Chapter18 TheMarketsfortheFactorsofProduction

MULTIPLECHOICE 1. Whichofthefollowingbestdescribestheeconomysstockofequipmentandstructures? a. capital b. aggregatedemand c. longterminventory d. aggregatestock ANSWER:a. capital TYPE:MDIFFICULTY:1SECTION:18.1 2. Rent,interest,andprofitareallformsofincomepaidtotheownersof a. aggregatestock. b. aggregatedemand. c. firmsandnonforprofitorganizations. d. landandcapital. ANSWER:d. landandcapital. TYPE:MDIFFICULTY:1SECTION:18.1 3. Thefactorsofproductionarebestdefinedasthe a. outputproducedfromrawmaterials. b. inputsusedtoproducegoodsandservices. c. wagespaidtotheworkforce. d. goodsandservicessoldinthemarket. ANSWER:b. inputsusedtoproducegoodsandservices. TYPE:MDIFFICULTY:1SECTION:18.1 4. Foracomputersoftwarefirm,capitalcouldbethoughtofas (i) thefirmscomputerprogrammers. (ii) thewagesthefirmpaystoitscomputerprogrammers. (iii) computerequipment. a. (i)only b. (ii)only c. (iii)only d. (i)and(iii) ANSWER:c. (iii)only TYPE:MDIFFICULTY:1SECTION:18.1 5. Foraretailgasolinestation,whichofthefollowingwouldqualifyascapital? (i) thegastanksandpumps (ii) theserviceattendantstime (iii) theplotoflandonwhichthestationsits a. (i)only b. (iii)only c. (i)and(iii) d. (ii)and(iii) ANSWER:a. (i)only TYPE:MDIFFICULTY:1SECTION:18.1

41

42 3 Chapter 18/The Markets for the Factors of Production

6. Becauseafirmsdemandforafactorofproductionisderivedfromitsdecisiontosupplyagoodinthemarket,we callthistypeofdemand a. differentiateddemand. b. secondarydemand. c. deriveddemand. d. hybriddemandsupply. ANSWER:c. deriveddemand. TYPE:MDIFFICULTY:1SECTION:18.1 7. MostofthetotalincomeearnedintheU.S.economyisultimatelypaidtohouseholdsintheformof a. profit. b. rent. c. interest. d. wages. ANSWER:d. wages. TYPE:MDIFFICULTY:1SECTION:18.1 8. IntheUnitedStateseconomy,whichofthefollowingfactorsofproductionisconsideredtobethemostimportantin termsofthemagnitudeofincomeearnedbythatfactorofproduction? a. land b. labor c. profit d. capital ANSWER:b. labor TYPE:MDIFFICULTY:1SECTION:18.1 9. Thebasictoolsofsupplyanddemandapplyto a. marketsforgoodsandservicesandtomarketsforlaborservices. b. marketsforgoodsandservicesbutnottomarketsforlaborservices. c. marketsforgoodsandservicesbutnottomarketsforfactorsofproduction. d. allmarketsexceptthoseinwhichdemandisaderiveddemand. ANSWER:a. marketsforgoodsandservicesandtomarketsforlaborservices. TYPE:MDIFFICULTY:2SECTION:18.1 10. Labormarketsaredifferentfrommostothermarketsbecauselabordemandis a. representedbyaverticallineonasupplydemanddiagram. b. representedbyanupwardslopinglineonasupplydemanddiagram. c. suchanelusiveconcept. d. derived. ANSWER:d. derived. TYPE:MDIFFICULTY:1SECTION:18.1 11. Whichofthefollowingbestillustratestheconceptofderiveddemand? a. Anincreaseinthewagesofautoworkerswillleadtoanincreaseinthedemandforrobotsinautomobile factories. b. Anautomobileproducer'sdecisiontosupplymorecarswillleadtoanincreaseinthedemandforautomobile productionworkers. c. Anautomobileproducer'sdecisiontosupplymoreminivansresultsfromadecreaseinthedemandforstation wagons. d. Anincreaseinthepriceofgasolinewillleadtoanincreaseinthedemandforsmallcars. ANSWER:b. Anautomobileproducer'sdecisiontosupplymorecarswillleadtoanincreaseinthedemandfor automobileproductionworkers. TYPE:MDIFFICULTY:2SECTION:18.1

Chapter 18/The Markets for the Factors of Production 3 43

12. Thetermfactormarketappliestothemarketfor a. labor. b. capital. c. land. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:1SECTION:18.1 13. Factormarketsaredifferentfromproductmarketsinanimportantway,because a. equilibriumistheexception,andnottherule,infactormarkets. b. thedemandforafactorofproductionisaderiveddemand. c. thedemandforafactorofproductionislikelytobeupwardsloping,inviolationofthelawofdemand. d. Alloftheabovearecorrect. ANSWER:b. thedemandforafactorofproductionisaderiveddemand. TYPE:MDIFFICULTY:2SECTION:18.1 14. HowmuchoftheincomeintheUnitedStatesisintheformofwagesandfringebenefits? a. morethan90percent b. about75percent c. about50percent d. lessthan75percent ANSWER:b. about75percent TYPE:MDIFFICULTY:1SECTION:18.1 15. Factormarketanalysiscouldnotbecompletewithoutsomecharacterizationof a. productmarketdemand. b. themarginalproductivitiesofthedifferentfactors. c. marketpricesforfinalgoodsandservices. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.1 Usethefollowinginformationtoanswerquestions16through22. GertrudeKelpownsthreeboats,whichparticipateincommercialfishingforfreshPacificsalmonoffthecoastofAlaska. Aspartofherbusinessshehiresacaptainandseveralcrewmembersforeachboat.InthemarketforfreshPacificsalmon, therearethousandsoffirmslikeGertrudes.WhileGertrudeusuallycatchesasignificantnumberoffisheachyear,her contributiontotheentireharvestofsalmonisnegligiblerelativetothesizeofthemarket. 16. Basedonthegiveninformation,itislikelythatGertrudesfirmhas a. someinfluenceoverthewagespaidtocrewmembers,butnoinfluenceoverthepriceofsalmon. b. someinfluenceoverthepriceofsalmon,butnoinfluenceoverthewagespaidtocrewmembers. c. someinfluenceoverboththepriceofsalmonandoverthewagespaidtocrewmembers. d. noinfluenceovereitherthepriceofsalmonoroverthewagespaidtocrewmembers. ANSWER:d. noinfluenceovereitherthepriceofsalmonoroverthewagespaidtocrewmembers. TYPE:MDIFFICULTY:2SECTION:18.1 17. WhenGertrudeparticipatesinthelabormarkettohirecrewmembersforherboats,sheismostlikelyconsidereda a. demanderoflaborservices. b. supplieroflaborservices. c. buyerofcapital. d. demanderofcapital. ANSWER:a. demanderoflaborservices. TYPE:MDIFFICULTY:1SECTION:18.1

44 3 Chapter 18/The Markets for the Factors of Production

18. IfthepriceoffreshPacificsalmonweretodecreasesignificantly,itismostlikelythatGertrudewould a. reduceherdemandforcrewmembers. b. trytoincreasehercatchtomakeupforlostrevenue. c. becomeasellerinatleastonefactormarket. d. hiremorecrewmembers. ANSWER:a. reduceherdemandforcrewmembers. TYPE:MDIFFICULTY:2SECTION:18.1 19. IfGertrudeisacompetitorinboththefreshPacificsalmonmarketandinthemarketforcrewmemberssheiscalled aprice a. takerinthesalmonmarketandawagesetterinthecrewmarket. b. takerinthecrewmarketandapricesetterinthesalmonmarket. c. takerinbothmarkets. d. setterinbothmarkets. ANSWER:c. takerinbothmarkets. TYPE:MDIFFICULTY:2SECTION:18.1 20. InthefreshPacificsalmonproductmarketGertrudehascontrolover a. thepriceshechargesforherfreshsalmon. b. thequantityoffreshsalmonthatshecatchesandsuppliestothemarket. c. thecompetitiveenvironmentofthemarket. d. Alloftheabovearecorrect. ANSWER:b. thequantityoffreshsalmonthatshecatchesandsuppliestothemarket. TYPE:MDIFFICULTY:1SECTION:18.1 21. IfGertrudeisapricetakerinthelabormarket,shedecides a. thepriceforwhichshewillsellthefishshecatches. b. howmanycrewmembersshewillhire. c. thewagesthatshewillpaytohercrewmembers. d. Alloftheabovearecorrect. ANSWER:b. howmanycrewmembersshewillhire. TYPE:MDIFFICULTY:1SECTION:18.1 22. LabormarkettheoryassumesthatGertrude'sdemandforcrewmembersandhersupplyoffreshPacificsalmon resultsfromher a. intrinsicdesiretohirecrewmembers. b. primarygoalofmaximizingprofit. c. altruisticmotivestoprovidefreshsalmontoconsumers. d. desiretostrikeabalancebetweenenvironmentalconcernsandmaximumprofit. ANSWER:b. primarygoalofmaximizingprofit. TYPE:MDIFFICULTY:1SECTION:18.1 23. Whenafirmisaprofitmaximizer a. itisdriventoproduceasmuchofitsproductaspossible. b. itwillmeasureitssuccessbythenumberofemployeesithas. c. itsrevenuewillalwaysbemaximizedaswell. d. itdoesnotcaredirectlyaboutthenumberofworkersithires. ANSWER:d. itdoesnotcaredirectlyaboutthenumberofworkersithires. TYPE:MDIFFICULTY:2SECTION:18.1 24. Alongthehorizontalaxisoftheproductionfunctionwetypicallymeasure a. revenue. b. themarginalproductoftheinput. c. thequantityofinput. d. thequantityofoutput. ANSWER:c. thequantityofinput. TYPE:MDIFFICULTY:1SECTION:18.1

