Study Guide

Chapter 12: The Labor Market

1. Explain why the study of factor markets is important.

2. Explain two reasons why labor is different from other things that are traded.

3. List the characteristics of a perfectly competitive labor market and explain why this model is used so often to answer questions about the labor market.

4. Explain why the demand for labor is a derived demand.

5. Explain how a firm determines how much of a resource it should employ.

6. Explain why each firm in a competitive labor market is a wage taker.

7. Define the marginal revenue product of labor (MRP), and explain why MRP first rises and then falls as more labor is employed.

8. Use the marginal approach to profit to find the profit-maximizing employment level for a perfectly competitive firm when labor is the only variable input.

9. List the variables that cause the labor demand curve to shift and explain the effects of an increase and decrease in each one.

10. Use the concept of a reservation wage to explain the decision to enter the labor force.

11. Explain why the market labor supply curve is upward sloped.

12. List and explain the variables that cause the labor supply curve to shift.

13. Define the short run and the long run in labor markets, and explain why the long-run labor supply curve is flatter than the short-run labor supply curve.

14. Describe how the short-run and long-run responses to a shift of labor demand differ.

15. Explain why the wage sometimes fails to adjust to its equilibrium value, leading to a shortage or surplus.

1. [Appendix] Define pure monopsony and explain how a monopsonist decides how much labor to employ (or what wage to pay).