Holt 7525-9 S15_IT

Value of the marginal product is the value to society of the output produced by the marginal
factor. VMP equals the price of the product times the MPP of the factor. The VMP of a factor is
always at least as great as the factor’s MRP.
To minimize costs, producers will attempt to combine factors so that the ratio of MPP to factor
price will be the same for all factors.
The elasticity of demand for labor measures the responsiveness of employers to a change in the
wage rate. The three determinants of the elasticity of demand for labor are; (1) the number of
substitute factors, (2) the price elasticity of demand for the product that the labor produces, and
(3) the percentage that labor costs make up of total costs.
For a perfectly competitive labor employer, the labor supply curve will be horizontal. Wage and
marginal factor cost are the same. The labor supply curve in a particular labor market will be
upward sloping. The determinants of labor supply are; (1) wage rates in alternative labor markets,
and (2) nonmoney aspects of a job.
Wage rates in different labor markets differ due to; (1) differences in workers’ MRP, (2)
differences in nonmoney aspects of jobs, (3) rareness of skills required, (4) training costs, and (5)
relocation costs.
Employers seek to hire and promote employees who will be highly productive. Employers do not
have perfect information, so they rely on some type of screening device. A screening device is a
characteristic used by employers as the basis for hiring and promoting employees. An employer
who discovers screening devices that more accurately predict worker productivity will have a
competitive advantage. Some commonly used screening devices are seen as generally legitimate
(work experience, education). These may not always be legitimate and will not always predict
worker productivity accurately. Other screening devices are seen as less legitimate (appearance).
Some screening devices may amount to illegal discrimination (age, race, gender).
Questions for Chapter 24
Fill-in-the-blanks:
1. Marginal ______________________ ______________________ is the change in total
revenue from employing an additional factor unit.
2. Marginal ______________________ ______________________ is the additional cost from
employing an additional factor unit.
3. A ______________________ ______________________ is a characteristic used by
employers as the basis for hiring and promoting employees.
Multiple Choice:
___ 1. If the demand for dog grooming increases, the demand for dog groomers will
____________________ and their wage rate will ____________________ .
a. increase, increase
b. decrease, decrease
c. increase, decrease
d. decrease, increase
___ 2. Due to the law of diminishing marginal returns:
a. marginal revenue product will eventually decline
b. the marginal revenue product curve will eventually slope downward
c. Both of the above
d. Neither of the above
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Factor Markets 24 - 10