Chapter 18/The Markets for the Factors of Production 3 45

25. Themarginalproductoflaborisdefinedasthechangein a. outputperadditionalunitofrevenue. b. outputperadditionalunitoflabor. c. revenueperadditionalunitoflabor. d. revenueperadditionalunitofoutput. ANSWER:b. outputperadditionalunitoflabor. TYPE:MDIFFICULTY:1SECTION:18.1 26. Ifhiringmoreworkersresultsineachadditionalworkercontributingsuccessivelysmalleramountsofoutput,then a. diminishingprofitabilityispresent. b. diminishingmarginalcostispresent. c. diminishingmarginalproductispresent. d. increasingmarginalproductispresent. ANSWER:c. diminishingmarginalproductispresent. TYPE:MDIFFICULTY:1SECTION:18.1 27. Diminishingmarginalproductservestohavewhateffectontheshapeoftheproductionfunction? a. Theslopeoftheproductionfunctiondecreasesasthequantityofinputincreases. b. Theproductionfunctionbecomessteeperasthequantityofinputincreases. c. Theproductionfunctionslopesdownward. d. Theproductionfunctionishorizontalbeyondacertainquantityofinput. ANSWER:a. Theslopeoftheproductionfunctiondecreasesasthequantityofinputincreases. TYPE:MDIFFICULTY:2SECTION:18.1 28. Whendecidingwhethertohireanadditionalworker,firmslookathowtheadditionalworkerwouldaffect a. costsonly. b. revenueonly. c. outputonly. d. profit. ANSWER:d. profit. TYPE:MDIFFICULTY:2SECTION:18.1 29. Thecontributiontoprofitfromanadditionalworkercanbemeasuredbythechangein a. profitBmarginalproduct. b. costBwage. c. revenueBwage. d. profitBwage. ANSWER:c. revenueBwage. TYPE:MDIFFICULTY:2SECTION:18.1 30. Thevalueofthemarginalproductofanyinputisequaltothemarginalproductofthatinputmultipliedbythe a. additionalrevenue. b. marginalcostoftheoutput. c. changeintotalprofit. d. marketpriceoftheoutput. ANSWER:d. marketpriceoftheoutput. TYPE:MDIFFICULTY:2SECTION:18.1 31. Thevalueofthemarginalproductoflaborisequaltothechangein a. marginalcostcausedbytheadditionofthelastworker. b. totalcostcausedbytheadditionofthelastworker. c. totalrevenuecausedbytheadditionofthelastworker. d. totalprofitcausedbytheadditionofthelastworker. ANSWER:c. totalrevenuecausedbytheadditionofthelastworker. TYPE:MDIFFICULTY:2SECTION:18.1

46 3 Chapter 18/The Markets for the Factors of Production

32. Whatistheshapeofthecurvethatrepresentsthevalueofthemarginalproductoflabor? a. Ushaped b. flat c. downwardsloping d. upwardsloping ANSWER:c. downwardsloping TYPE:MDIFFICULTY:2SECTION:18.1 33. Tomaximizeprofit,acompetitivefirmhiresworkersuptothepointofintersectionofthe a. marginalproductcurveandthemarginalcostcurve. b. valueofmarginalproductcurveandthewageline. c. valueofmarginalproductcurveandthemarginalrevenuecurve. d. totalrevenuecurveandthewageline. ANSWER:b. valueofmarginalproductcurveandthewageline. TYPE:MDIFFICULTY:2SECTION:18.1 34. Theshapeofthevalueofmarginalproductcurveismosteasilyexplainedby a. tightlabormarkets. b. asurplusofworkers. c. diminishingmarginalproduct. d. diminishingmarginalcost. ANSWER:c. diminishingmarginalproduct. TYPE:MDIFFICULTY:2SECTION:18.1 35. Ifthevalueofthemarginalproductoflaborexceedsthewage,thenhiringanotherworkerincreasesthefirms a. profit. b. totalcost. c. totalrevenue. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.1 36. Ifthewageexceedsthevalueofthemarginalproductoflabor,thenhiringanotherworker a. decreasesthefirmstotalrevenue. b. increasesthefirmsprofit. c. increasesthefirmstotalcost. d. Alloftheabovearecorrect. ANSWER:c. increasesthefirmstotalcost. TYPE:MDIFFICULTY:2SECTION:18.1 37. Acompetitive,profitmaximizingfirmhiresworkersuptothepointwherethe a. marginalproductequalszero. b. marginalrevenueproductequalszero. c. marginalproductequalsthewage. d. valueofthemarginalproductequalsthewage. ANSWER:d. valueofthemarginalproductequalsthewage. TYPE:MDIFFICULTY:2SECTION:18.1 38. Foracompetitive,profitmaximizingfirmthelabordemandcurveisthesameasthe a. marginalcostcurve. b. valueofmarginalproductcurve. c. productionfunction. d. profitfunction. ANSWER:b. valueofmarginalproductcurve. TYPE:MDIFFICULTY:2SECTION:18.1

Chapter 18/The Markets for the Factors of Production 3 47

39. Whenlaboristheonlyinputafirmuses,themarginalcostofaunitofoutputcanbedefinedas a. marginalrevenueBwage. b. marginalproductoflaborBwage. c. wagedividedbymarginalproductoflabor. d. marginalproductoflabordividedbywage. ANSWER:c. wagedividedbymarginalproductoflabor. TYPE:MDIFFICULTY:3SECTION:18.1 40. Diminishingmarginalproductiscloselyrelatedto a. diminishingtotalcost. b. diminishingmarginalcost. c. diminishingvariablecost. d. increasingmarginalcost. ANSWER:d. increasingmarginalcost. TYPE:MDIFFICULTY:2SECTION:18.1 41. Whenaproductionfunctionexhibitsadiminishing,butpositive,marginalproductoflabor, a. profitalwaysincreasesasoutputincreases. b. profitalwaysdecreasesasoutputincreases. c. outputdeclinesasmoreworkersareemployed. d. outputincreases,butatadecreasingrate,asmoreworkersareemployed. ANSWER:d. outputincreases,butatadecreasingrate,asmoreworkersareemployed. TYPE:MDIFFICULTY:2SECTION:18.1 42. Aworker'scontributiontoafirm'srevenueismeasureddirectlybytheworker's a. marginalproduct. b. valueofmarginalproduct. c. marginalproductmultipliedbyhis/herwage. d. valueofmarginalproductmultipliedbyhis/herwage. ANSWER:b. valueofmarginalproduct. TYPE:MDIFFICULTY:2SECTION:18.1 43. Aprofitmaximizingcompetitivefirmforwhichthemarginalproductoflaborisdiminishingalsoexperiences a. aperfectlyinelasticsupplyoflabor. b. aperfectlyelasticsupplyoflabor. c. adownwardslopingdemandforlabor. d. anupwardslopingdemandforlabor. ANSWER:c. adownwardslopingdemandforlabor. TYPE:MDIFFICULTY:2SECTION:18.1 44. Ifoneobservesaprofitmaximizingfirmstartingwith50employeesandthenincreasingemployment,itispossible toinferthat,when50employeesarehired,the a. wageexceedsthevalueofthemarginalproductoflabor. b. valueofthemarginalproductorlaborexceedsthewage. c. marginalproductoflaborisincreasing. d. firmisattemptingtoincreaseitsmarketshare. ANSWER:b. valueofthemarginalproductorlaborexceedsthewage. TYPE:MDIFFICULTY:2SECTION:18.1 45. Letting denotechange,acompetitivefirmwillhireanadditionalworkeronlyiftheresultofhiringthatworkeris that a. revenue> cost. b. revenue> profit. c. profit> cost. d. marginalproduct> cost. ANSWER:a. revenue> cost. TYPE:MDIFFICULTY:2SECTION:18.1

48 3 Chapter 18/The Markets for the Factors of Production

46. Aprofitmaximizing,competitivefirmwillalwayshireanadditionalworkerwhentheadditionalworkermakes apositivecontributionto a. totalrevenue. b. totalprofit. c. thevalueofthemarginalproductoflabor. d. marginalrevenue. ANSWER:b. totalprofit. TYPE:MDIFFICULTY:2SECTION:18.1 47. Ifoneobservesaprofitmaximizingfirmstartingwith25employeesandthendecreasingemployment,itispossible toinferthat,when25employeesarehired,the a. firmislosingmarketshare. b. firmisnotlikelytobeminimizinglosses. c. wageexceedsthevalueofthemarginalproductoflabor. d. valueofthemarginalproductoflaborexceedsthewage. ANSWER:c. wageexceedsthevalueofthemarginalproductoflabor. TYPE:MDIFFICULTY:2SECTION:18.1 48. Foracompetitivefirmthatfindsitworthwhiletooperate,ratherthanshutdown,attainmentoftheusualobjective requiresthat a. outputprice=marginalcost. b. wage=valueofmarginalproductoflabor. c. profitismaximized. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.1 49. Acompetitivefirmwillhireworkersuptothepointatwhichthevalueofthemarginalproductoflaborequalsthe a. averagetotalcost. b. averagevariablecost. c. wage. d. priceperunitofoutput. ANSWER:c. wage. TYPE:MDIFFICULTY:2SECTION:18.1 50. Whatcausesthelabordemandcurvetoshift? (i) changesinproductivity (ii) changesinwages (iii) changesinoutputprices a. (i)and(ii) b. (ii)and(iii) c. (i)and(iii) d. Alloftheabovearecorrect. ANSWER:c. (i)and(iii) TYPE:MDIFFICULTY:2SECTION:18.1 51. Ifthepriceofairlineticketsfalls,whatwillhappentothedemandcurveforflightattendants? a. Itwillshiftupward. b. Itwillshifttotheleft. c. Itwillshifttotheright. d. Itwillremainunchanged;pricechangesdonotshiftdemandcurves. ANSWER:b. Itwillshifttotheleft. TYPE:MDIFFICULTY:2SECTION:18.1

