Labor is the only input used by a perfectly competitive firm. It hires workers for $50 a day. The firm’s production
function is as shown in the following Table. (The table will open in a new window.) Each unit of output sells for $10.
- Complete the table to show the marginal product of labor and the value of the marginal product of labor.
- How many days of labor should the firm hire? Explain.
- 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. - 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? - Do consumers play a role in perpetuating discrimination in labor markets? If so, how? If not, explain the reasoning for
your answer. - 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? - Describe each of the four properties of indifference curves.
- 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? - Explain what is meant by “asymmetric information.” Identify and explain the two basic types of problems that arise
when there is asymmetric information. - 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? - 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.
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