rises, the money that a consumer has budgeted for consumption has a lower purchasing power. Even though a consumer’s budget has not changed, the price increase makes it as if his or her budget has decreased, just like a decrease in the consumer’s income. The way the consumer responds to this altering of purchasing power is referred to as the income effect. With the substitution effect, the consumer, taking into account the new relative prices, switches between goods in order to keep his or her overall level of satisfaction unchanged. The purpose of utility maximization is obtaining the highest level of utility from the consumption of goods and services. When there is a change in the price of a good or service, consumers are assumed able to still choose the highest possible level of satisfaction while maximizing utility however at times they do not. correct

Written Assignment 4

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