Chapter 18/The Markets for the Factors of Production 3 49

52. Ifconsumersdemandmoregeneticallyengineeredfoods,thevalueofgeneticengineersmarginalproductoflabor will a. rise. b. fall. c. remainunchanged. d. riseorfall;eitherispossible. ANSWER:a. rise. TYPE:MDIFFICULTY:2SECTION:18.1 Usethefollowingtabletoanswerquestions53through61. Numberof Workers 0 1 2 3 4 5 53. 280 20 MarginalProduct ofLabor ValueofMarginalProduct ofLabor $1,000 80 60 $400 $800 Wage $500 $500 $500 $500 $500 $100

Output 0 100

MarginalProfit $500

Whatisthemarketpriceofthefinalgood? a. $5 b. $6 c. $8 d. $10 ANSWER:d. $10 TYPE:MDIFFICULTY:2SECTION:18.1 54. Itisapparentfromthistablethatincreasingmarginalproduct a. occursonlyafterthefirstworkerishired. b. occursonlyafterthesecondworkerishired. c. occursonlyafterthethirdworkerishired. d. neveroccurs. ANSWER:d. neveroccurs. TYPE:MDIFFICULTY:2SECTION:18.1 55. Ifthefirmhirestwoworkers,thetwoworkerstogetherproduce a. 80units. b. 100units. c. 180units. d. 200units. ANSWER:c. 180units. TYPE:MDIFFICULTY:2SECTION:18.1 56. Whatisthemarginalproductofthefourthworker? a. 30 b. 40 c. 60 d. 100 ANSWER:b. 40 TYPE:MDIFFICULTY:2SECTION:18.1

50 3 Chapter 18/The Markets for the Factors of Production

57. Thefactthatthemarginalproductchangesasthenumberofworkersincreasesexemplifiesapropertycalled a. diminishingmarginalproduct. b. utilitymaximization. c. supplyanddemand. d. labortheory. ANSWER:a. diminishingmarginalproduct. TYPE:MDIFFICULTY:1SECTION:18.1 58. Whatisthemarginalprofitofthefourthworker? a. $400 b. $200 c. $0 d. $100 ANSWER:d. $100 TYPE:MDIFFICULTY:1SECTION:18.1 59. Whatisthefourthworkerscontributiontototalrevenue? a. $100 b. $200 c. $400 d. $500 ANSWER:c. $400 TYPE:MDIFFICULTY:2SECTION:18.1 60. Tomaximizeitsprofit,howmanyworkerswillthefirmhire? a. 2 b. 3 c. 4 d. 5 ANSWER:b. 3 TYPE:MDIFFICULTY:2SECTION:18.1 61. Tomaximizeitsprofit,thefirmwillhireworkersaslongasthevalueofthemarginalproductoflaborequalsor exceeds a. $200. b. $300. c. $400. d. $500. ANSWER:d. $500. TYPE:MDIFFICULTY:2SECTION:18.1 62. Formaximumprofit,afirmhireslaboruptothepointatwhichthewageequals (i) thevalueofthemarginalproductoflabor. (ii) themarginalcostofanadditionalunitofoutput. (iii) outputprice marginalproductoflabor. a. (i)and(ii) b. (i)and(iii) c. (ii)and(iii) d. Alloftheabovearecorrect. ANSWER:b. (i)and(iii) TYPE:MDIFFICULTY:2SECTION:18.1

Chapter 18/The Markets for the Factors of Production 3 51

63. Competitivefirmsthatmaximizeprofitwillhireworkersuntilthevalueofthemarginalproductoflabor a. equalsthewage. b. equalsthepriceofthefinalgood. c. beginstofall. d. beginstorise. ANSWER:a. equalsthewage. TYPE:MDIFFICULTY:2SECTION:18.1 64. Fortheprofitmaximizingcompetitivefirm,thevalueofmarginalproductcurveis a. alwaysrising. b. fallingonlywhenmarginalproductisrising. c. thelaborsupplycurve. d. thelabordemandcurve. ANSWER:d. thelabordemandcurve. TYPE:MDIFFICULTY:2SECTION:18.1

52 3 Chapter 18/The Markets for the Factors of Production

Thefigurerepresentsthevalueofmarginalproductforafirmthatsellsitsproductinacompetitivemarket.Usethe followingfiguretoanswerquestions65through68.

65.

Thevalueofthemarginalproductcurveshowninthisfigureisthesameaswhichofthefollowing? a. thelaborsupplycurve b. thelabordemandcurve c. themarginalrevenuecurve d. thetotalrevenuecurve ANSWER:b. thelabordemandcurve TYPE:MDIFFICULTY:2SECTION:18.1 66. Theshapeofthecurvesuggeststhepresenceof a. increasedproductivitywithincreasedlabor. b. increasingreturnstoscale. c. increasingreturnstoscale. d. diminishingmarginalproduct. ANSWER:d. diminishingmarginalproduct. TYPE:MDIFFICULTY:2SECTION:18.1 67. Tomaximizeprofit,afirmwillhireaquantityoflabor a. lessthanQ*. b. greaterthanQ*. c. equaltoQ*. d. thatcannotbedeterminedfromthediagram.Thesupplycurveisneededtomakethisdetermination. ANSWER:c. equaltoQ*. TYPE:MDIFFICULTY:1SECTION:18.1 68. IfafirmwereemployingfewerthanQ*workers,hiringmoreworkerswould a. increasemarginalproduct. b. decreasethepriceofthefinalgood. c. increaseprofit. d. decreaseprofit. ANSWER:c. increaseprofit. TYPE:MDIFFICULTY:2SECTION:18.1

Chapter 18/The Markets for the Factors of Production 3 53

69. Foracompetitivefirm,thevalueofthemarginalproduct (i) increaseswhenthepriceofoutputdecreases. (ii) changeswhenmarginalproductchanges. (iii) diminishesasthenumberofworkersrises. a. (i)and(ii) b. (i)and(iii) c. (ii)and(iii) d. Alloftheabovearecorrect. ANSWER:c. (ii)and(iii) TYPE:MDIFFICULTY:2SECTION:18.1 70. Whatdoesafirmslabordemandcurverepresent? a. thequantityoflaborsuppliedatthemarketwage b. themarginalproductoflabor c. thenumberofworkersthatarewillingtoworkatanygivenwage d. thenumberofworkersthatthefirmiswillingtohireatanygivenwage ANSWER:d. thenumberofworkersthatthefirmiswillingtohireatanygivenwage TYPE:MDIFFICULTY:2SECTION:18.1 71. Competitivefirmsdecidehowmuchoutputtosellbyproducingoutputuntilthepriceofthegoodequals a. marginalproduct. b. thevalueofmarginalproduct. c. marginalcost. d. marginalprofit. ANSWER:c. marginalcost. TYPE:MDIFFICULTY:2SECTION:18.1 72. Competitivefirmshireworkersuptothepointatwhichtheadditionalbenefittheyreceivefromthelastworker hiredisequalto (i) theadditionalcostofthatworker. (ii) thewagepaidtothatworker. (iii) thepriceofthegoodtheyselltoconsumers. a. (i)only b. (iii)only c. (i)and(ii) d. (ii)and(iii) ANSWER:c. (i)and(ii) TYPE:MDIFFICULTY:2SECTION:18.1 73. DanownsoneofthemanybakeriesinNewYorkCity.Whichofthefollowingeventswillleadtoanincreasein Dansdemandfortheservicesofbakers? (i) Thepriceofmuffinsincreases.(MuffinsareDansspecialty.) (ii) Danaddsthreenewovenstothekitchenareatohelpthebakersworkfaster. (iii) Localbakersformauniontoprotectthemselvesfromlowwages. a. (i)and(ii) b. (ii)and(iii) c. (i)and(iii) d. Alloftheabovearecorrect. ANSWER:a. (i)and(ii) TYPE:MDIFFICULTY:2SECTION:18.1

