2010 AP Micro FRQ #2
(A) Using a CLG of the factor market for machines and the John Lamb Company, showing each of the following.
(i) The equilibrium rental price of machines in the factor market, labeled PR.
(ii) John Lamb's equilibrium rental quantity of machines, labeled as QL.
Understand that no matter if machines or labor we label the graphs the same. The college board is just checking to see if you know how to draw the Resource (factor) market graph.
Resource (Labor) Cheat Sheet here.
You also needed to know that a perfectly competitive (factor) market which will give us that perfectly elastic MRP curve for John Lamb's company.
(B) Assume the popularity for widgets declines decreasing the demand for widgets. What will happen to each of the following?
(i) Marginal product curve for machine hours.
Know what marginal product is:
from the Output and Costs, Cheat Sheet, here.
This is tricky - understand that MP doesn't change for machines. The first machine makes 10 widgets an hour, the second machine makes 10 widgets and hour and so on...
(ii) Marginal Revenue Product curve for machine hours. Explain.
The MRP will decrease. As the demand for machines decreases, the price for the machines will fall. Since the formula for MRP = MP x P (of the good) and price of the good (widgets) decreases because the demand falls. The MRP shifts left.
From the Resource Costs Cheat sheet:
(C) John Lamb is employing the cost-minimisation combination of inputs (labor/machines). The marginal product of labor is 28 widgets per worker hour and the wage-rate is $14 an hour. The
marginal product of the machine is 60 widgets per hour. What is the rental price per hour?
I did a blog post specifically on Least Cost Rule here.
Understand that the price of labor is the wage (MRC)