Saturday, April 4, 2015

2014 AP Microeconomics FRQ #2

2014 AP Microeconomics FRQ #2

Oh! I just love me 
some unskilled labor.

(a) Using correctly labeled side-by-side graphs for the labor market and Ray's Stable, show each of the following.
(i) The equilibrium wage and quantity for unskilled labor.
(ii) The wage paid by Ray's Stable and the quantity of unskilled labor hired.

(b) Is the MFC of unskilled labor for Ray's Stable greater than, less than, or equal to WE?

If you were able to draw the graph above then it seems fairly straight forward that the equilibrium rate of pay for unskilled employees is equal. The explain,, part of this question is the fact that Ray's Stable is in the perfectly competitive factor market (factor as in employee) and perfectly competitive as in Ray's is a wage taker and can't pay more or less than the market wage rate as the market sets the price of wages.

Answer - wage rates are equal in the market and at Ray's, and the wage rate is set by the market as Ray is a wage taker.

(c) Now assume the government imposes a minimum wage for unskilled labor.
(i) Show the minimum wage & quantity for unskilled labor.

You must understand that a minimum wage is a price floor (floors are high) and that to be binding (effective) it must be drawn above equilibrium... (as minimum wage below the market equilibrium will not effect the employees wages)

What we know about price floors is that they cause a surplus,, at the higher price less employees are demanded but more will be supplied.

(ii) On the labor market graph in part (a) show the quantity of unskilled labor supplied in the labor market as a result of the new minimum wage, labeled Qs.

(iii) As a result of the new minimum wage, will the marginal revenue product (MRP) of the last worker hired by Ray's Stable increase, decrease, or stay the same?

So 1st off,, I don't like this question. It's a literal question,, as in look at the graph. Are we travelling up the MRP curve as we fire people... Yes... If we fire the fifth worker,, the 4th worker hired would have a higher MRP.

Does that workers MRP (the 4th) change??? Does it really increase??? or is it just higher?

What we do know is that the 4th worker has a higher MRP...

What we also know,, is that 75% of students missed this question.

I think if they had used the word (higher) instead of increase there would have been less confusion.
As in the 4th workers MRP is clearly higher but it didn't increase..

Answer - the MRP of the next worker hired increases

Perhaps,, that should be a fallback response,, if in doubt look at the graph.