54 3 Chapter 18/The Markets for the Factors of Production

74. CharlesownsoneofmanybakeriesinNewYorkCity.Whichofthefollowingeventswillleadtoadecreasein Charlessdemandfortheservicesofbakers? a. HollywoodglamorizationofanewmovieaboutabakerleadshundredsofhighschoolstudentsinNewYork CitytoapplyforajobatDans. b. Thepriceofbakedgoodsfalls. c. Thelocalbakersformaunion. d. Alloftheabovearecorrect. ANSWER:b. Thepriceofbakedgoodsfalls. TYPE:MDIFFICULTY:2SECTION:18.1 75. Economistsrefertotheinputsthatfirmsusetoproducegoodsandservicesas a. derivedfactors. b. derivedresources. c. factorsofproduction. d. instrumentsofrevenue. ANSWER:c. factorsofproduction. TYPE:MDIFFICULTY:1SECTION:18.1 76. Giventhatwheatisanimportantingredientinbread,whichofthefollowingstatementsiscorrect? a. Thesupplyofwheatisderivedfromconsumerschoices,whichdeterminethedemandforbread. b. Thedemandforwheatisderivedfromfirmschoices,whichdeterminethesupplyofbread. c. Thedemandforwheatandthedemandforbreadarebothderiveddemands. d. Neitherthedemandforwheatnorthedemandforbreadisaderiveddemand. ANSWER:b. Thedemandforwheatisderivedfromfirmschoiceswhichdeterminethesupplyofbread. TYPE:MDIFFICULTY:2SECTION:18.1 77. Asandwichshophiresworkerstomakesandwichesandsellthemtocustomers.Ifthefirmiscompetitiveinboth themarketforsandwichesandinthemarketforsandwichmakers,thenithas a. somecontroloverboththepriceofsandwichesandthewageitpaystoitsworkers. b. nocontroloverthepriceofsandwichesbutithassomecontroloverthewageitpaystoitsworkers. c. somecontroloverthepriceofsandwichesbutithasnocontroloverthewageitpaystoitsworkers. d. nocontrolovereitherthepriceofsandwichesorthewageitpaystoitsworkers. ANSWER:d. nocontrolovereitherthepriceofsandwichesorthewageitpaystoitsworkers. TYPE:MDIFFICULTY:1SECTION:18.1 78. Whenwefocusonthefirmasasupplierofagoodoraservice,weassumethatthefirmisaprofitmaximizer.When wefocusonthefirmasademanderoflabor,weassumethatthefirmsobjectiveisto a. minimizewages. b. minimizevariablecosts. c. maximizethenumberofworkershired. d. maximizeprofit. ANSWER:d. maximizeprofit. TYPE:MDIFFICULTY:1SECTION:18.1 79. Thevalueofthemarginalproductoflaboriscalculatedbymultiplyingthe a. priceofoutputbythequantityoflabor. b. priceofoutputbythemarginalproductoflabor. c. wagebythequantityoflabor. d. wagebythemarginalproductoflabor. ANSWER:b. priceofoutputbythemarginalproductoflabor. TYPE:MDIFFICULTY:1SECTION:18.1

Chapter 18/The Markets for the Factors of Production 3 55

80. Typically,asafirmhiresadditionalworkers,themarginalproductoflabor a. andthevalueofthemarginalproductoflaborbothdecrease. b. staysconstantandthevalueofthemarginalproductoflabordecreases. c. decreasesandthevalueofthemarginalproductoflaborstaysconstant. d. decreasesandthevalueofthemarginalproductoflaborincreases. ANSWER:a. andthevalueofthemarginalproductoflaborbothdecrease. TYPE:MDIFFICULTY:2SECTION:18.1 81. Whenafirmhireslaboruptothepointwherethewageisequaltothevalueofthemarginalproductoflabor,itis a. minimizinglaborcosts. b. guaranteeingthatlaborcostsdonotexceedfixedcosts. c. maximizingthenumberofworkersitcanhireandstillexperienceapositiveprofit. d. maximizingprofit. ANSWER:d. maximizingprofit. TYPE:MDIFFICULTY:2SECTION:18.1 82. Acompetitivefirmsellsitsoutputfor$45perunit.Itemploys30workers,andthemarginalproductofthe30th workeris4unitsofoutputperday.Itpaysitsworkersawageof$150perday. a. Thefirmsprofitwouldincreaseifithireda31stworker. b. Forthe30thworker,thevalueofthemarginalproductoflaboris$600. c. Forthe30thworker,themarginalrevenueproductis$600. d. Alloftheabovearecorrect. ANSWER:a. Thefirmsprofitwouldincreaseifithireda31stworker. TYPE:MDIFFICULTY:3SECTION:18.1 83. AuroraCustomCabinetsproducesandsellscustomkitchencabinets.Thefirmhasdeterminedthatifithires10 workers,itcanproduce4setsofcabinetsperday.Alternatively,ifithires11workers,itcanproduce4.2setsof cabinetsperday.Itsellseachsetofcabinetsfor$2,000,anditpayseachofitsworkers$200perday. a. Forthe11thworker,thevalueofthemarginalproductoflaboris$500. b. Forthe11thworker,themarginalrevenueproductis$400. c. Thefirmismaximizingitsprofit. d. Ifthefirmisemploying11workers,thenitsprofitwouldincreaseifitcutbackto10workers. ANSWER:b. Forthe11thworker,themarginalrevenueproductis$400. TYPE:MDIFFICULTY:3SECTION:18.1 84. Foracompetitive,profitmaximizingfirm,thedemandcurveforlaborwillshiftinresponsetoachangeinthe a. wagerate. b. quantityoflabordemanded. c. priceoftheproductthatthefirmsells. d. Alloftheabovearecorrect. ANSWER:c. priceoftheproductthatthefirmsells. TYPE:MDIFFICULTY:2SECTION:18.1 85. Whichofthefollowingeventswouldbringaboutachangeinthevalueofthemarginalproductoflabor? a. technologicalprogress b. achangeinthemarginalproductoflabor c. achangeinthepriceoftheproductthatthefirmsells d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.1

56 3 Chapter 18/The Markets for the Factors of Production

Usethefollowinginformationtoanswerquestions86through89. Jerryhastwojobs,oneforthewinterandoneforthesummer.Inthewinter,heworkersasaliftattendantataskiresort whereheearns$10perhour.Duringthesummer,Jerrydrivesatourbusaroundtheskiresort,earning$12perhour. 86. Duringthewintermonths,whatisJerrysopportunitycostoftakinganhouroffworktogoskiing? a. $12 b. between$10and$12 c. $10 d. lessthan$10 ANSWER:c. $10 TYPE:MDIFFICULTY:1SECTION:18.2 87. Duringthesummermonths,whatisJerrysopportunitycostoftakinganhouroffworktogohiking? a. $12 b. between$10and$12 c. $10 d. lessthan$10 ANSWER:a. $12 TYPE:MDIFFICULTY:1SECTION:18.2 88. AssumethatJerryhasanupwardslopinglaborsupplycurve.IftheopportunitycostofJerrysleisuretime increases,hewillrespondbyworking a. morehours. b. fewerhours. c. anequalnumberofhours. d. Alloftheabovearecorrect. ANSWER:a. morehours. TYPE:MDIFFICULTY:2SECTION:18.2 89. IfJerrytakesfewerhoursofleisureinthesummerthaninthewinter,wecanassumethathislaborsupplycurve a. ishorizontal. b. isvertical. c. slopesupward. d. slopesdownward. ANSWER:c. slopesupward. TYPE:MDIFFICULTY:2SECTION:18.2 90. Whichofthefollowingeventswouldshiftthelaborsupplycurve? a. changesinthenumberofwomenwillingtowork b. immigrationofworkers c. changingattitudestowardswork d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.2 91. Thelaborsupplycurveshiftswhen a. employersneedtohiremorepeople. b. employersdevelopnewtechnology. c. workerschangetheamounttheywanttoworkatanygivenwage. d. workersbecomemoreproductive. ANSWER:c. workerschangetheamounttheywanttoworkatanygivenwage. TYPE:MDIFFICULTY:2SECTION:18.2

Chapter 18/The Markets for the Factors of Production 3 57

92. Thelaborsupplycurveisfundamentallyarepresentationofthetradeoffpeoplefacebetweenwhichofthe following? a. workandwage b. workandleisure c. wageandproductivity d. technologyandwage ANSWER:b. workandleisure TYPE:MDIFFICULTY:2SECTION:18.2 93. Whatdoesanupwardslopingsupplycurvemean? a. Itmeansthatworkersprefertobuymoreleisuretimewhentheirincomesincrease. b. Itmeansthatworkersprefertosupplylesslaborwhenwagesarehigh. c. Itmeansthatanincreaseintheopportunitycostofleisureleadsworkerstoincreasethequantityoflaborthey supply. d. Alloftheabovearecorrect. ANSWER:c. Itmeansthatanincreaseintheopportunitycostofleisureleadsworkerstoincreasethequantityoflabor theysupply. TYPE:MDIFFICULTY:2SECTION:18.2 94. Ifworkersrespondtoanincreaseintheopportunitycostofleisurebytakinglessleisure,thentheirlaborsupply curveis a. horizontal. b. vertical. c. downwardsloping. d. upwardsloping. ANSWER:d. upwardsloping. TYPE:MDIFFICULTY:2SECTION:18.2 95. Ifworkersrespondtoanincreaseintheopportunitycostofleisurebytakingmoreleisure,thentheirlabor supplycurveis a. upwardsloping. b. downwardsloping. c. horizontal. d. vertical. ANSWER:b. downwardsloping. TYPE:MDIFFICULTY:2SECTION:18.2 96. Whathappenstothelaborsupplyinthepearpickingmarketwhenthewagepaidtoapplepickersincreases? a. Thelaborsupplywillstayunchangeduntilthewagespaidtopearpickerschange. b. Thelaborsupplywilldecrease. c. Thelaborsupplywillincrease. d. Thelaborsupplymayfallorrise,dependingonthepriceofpears. ANSWER:b. Thelaborsupplywilldecrease. TYPE:MDIFFICULTY:2SECTION:18.2 97. WhathappenstothelaborsupplycurvesinbothcountrieswhenMexicanworkersleaveMexicoandmovetothe UnitedStates? a. LaborsupplydecreasesinMexicoanddecreasesintheUnitedStates. b. LaborsupplyincreasesintheUnitedStatesandincreasesinMexico. c. LaborsupplyincreasesintheUnitedStatesanddecreasesinMexico. d. LaborsupplyincreasesinMexicoanddecreasesinUnitedStates. ANSWER:c. LaborsupplyincreasesintheUnitedStatesanddecreasesinMexico. TYPE:MDIFFICULTY:1SECTION:18.2

