AP Microeconomics 5.2: Changes in Factor Markets

Analyze how firm incentives and worker constraints shift labor demand or supply and change the equilibrium wage and employment level.

[Maximum number: 2]

Voda Reservoir is a profit-maximizing firm and the only producer of bottled water in a country.

Currently, Voda Reservoir is earning negative economic profit.

(a)

Voda Reservoir hires workers in a perfectly competitive labor market.

[ 2 ]

(i)

If the demand for bottled water increases, what will happen to Voda Reservoir's demand

for labor? Explain.

[ 1 ]

(ii)

The government implements a new regulation that increases the minimum age required

for a worker to be employed in a bottled-water factory. What will happen to the market

wage in the short run? Explain.

[ 1 ]

Point 9	increase in demand for bottled water will increase the price and marginal revenue of bottled water, increasing the marginal revenue product of labor.
Point 10	State that the market wage will increase in the short run and explain that the new regulation will decrease the supply of workers.	1 point

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PRD-4.B—Explain (using graphs where appropriate) firms’ and factors’ responses to changes in incentives and constraints question 1