Question & Answer

Which of the above causes are reflected in differences in the marginal revenue product of factors?

List the reasons for each of the three factors above. (Re-read section 10.2 and Box 10.7 if you need help.)

If fringe benefits (such as long holidays, company cars, free clothing/uniforms, travel allowances and health insurance) were included, do you think the level of inequality would increase or decrease? Explain why.

1. Why do you think that the ratios for developing countries are lower than those for developed countries?

2. Make a list of reasons why the ratios of the bottom 40 per cent to the top 20 per cent may not give an accurate account of relative levels of inequality between countries.

3. What would the ratio be if national income were absolutely equally distributed?

In which country in Figure 11.5 would you expect to find the highest proportion of poor people? Describe how income is distributed in the two cases.

1. What price would the same piece of land sell for if it still earned £1000 rent per year, but if the rate of interest were now (a) 5 per cent; (b) 20 per cent?

2. What does this tell us about the relationship between the price of an asset (like land) and the rate of interest?

1. We defined the factor of production ‘land’ to include raw materials. Does the analysis of rent that we have just been looking at apply to raw materials?

2. The supply of land in a particular area may be totally inelastic, but the supply of land in that area for a specific purpose (e.g. growing wheat) will be upward sloping: the higher the price of wheat and thus the higher the rent that wheat producers are prepared to pay, the more will be made available for wheat production. Using the concept of transfer earnings, what will determine the elasticity of supply of land for any particular purpose?

What other factors will determine the MPP of land for industry?

Would the stock market be more efficient if insider dealing were made legal?

Can a perfectly competitive firm earn a supernormal rate of return on capital if it continuously innovates?

What is the present value of a machine that lasts three years, earns £100 in year 1, £200 in year 2 and £200 in year 3, and then has a scrap value of £100? Assume that the rate of discount is 5 per cent. If the machine costs £500, is the investment worthwhile? Would it be worthwhile if the rate of discount were 10 per cent?

What will happen to the demand for capital services and the equilibrium rental if the price of some other factor, say labour, changes? Assume that wage rates fall. Trace through the effects on a three-section diagram like that of Figure 10.13. (Clue: a fall in wages will have two significant effects: it will reduce costs and hence the price of the product, so that more will be sold; and it will make labour cheaper relative to capital. How will these two things affect the demand for capital?)

If supply is totally inelastic, what determines the rental value of capital equipment in the short run?

Assume now that the firm has monopoly power in hiring out equipment, and thus faces a downward-sloping demand curve. Draw in two such demand curves on a diagram like Figure 10.13(b), one crossing the MC curve in the horizontal section, and one in the vertical section. How much will the firm supply in each case and at what price? (You will need to draw in MR curves too.) Is the MC curve still the supply curve?

Under what circumstances would the market demand for renting a type of capital equipment be

(a) elastic;

(b) inelastic?

When we were looking at wage rates, were we talking about the price of labour or the price of labour services? Is this distinction between the price of a factor and the price of factor services a useful one in the case of labour? Was it in Roman times?

What effect will the discrimination by the firm have on the wages and employment of black workers in other firms in the area if

(a) these other firms discriminate against black workers;

(b) they do not discriminate?

Recall the various strategies that rival oligopolists can adopt. What parallels there are in union and management strategies?

If the negotiated wage rate were somewhere between W₁ and W₂, what would happen to employment?

Which of the following unions find themselves in a weak bargaining position for the above reasons?

(a)  The shopworkers’ union (USDAW).

(b)  The tube and train drivers’ union (ASLEF).

(c)  The farm workers’ union (part of Unite).

1. The following table shows data for a monopsonist employer. Fill in the missing figures. How many workers should the firm employ if it wishes to maximise profits?

2. Will a monopsony typically also be a monopoly? Try to think of some examples of monopsonists that are not monopolists, and monopolists that are not monopsonists.

For each of the following jobs, check through the above list of determinants (excluding the last), and try to decide whether demand would be relatively elastic or inelastic: firefighters; telesales operators; app developers; bus drivers; accountants; farm workers; car workers.

What will determine the elasticity of this curve?

Why is the MC_L curve horizontal? 

1. Assume that there is a growing demand for computer programmers. As a result more people train to become programmers. Does this represent a rightward shift in the supply curve of programmers, or merely the supply curve becoming more elastic in the long run, or both? Explain.

2. Which is likely to be more elastic, the supply of coal miners or the supply of shop assistants? Explain.