58 3 Chapter 18/The Markets for the Factors of Production

98. Ahouseholdmembersdecisiononhowmuchlabortosupplyismostcloselylinkedto a. thesupplyoffactorsofproductionotherthanlabor. b. technologicalchange. c. thetradeoffbetweenleisureandwork. d. immigrationtrends. ANSWER:c. thetradeoffbetweenleisureandwork. TYPE:MDIFFICULTY:1SECTION:18.2 99. Theopportunitycostofanhourofleisureis a. 60minutes. b. anhourofsleep. c. anhoursworthofwearandtearonyourTV,exerciseequipment,etc. d yourhourlywage. ANSWER:d yourhourlywage. TYPE:MDIFFICULTY:1SECTION:18.2 100. Amongthepeoplewhoarecharacterizedbelow,whohasthehighestopportunitycostofleisure? a. anattorneywhoearns$200perhourandwhoplaysgolfduringherleisuretime b. amedicaldoctorwhoearns$210perhourandwhosleepsduringhisleisuretime c. aretailclerkwhoearns$15perhourandwhowatchesTVduringherleisuretime d. awaiterwhoearns$12perhourandwhoreadspoetryduringhisleisuretime ANSWER:b. amedicaldoctorwhoearns$210perhourandwhosleepsduringhisleisuretime TYPE:MDIFFICULTY:2SECTION:18.2 101. Thelaborsupplycurvereflectshow a. workersdecisionsaboutthelaborleisuretradeoffrespondtoachangeinthewage. b. workersdecisionsabouttheopportunitycostoflaborrespondtoachangeinthequantityoflaborsupplied. c. firmsdecisionsaboutthelaborleisuretradeoffrespondtothequantityoflabordemanded. d. firmsdecisionsabouthowthequantityoflabortheyhirerespondstochangesintheiropportunitiestoearn profits. ANSWER:a. workersdecisionsaboutthelaborleisuretradeoffrespondtoachangeinthewage. TYPE:MDIFFICULTY:2SECTION:18.2 102. IfEmmasindividuallaborsupplycurveisupwardsloping,thenEmmarespondstoanincreasein a. thewagebyworkingmorehoursperweek. b. theopportunitycostofleisurebyworkingfewerhoursperweek. c. theopportunitycostofleisurebytakingmorehoursofleisureperweek. d. Alloftheabovearecorrect. ANSWER:a. thewagebyworkingmorehoursperweek. TYPE:MDIFFICULTY:2SECTION:18.2 103. Whichofthefollowingstatementsiscorrect?Anindividualworkerslaborsupplycurve a. canneverslopedownward. b. slopesdownwardifthatpersonrespondstoahigherwagebytakingfewerhoursofleisureperweek. c. slopesdownwardifthatpersonrespondstoahigheropportunitycostofleisurebyworkingfewerhoursper week. d. ishorizontalifthatpersonworksthesamenumberofhoursperweek,regardlessoftheopportunitycostof leisure. ANSWER:c. slopesdownwardifthatpersonrespondstoahigheropportunitycostofleisurebyworkingfewerhours perweek. TYPE:MDIFFICULTY:3SECTION:18.2

Chapter 18/The Markets for the Factors of Production 3 59

104. ImmigrationofworkersintotheUnitedStatesisoftenanimportantsourceof a. increasesinthedemandforlaborintheUnitedStates. b. decreasesinthedemandforlaborintheUnitedStates. c. increasesinthesupplyoflaborintheUnitedStates. d. decreasesinthesupplyoflaborintheUnitedStates. ANSWER:c. increasesinthesupplyoflaborintheUnitedStates. TYPE:MDIFFICULTY:2SECTION:18.2 105. Whichofthefollowingeventswouldleadtoanincreaseinthesupplyoflabor? a. Thepriceofafirm'sproductincreases. b. Acountryexperiencesanincreaseinimmigrantlabor. c. Thewagerateincreases. d. Alloftheabovearecorrect. ANSWER:b. Acountryexperiencesanincreaseinimmigrantlabor. TYPE:MDIFFICULTY:2SECTION:18.2 106. Whenlaborsupplyincreases, a. themarginalproductivityofworkersalwaysincreases. b. profitmaximizingfirmsreduceemployment. c. wagesincreaseaslongaslaborsupplyisupwardsloping. d. wagesdecreaseaslongaslabordemandisdownwardsloping. ANSWER:d. wagesdecreaseaslongaslabordemandisdownwardsloping. TYPE:MDIFFICULTY:2SECTION:18.3 Usethefollowinginformationtoanswerquestion107through109. In1997,Albaniaexperiencedacivilwar.ThecivilunrestsentthousandsofrefugeesacrosstheAdriaticSeatoItalywhere theysoughtrelieffromthefighting. 107. TheAlbaniancivilwarprobablyaffectedItalianlabormarketsinthefollowingway: a. TotalemploymentinItalydecreased. b. WagesinItalyincreased. c. ThemarginalproductoflaborinItalydecreased. d. Alloftheabovearecorrect. ANSWER:c. ThemarginalproductoflaborinItalydecreased. TYPE:MDIFFICULTY:2SECTION:18.3 108. TheItaliangovernmentstartedtopatroltheAdriaticSeaandhadapolicyofreturningallrefugeestoAlbania.This policywouldcontributeto a. anincreaseinthesupplyoflaborinItaly. b. anincreaseinthedemandlaborinItaly. c. adecreaseinthedemandforlaborinItaly. d. preventionofanincreaseinthesupplyoflaborinItaly. ANSWER:d. preventionofanincreaseinthesupplyoflaborinItaly. TYPE:MDIFFICULTY:1SECTION:18.3 109. Whenalabormarketexperiencesasurplusoflabor,thereisdownwardpressureon a. themarginalproductivityoflabor. b. finalproductprice. c. wages. d. thedemandforlabor. ANSWER:c. wages. TYPE:MDIFFICULTY:2SECTION:18.3

60 3 Chapter 18/The Markets for the Factors of Production

Usethefollowinginformationtoanswerquestion110through111. RocchettaIndustriesmanufacturesandsuppliesbottledwaterinMexico.Asaresultofacontaminationofwatersupplies atmanyofMexico'sresortcommunities,thedemandforbottledwaterhasincreased. 110. Wewouldexpectthat,asaresultofthecontamination,thevalueofthemarginalproductforRocchettaIndustries workerswould a. beoffsetbyadecreaseinwages. b. beunaffectedbyariseindemandforbottledwater. c. rise. d. fall. ANSWER:c. rise. TYPE:MDIFFICULTY:2SECTION:18.3 111. Whenthelabormarketadjuststoitsnewequilibriumwewouldexpectthe a. marginalproductoflabortobehigherthanitwasbeforetheincreaseindemandforbottledwater. b. valueofthemarginalproductoflabortobehigherthanitwasbeforetheincreaseindemandforbottledwater. c. priceofbottledwatertobelowerthanitwasbeforetheincreaseindemandforbottledwater. d. wagesofRocchettaworkerstobelowerthantheywerebeforetheincreaseindemandforbottledwater. ANSWER:b. valueofthemarginalproductoflabortobehigherthanitwasbeforetheincreaseindemandforbottled water. TYPE:MDIFFICULTY:2SECTION:18.3 112. Whichofthefollowingeventscouldincreasethedemandforlabor? a. adecreaseinoutputprice b. adecreaseintheamountofcapitalavailableforworkerstouse c. anincreaseinthemarginalproductivityofworkers d. Alloftheabovearecorrect. ANSWER:c. anincreaseinthemarginalproductivityofworkers TYPE:MDIFFICULTY:2SECTION:18.3 113. Whichofthefollowingeventscoulddecreasethedemandforlabor? a. anincreaseinmigrantworkers b. anincreaseinthemarginalproductivityofworkers c. adecreaseindemandforthefinalproductproducedbylabor d. adecreaseinthelaborsupply ANSWER:c. adecreaseindemandforthefinalproductproducedbylabor TYPE:MDIFFICULTY:2SECTION:18.3 114. Whenfirmsareabletoincreasetheamountofphysicalcapitalavailabletoworkers,the a. marginalproductoflaborwilldecrease. b. valueofthemarginalproductoflaborwilldecrease. c. valueofthemarginalproductoflaborwillincrease. d. finalproductpricewillincrease. ANSWER:c. valueofthemarginalproductoflaborwillincrease. TYPE:MDIFFICULTY:2SECTION:18.3 115. Whenworkersareinanindustrythatisexperiencingrapidimprovementsintechnology,theycanexpect a. toseeareductionintheneedforphysicalcapital. b. toseeadecreaseindemandforfinalproducts. c. theirwagestodecrease. d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.3

Chapter 18/The Markets for the Factors of Production 3 61

Usethefollowingfiguretoanswerquestions116through121

116.

Iftheapplepickersstartworkingfewerhours(bytakingmorevacationtime),theequilibriumwagewill a. fallbeloww1duetoashiftindemand. b. fallbeloww1duetoashiftinsupply. c. riseabovew1duetoashiftindemand.

ANSWER:d.

d. riseabovew1duetoashiftinsupply. riseabovew1duetoashiftinsupply. Ifthemarginalproductoflaborfallsandthepriceofapplesremainsunchanged, (i) thevalueofthemarginalproductoflaborwillfall. (ii) thequantityoflabordemandedwillincreaseaboveL1.

TYPE:MDIFFICULTY:2SECTION:18.3 117.

