Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

296 INPUT PRICING AND EMPLOYMENT [CHAP. 13
D a and S a intersect at point E 0 . Therefore, the market equilibrium P a ¼ $20 and Q a ¼ 800 units (see
Fig. 13-11). At P a ¼ $20, each of the 100 identical firms using input A will hire eight units of input A
(point E on d a ). Fig. 13-11
13.8 (a) In Problems 13.4(b), 13.5(a), and 13.7, we have identified three different curves, each giving
the firm’s demand curve for input A under a specific set of circumstances. Explain under what condition
each curve represents the firm’s demand curve for input A. (b) Does the MRP a determine the
equilibrium P a ? What income do inputs receive when a perfectly competitive firm in both the
product and input markets is in long-run equilibrium?
(a)
(b)
The MRP a curve of Problem 13.4(b) is the firm’s short-run demand curve for input A when input A is the
firm’s only variable input and the firm is a perfect competitor in the product market; d a in Problem 13.5(a)
is the firm’s long-run demand curve for input A when only the internal effect on the firm resulting from
the change in P a is considered; d a in Problem 13.7 [derived from d a and da 0 of Problem 13.6(a)] is the
firm’s long-run demand curve for input A showing both the internal and external effects on the firm resulting
from the change in P a . It is the straightforward horizontal summation of these d a that gives us the D a of
Problem 13.7.
The MRP a only helps us define D a . The equilibrium P a is determined at the intersection of D a and S a . When in
long-run equilibrium, the perfectly competitive firm in both the product and input markets will pay each input
a price equal to the MRP of the input. Thus the entire output of the firm is exhausted, and just exhausted, and
so the firm breaks even. In any event, an understanding of the determinants of input prices is very important
since in a free-enterprise economy input prices are an important determinant of consumers’ incomes and the
organization of production.
13.9 (a) Draw a backward-bending supply curve of an individual’s labor services, (b) explain how the substitution
effect operates along such a curve, (c) explain how the income effect operates along such a
curve, and (d ) with the aid of the figure in part (a) and utilizing the concepts of the substitution and
income effects of parts (b) and (c), explain why the supply curve of an individual’s labor services
might be backward-bending.
Fig. 13-12