(iii) thelaborsupplycurvewillremainunchanged. a. (i)and(ii) b. (ii)and(iii) c. (i)and(iii) d. Alloftheabovearecorrect. ANSWER:c. (i)and(iii) TYPE:MDIFFICULTY:2SECTION:18.3 118. Ifthepriceofapplesincreases,the a. demandforapplepickerswillshifttotheleft. b. demandforapplepickerswillshifttotheright. c. supplyofapplepickerswillshifttotheleft. d. supplyofapplepickerswillshifttotheright. ANSWER:b. demandforapplepickerswillshifttotheright. TYPE:MDIFFICULTY:2SECTION:18.3 119. Ifthepriceofapplesincreases,thewagewill a. increaseandmoreapplepickerswillbehired. b. decreaseandmoreapplepickerswillbehired. c. increaseandfewerapplepickerswillbehired. d. decreaseandfewerapplepickerswillbehired. ANSWER:a. increaseandmoreapplepickerswillbehired. TYPE:MDIFFICULTY:2SECTION:18.3

62 3 Chapter 18/The Markets for the Factors of Production

120. Whathappenstotheprofitearnedbyappleproducersandtothewageearnedbyapplepickerswhenthepriceof applesrises? a. Profitwillriseandthewagewillfall. b. Profitwillfallandthewagewillrise. c. Bothprofitandthewagewillrise. d. Bothprofitandthewagewillfall. ANSWER:c. Bothprofitandthewagewillrise. TYPE:MDIFFICULTY:2SECTION:18.3 121. Whathappenstotheprofitearnedbyappleproducersandthewageearnedbyapplepickerswhenthepriceof applesfalls? a. Bothprofitandthewagewillfall. b. Bothprofitandthewagewillrise. c. Profitwillriseandthewagewillfall. d. Profitwillfallandthewagewillrise. ANSWER:a. Bothprofitandthewagewillfall. TYPE:MDIFFICULTY:2SECTION:18.3 RefertothediagrambelowtoanswerQuestions122through126.

122.

WhentherelevantlaborsupplycurveisS1andthelabormarketisinequilibrium, a. thewageisW1. b. theopportunitycostofleisuretoworkersisW1. c. thevalueofthemarginalproductoflabortofirmsisW1.

d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.3 123. TheshiftofthelaborsupplycurvefromS1toS2couldpossiblybeexplainedby

a. technologicalprogress. b. achangeinthepriceoffirmsoutput. c. achangeinworkersattitudestowardtheworkleisuretradeoff. d. Alloftheabovearecorrect. ANSWER:c. achangeinworkersattitudestowardtheworkleisuretradeoff. TYPE:MDIFFICULTY:2SECTION:18.3

Chapter 18/The Markets for the Factors of Production 3 63

124. TheshiftofthelaborsupplycurvefromS1toS2couldpossiblybeexplainedby

a. achangeinworkersattitudestowardtheworkleisuretradeoff. b. decreasesinwagesinotherlabormarkets. c. immigrationofworkersintotheregionorcountry. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.3 125. AssumeW1=$20andW2=$18andthemarketisalwaysinequilibrium.Thentheshiftofthelaborsupplycurve fromS1toS2

a. increasesthevalueofthemarginalproductoflaborby$2. b. decreasesthevalueofthemarginalproductoflaborby$2. c. decreasesthevalueofthemarginalproductoflaborbymorethan$2. d. doesnotchangethevalueofthemarginalproductoflabor. ANSWER:b. decreasesthevalueofthemarginalproductoflaborby$2. TYPE:MDIFFICULTY:2SECTION:18.3 126. IftherelevantlaborsupplycurveisS2andthecurrentwageisW1, a. thereisasurplusoflabor. b. thequantityoflabordemandedexceedsthequantityoflaborsupplied. c. anincreaseintheminimumwagecouldbeemployedtorestoreequilibriuminthemarket. d. Alloftheabovearecorrect. ANSWER:a. thereisasurplusoflabor. TYPE:MDIFFICULTY:2SECTION:18.3 RefertothediagrambelowtoanswerQuestions127through131.

127.

WhentherelevantlabordemandcurveisD1andthelabormarketisinequilibrium, a. thevalueofthemarginalproductoflabortofirmsislessthanW1. b. theopportunitycostofleisuretoworkersisgreaterthanW1. c. thewageisW1.

d. Alloftheabovearecorrect. ANSWER:c. thewageisW1. TYPE:MDIFFICULTY:2SECTION:18.3

64 3 Chapter 18/The Markets for the Factors of Production

128. TheshiftofthelabordemandcurvefromD1toD2couldpossiblybeexplainedby a. technologicalprogress. b. anincreaseinthepriceoffirmsoutput. c. anincreaseinthesupplyofarelevantfactorofproductionotherthanlabor. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:3SECTION:18.3 129. TheshiftofthelabordemandcurvefromD1toD2couldpossiblybeexplainedby a. achangeinworkersattitudestowardtheworkleisuretradeoff. b. decreasesinwagesinotherlabormarkets. c. anincreaseinthepriceoffirmsoutput. d. Alloftheabovearecorrect. ANSWER:c. anincreaseinthepriceoffirmsoutput. TYPE:MDIFFICULTY:2SECTION:18.3 130. AssumeW1=$20andW2=$22andthemarketisalwaysinequilibrium.Thentheshiftofthelabordemandcurve fromD1toD2

a. increasesthevalueofthemarginalproductoflaborby$2. b. increasesthevalueofthemarginalproductoflaborbylessthan$2. c. decreasesthevalueofthemarginalproductoflaborbymorethan$2. d. doesnotchangethevalueofthemarginalproductoflabor. ANSWER:a. increasesthevalueofthemarginalproductoflaborby$2. TYPE:MDIFFICULTY:2SECTION:18.3 131. IftherelevantlabordemandcurveisD2andthecurrentwageisW1, a. b. c. d.

thereisasurplusoflabor. thereisashortageoflabor. thequantityoflaborsuppliedexceedsthequantityoflabordemanded. workersarefailingtotakeintoaccounttheworkleisuretradeoffindecidingwhatquantityoflabortosupplyat alternativewages. ANSWER:b. thereisashortageoflabor. TYPE:MDIFFICULTY:2SECTION:18.3 132. Anincreaseinthevalueofthemarginalproductoflaborhastheeffectofincreasingthe a. demandforlabor. b. wage. c. quantityoflaboremployed. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:1SECTION:18.3 133. Anincreaseinthesupplyoflaborhastheeffectofdecreasingthe a. wage. b. marginalproductoflabor. c. valueofthemarginalproductoflabor. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.3

Chapter 18/The Markets for the Factors of Production 3 65

134. Supposemedicalresearchprovidesevidencethateatingbananasprovidesfargreaterhealthbenefitsthanwas previouslythought.Theresultingincreaseinthedemandforbananas a. increasesthemarginalproductofbananapickersforanygivennumberofbananapickers. b. increasesthevalueofthemarginalproductofbananapickersforanygivennumberofbananapickers. c. increasesthesupplyofbananapickers. d. Alloftheabovearecorrect. ANSWER:b. increasesthevalueofthemarginalproductofbananapickersforanygivennumberofbananapickers. TYPE:MDIFFICULTY:3SECTION:18.3 135. Boththeoryandhistorypointtoacloserelationshipbetweenincreasesin a. labordemandandincreasesinlaborsupply. b. labordemandanddecreasesinrealwages. c. theproductivityoflaborandincreasesinrealwages. d. interestratesanddecreasesinrealwages. ANSWER:c. theproductivityoflaborandincreasesinrealwages. TYPE:MDIFFICULTY:2SECTION:18.3 136. Amarketinwhichthereisonlyonebuyeriscalleda(n) a. monopsony. b. monopoly. c. unipoly. d. oligopsony. ANSWER:a. monopsony. TYPE:MDIFFICULTY:1SECTION:18.3 137. Whichofthefollowingstatementsiscorrect? a. Thetermmonopolyreferstoeitheramarketwithonebuyerortoamarketwithoneseller. b. Thetermmonopolyreferstoamarketwithonebuyer,whilethetermmonopsonyreferstoamarketwith oneseller. c. Thetermmonopsonyreferstoamarketwithonebuyer,whilethetermmonopolyreferstoamarketwith oneseller. d. Thetermmonopsonyreferstoeitheramarketwithonebuyerortoamarketwithoneseller. ANSWER:c. Thetermmonopsonyreferstoamarketwithonebuyer,whilethetermmonopolyreferstoamarket withoneseller. TYPE:MDIFFICULTY:1SECTION:18.3 138. Whenalabormarketisamonopsony,themonopsonyfirm a. hiresmoreworkersthanwouldacompetitivefirm. b. hiresfewerworkersthanissociallyoptimal. c. paysahigherwagethanwouldacompetitivefirm. d. isneverthelessregardedasacompetitivefirminboththeinputandoutputmarkets. ANSWER:b. hiresfewerworkersthanissociallyoptimal. TYPE:MDIFFICULTY:2SECTION:18.3 139. Whenaneconomistreferstoafirm'scapital,she/heislikelytobeusingthetermtodescribethe a. marketsforfinalgoodsandservices. b. stockofequipmentandbuildingsusedinproduction. c. amountofbankfinancingusedbythefirm. d. amountoffinancingprovidedbytheequitymarkets. ANSWER:b. stockofequipmentandbuildingsusedinproduction. TYPE:MDIFFICULTY:1SECTION:18.4

66 3 Chapter 18/The Markets for the Factors of Production

140. Theaccumulationofmachineryandbuildingsusedintheproductionofnewgoodsandservicesisreferredtoas a. productionfactors. b. outputfactors. c. capital. d. equity. ANSWER:c. capital. TYPE:MDIFFICULTY:1SECTION:18.4 141. Ifoneweretoconsiderauniversityasabusiness,thecomputersinthecomputerlabswouldberegardedby economistsas a. technologyflows. b. mechanizationflows. c. partoftheuniversitysstockofcapital. d. aflowofservicesfromtheuniversitysstockofcapital. ANSWER:c. partoftheuniversitysstockofcapital. TYPE:MDIFFICULTY:2SECTION:18.4 142. Thepurchasepriceofcapitalis a. thevalueofthecapitaltothefirm. b. alwayslessthantherentalprice. c. thepricereceivedfromtheflowofsomecapitalservices. d. thepriceapersonpaystoownthatfactorofproductionindefinitely. ANSWER:d. thepriceapersonpaystoownthatfactorofproductionindefinitely. TYPE:MDIFFICULTY:2SECTION:18.4 143. Therentalpriceofcapitalis a. determinedoutsidetherealmoffactormarkets. b. thepricepaidtousecapitalforalimitedtimeperiod. c. thepricepaidforownershipofthecapital. d. alwaysmorethanthepurchaseprice. ANSWER:b. thepricepaidtousecapitalforalimitedtimeperiod. TYPE:MDIFFICULTY:2SECTION:18.4 144. Therentalpriceoflandis a. thepricepaidforownershipoftheland. b. thepricepaidfortheflowofservicesfromlandoveraspecifiedtimeperiod. c. alwaysmorethanthepurchaseprice. d. Alloftheabovearecorrect. ANSWER:b. thepricepaidfortheflowofservicesfromlandoveraspecifiedtimeperiod. TYPE:MDIFFICULTY:2SECTION:18.4 145. Therentalpriceofcapitalisdeterminedby a. forcesofsupplyanddemandincapitalmarkets. b. theamountofequitythatisgeneratedinequitymarkets. c. theamountofbondfinancingusedbyprofitmaximizingfirms. d. theamountofdividendspaidouttostockholdersbyprofitmaximizingfirms. ANSWER:a. forcesofsupplyanddemandincapitalmarkets. TYPE:MDIFFICULTY:2SECTION:18.4 146. Ownersoflandarecompensatedaccordingtothe a. absolutelevelofproductionfromtheland. b. numberoflaborersthelandcansupport. c. purchasepriceofthelandstock. d. valueofthemarginalproductofland. ANSWER:d. valueofthemarginalproductofland. TYPE:MDIFFICULTY:2SECTION:18.4

Chapter 18/The Markets for the Factors of Production 3 67

147. Theownersofcapitalresourcesarecompensatedaccordingtothe a. purchasepriceofthecapitalstock. b. marginalproductofcapital. c. valueofthemarginalproductofcapital. d. absolutelevelofproductionoffinalgoodsandservices. ANSWER:c. valueofthemarginalproductofcapital. TYPE:MDIFFICULTY:2SECTION:18.4 148. Themarginalproductofanyfactorofproductiondependson a. thequantityofthefactorused. b. thepriceofthefinalgood. c. thedemandforthefinalgood. d. Alloftheabovearecorrect. ANSWER:a. thequantityofthefactorused. TYPE:MDIFFICULTY:2SECTION:18.4 149. Becauseofdiminishingreturns,afactorinabundantsupplyhas a. ahighmarginalproductandahighrentalprice. b. ahighmarginalproductandalowrentalprice. c. alowmarginalproductandahighrentalprice. d. alowmarginalproductandalowrentalprice. ANSWER:d. alowmarginalproductandalowrentalprice. TYPE:MDIFFICULTY:2SECTION:18.4 150. Becauseofdiminishingreturns,afactorinscarcesupplyhas a. alowmarginalproductandalowrentalprice. b. alowmarginalproductandahighrentalprice. c. ahighmarginalproductandalowrentalprice. d. ahighmarginalproductandahighrentalprice. ANSWER:d. ahighmarginalproductandahighrentalprice. TYPE:MDIFFICULTY:2SECTION:18.4 151. Ifthegovernmentdesignatescertainareaswithinacommunitytobewetlands,andthereforeillegaltobuild upon,whathappenstolandnotclassifiedas"wetlands"withinthecommunity? (i) Thepriceofnonwetlandlandwillrise. (ii) Themarginalproductofnonwetlandlandwillfall. (iii) Themarginalproductofnonwetlandlandwillrise. a. (i)and(ii) b. (ii)and(iii) c. (i)and(iii) d. (ii)only ANSWER:c. (i)and(iii) TYPE:MDIFFICULTY:2SECTION:18.4 152. Asaresultofasevereflooding,afarmerlosesonehalfofhisproductivefarmland.Heshouldexpecttoseethe marginalproductivityofhisremainingland a. increase. b. remainunchanged. c. decrease,butremainpositive. d. decreaseandbecomenegative. ANSWER:a. increase. TYPE:MDIFFICULTY:2SECTION:18.4

68 3 Chapter 18/The Markets for the Factors of Production

153. Asaresultofasevereflooding,afarmerlosesonehalfofhisproductivefarmland.Ifthepropertyofdiminishing returnsappliestoallfactorsofproduction,heshouldexpecttosee a. anincreaseinthemarginalproductivityofhisremaininglandandanincreaseinthemarginalproductivityof hislabor. b. anincreaseinthemarginalproductivityofhisremaininglandandadecreaseinthemarginalproductivityofhis labor. c. adecreaseinthemarginalproductivityofhisremaininglandandanincreaseinthemarginalproductivityofhis labor. d. adecreaseinthemarginalproductivityofhisremaininglandandadecreaseinthemarginalproductivityofhis labor. ANSWER:b. anincreaseinthemarginalproductivityofhisremaininglandandadecreaseinthemarginal productivityofhislabor. TYPE:MDIFFICULTY:3SECTION:18.4 154. Achangeinsupplyofonefactorofproduction a. willnotchangeeitherthemarginalproductivitiesorthepricesofotherfactors. b. willnotchangethepricesofotherfactors,butitmaychangetheirmarginalproductivities. c. willnotchangethemarginalproductivitiesofotherfactors,butitmaychangetheirprices. d. changesthemarginalproductivitiesandthepricesofotherfactors. ANSWER:d. changesthemarginalproductivitiesandthepricesofotherfactors. TYPE:MDIFFICULTY:2SECTION:18.4 155. Theequilibriumrentalincomepaidtolandownersatanypointintimeequalsthe a. purchasepriceofland. b. valueofthemarginalproductofland. c. marginalproductofland. d. wagepaidtolaborers. ANSWER:b. valueofthemarginalproductofland. TYPE:MDIFFICULTY:2SECTION:18.4 156. Theequilibriumrentalincomepaidtotheownersofcapitalatanypointintimeequalsthe a. marginalproductofcapital. b. valueofthemarginalproductofcapital. c. percentageofprofitspaidouttostockholdersintheformofdividends. d. equilibriumpurchasepriceofcapital. ANSWER:b. thevalueofthemarginalproductofcapital. TYPE:MDIFFICULTY:2SECTION:18.4 157. WhoreceivesincomefromcapitalintheUnitedStates? a. bankdepositors b. bondholders c. stockholders d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.4 158. Whichofthefollowingqualifyaspartofoureconomyscapitalincome? a. wagespaidtoworkers b. interestpaidtotheownersofcorporatebonds c. salariespaidtochiefexecutiveofficersofcorporations d. Alloftheabovearecorrect. ANSWER:b. interestpaidtotheownersofcorporatebonds TYPE:MDIFFICULTY:2SECTION:18.4

Chapter 18/The Markets for the Factors of Production 3 69

159. Ifyoupurchaseashareintheownershipofafirmyouaresaidtobea a. profiteer. b. renter. c. bondholder. d. stockholder. ANSWER:d. stockholder. TYPE:MDIFFICULTY:1SECTION:18.4 160. Ineconomics,thetermcapitalisusedtoreferto a. money. b. stocksandbonds. c. equipmentandstructuresusedinproduction. d. Alloftheabovearecorrect. ANSWER:c. equipmentandstructuresusedinproduction. TYPE:MDIFFICULTY:1SECTION:18.4 161. Withregardtocapital,itisimportanttodistinguishbetween a. thesupplypriceofcapitalandthedemandpriceofcapital. b. therentalpriceofcapitalandthepurchasepriceofcapital. c. firmsandthedemandersofcapital. d. thesuppliersofcapitalandtheownersofcapital. ANSWER:b. therentalpriceofcapitalandthepurchasepriceofcapital. TYPE:MDIFFICULTY:2SECTION:18.4 162. Thedistinctionbetweenpurchasepriceandrentalpriceappliestowhichfactor(s)ofproduction? a. landonly b. capitalonly c. landandcapitalonly d. land,capital,andlabor ANSWER:c. landandcapitalonly TYPE:MDIFFICULTY:2SECTION:18.4 163. Whichtermbelowreferstotheaccumulationofgoodsproducedinthepastthatarebeingusedinthepresentto producenewgoodsandservices? a. inventories b. products c. factorsofproduction d. capital ANSWER:d. capital TYPE:MDIFFICULTY:1SECTION:18.4 164. Thedeterminationofthedemandforlandisessentiallythesameasthedeterminationofthe a. demandsforgoodsandservices. b. demandsforlaborandcapital. c. suppliesoflaborandcapital. d. suppliesofallfactorsofproduction. ANSWER:b. demandsforlaborandcapital. TYPE:MDIFFICULTY:2SECTION:18.4 165. Thefirmhiresthefactoruptothepointwherethevalueofthefactorsmarginalproductisequaltothefactors price.Thisstatementappliestowhichfactorofproduction? a. labor b. land c. capital d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:18.4

70 3 Chapter 18/The Markets for the Factors of Production

166. Thecurrentvalueofthemarginalproductoflandinfluencesthe a. demandforland. b. equilibriumrentalpriceofland. c. equilibriumpurchasepriceofland. d alloftheabove. ANSWER:d. alloftheabove. TYPE:MDIFFICULTY:2SECTION:18.4 167. Capitalispaidaccordingtothevalueofitsmarginalproduct a. onlyifearningsfromcapitalarepaidtohouseholdsintheformofdividends. b. onlyifearningsfromcapitalarekeptwithinfirmsasretainedearnings. c. regardlessofwhetherearningsfromcapitalarepaidtohouseholdsintheformofdividendsorwhetherthose earningsarekeptwithinfirmsasretainedearnings. d. Noneoftheabovearecorrect;capitalisafactorofproductionforwhichearningsareunrelatedtothevalueof marginalproduct. ANSWER:c. regardlessofwhetherearningsfromcapitalarepaidtohouseholdsintheformofdividendsorwhether thoseearningsarekeptwithinfirmsasretainedearnings. TYPE:MDIFFICULTY:3SECTION:18.4 168. TheBlackDeathinfourteenthcenturyEuroperesultedin a. alowermarginalproductofland. b. alowermarginalproductoflaborofsurvivingworkers. c. economichardshipforsurvivingpeasants. d. economicprosperityforsurvivinglandowners. ANSWER:a. alowermarginalproductofland. TYPE:MDIFFICULTY:3SECTION:18.4 TRUE/FALSE 1. In1999,thetotalincomeofallU.S.residentswasabout$8billion. ANSWER:FTYPE:TFDIFFICULTY:1SECTION:18.1 2. Thedemandforcomputerprogrammersisinextricablytiedtothesupplyofcomputersoftware. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:18.1 3. IfFirmXisacompetitivefirminthemarketforlabor,ithaslittleinfluenceoverthewageitpaysitsemployees. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:18.1 4. Theideathatrationalemployersthinkatthemarginiscentraltounderstandinghowmanyunitsoflaborthey choosetoemploy. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:18.1 5. Forcompetitivefirms,thecurvethatrepresentsthevalueofmarginalproductoflaboristhesameasthedemand forlaborcurve. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.1 6. Thevalueofthemarginalproductoflaborcanbecalculatedasthepriceofthefinalgoodminusthemarginal productoflabor. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:18.1 7. Acompetitive,profitmaximizingfirmhiresworkersuptothepointatwhichthewageequalsthepriceofthefinal good. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:18.1 8. Technologicaladvancescancausethelabordemandcurvetoshift. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.1

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9. IntheUnitedStates,technologicaladvanceshelpexplainpersistentlyrisingemploymentinthefaceofrisingwages. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.1 10. Thequantityavailableofonefactorofproductioncanaffectthemarginalproductofotherfactors. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.1 11. Theopportunitycostofleisureisimpossibletomeasure,sincewecantmeasureleisuretimeindollars. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:18.2 12. Thelaborsupplycurvereflectshowworkersdecisionsaboutthelaborleisuretradeoffrespondtochangesinthe opportunitycostofleisure. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.2 13. Laborsupplycurvesarealwaysupwardsloping. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:18.2 14. Thesupplyoflaborinanyonemarketdependsontheopportunitiesavailableinothermarkets. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.2 15. Movementsofworkersfromcountrytocountrycancauseshiftsinthelaborsupplycurvesforbothcountries. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.2 16. Inacompetitivemarketforlabor,theequilibriumwagealwaysequalsthevalueofthemarginalproduct. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.3 17. AsthenumberofconcreteworkersintheUnitedStatesfalls,thewagepaidtotheremainingconcreteworkerswill necessarilyfallaswell. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:18.3 18. Oilfieldworkerswagesaredirectlytiedtotheworldpriceofoil. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:18.3 19. Changesinsupplyanddemandinthelabormarketwillcausechangesinwages. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:18.3 20. Ingeneral,lessproductiveworkersarepaidlessthanmoreproductiveworkers. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:18.3 21. IncreasesinproductivityarenotresponsibleforincreasedstandardsoflivingintheUnitedStates. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:18.3 22. Averageproductivitycanbemeasuredastotaloutputdividedbytotalunitsoflabor. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:18.3 23. Foralawnmowingandyardmaintenancebusiness,thecapitalstockwouldincludelawnmowers,rakes,shovels, andhoses. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:18.4 24. Thedemandcurveforeachfactorofproductionreflectsthemarginalproductivityofthatfactor. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.4 25. Capitalincomedoesnotincludeincomepaidtohouseholdsfortheuseoftheircapital. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:18.4 26. Firmspayoutaportionoftheirearningsintheformofinterestanddividends,andthosepaymentsareaportionof theeconomyscapitalincome. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.4 27. Whenafirmdecidestoretainitsearningsinsteadofpayingdividends,thestockholdersnecessarilysuffer. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:18.4

72 3 Chapter 18/The Markets for the Factors of Production

28. Capitalownersarecompensatedaccordingtothevalueofthemarginalproductofthatcapital. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.4 29. Achangeinthesupplyofanyonefactoralterstheearningsofalltheotherfactors. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.4 30. Astherentalpriceofcapitalincreases,lesscapitalisusedinproduction. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:18.4 31. Astherentalpriceofcapitaldecreases,morecapitalisusedinproductionandthemarginalproductofcapital increases. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:18.4 32. Ifadisease,liketheBlackDeath,weretosignificantlydecreasethepopulationofacountry,wewouldpredicta decreaseinthemarginalproductofland. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:18.4 SHORTANSWER 1. Describethedifferencebetweenadiminishingmarginalproductoflaborandanegativemarginalproductoflabor. Whywouldaprofitmaximizingfirmalwayschoosetooperatewheremarginalproductoflaborisdecreasing(but notnegative)? ANSWER:Diminishingmarginalproductoflabormeansthatthelastworkerhiredcontributeslesstothetotaloutputof thefirmthantheworkerthatwashiredjustprevioustoher.Negativemarginalproductoflaborsuggeststhatthe lastpersonhiredactuallycausestotaloutputofthefirmtodecline.Ifwagesareconstantandmarginalproductis decreasing,itforcesthefirmtoevaluatethebenefitofhiring(addedrevenue)versustheaddedcostofhiring (wage).Incompetitivemarkets,thecostandbenefitconvergeonlywhenmarginalproductdeclines.Ifmarginal productoflaborisnegative,hiringanadditionalworkerwouldactuallydecreaserevenue. TYPE:SDIFFICULTY:2SECTION:18.1 2. Explainhowafirmvaluesthecontributionofworkerstoitsprofitability.Wouldaprofitmaximizingcompetitive firmeverstopincreasingemploymentaslongasmarginalproductisrising?Explainyouranswer. ANSWER:Afirmvaluesthecontributionofaworkerbyevaluatingtheworkersindividualcontributiontofirmrevenue. Thisisdonebymultiplyingtheirmarginalproductbytheoutputpricereceivedfortheirproduction.Aprofit maximizingfirmwouldneverchoosetooperatewheremarginalproductisrisingbecausehiringanadditional workerwouldincreasethe"value"aworkercontributestothefirmandcostwouldremainconstant.Assuch,value andcostdivergeaslongamarginalproductisincreasing,anditisalwaysmoreprofitabletocontinuetohiremore workers. TYPE:SDIFFICULTY:2SECTION:18.1 3. Inthe1980s,thedangerousEbolavirusenteredtheUnitedStatesthroughcontaminatedmonkeysthatwere importedforuseinmedicalexperiments.Supposethisvirushadnotbeencontained,andhadspreadtothegeneral population.Describetheresultingeffectonlaborproductivity.(Assumethatthevirusislethalinhalfofthepeople whoareexposedtothevirus.) ANSWER:Therearetwopossibledirecteffects:Oneeffectwouldbethatpeoplewouldbeabsentfromworkiftheycaught thevirus(butdidnotdie)andsomarginalproductivitywouldbehigherfortheremainingworkers.Theothereffect isthatpeoplewhocaughttheviruswoulddieandthusthelaborsupplywoulddecreaseandtheremainingworkers wouldhaveahighermarginalproductoflabor.Whilelaborproductivityofremainingworkersincreases,total outputwouldstillfall. TYPE:SDIFFICULTY:2SECTION:18.3 4. Usingthetheoryofwagedetermination,explainwhywagesindevelopingcountriesaretypicallyquitelow. ANSWER:Wagesaredeterminedbythevalueofworkerstofirms.Inmanydevelopingcountries,thelevelofcapitalis quitesmall,andsoworkerproductivityisquitelow.Assuch,workersarenotabletocontributeasmuchvaluetoa firmastheircounterpartsincountriesthathavemorecapitaltocomplementtheirlaborefforts.Sincemarginal productivityislow,wagesarelow. TYPE:SDIFFICULTY:2SECTION:18.3

Chapter 18/The Markets for the Factors of Production 3 73

5. ArecentfloodintheMidwesthasdestroyedmuchofthefarmlandthatliesinfertileregionsneartherivers. Describetheeffectofthefloodonthemarginalproductivityofland,labor,andcapital.Howwouldthefloodaffect thepriceofinputs?Providesomeexamples. ANSWER:Thefloodwouldincreasethemarginalproductoflandandlowerthemarginalproductoflaborandcapital.As such,thepriceofunfloodedlandshouldriseandthepriceoflaborandcapitalshouldfall. TYPE:SDIFFICULTY:2SECTION:18.3 6. Describetheprocessbywhichthemarketforcapitalandthemarketforlandreachequilibrium.Aspartofyour description,elaborateontheroleofthestockoftheresourceversustheflowofservicesfromtheresource. ANSWER:Equilibriuminthemarketsforlandandcapitalaregovernedbythevalueofmarginalproductforthesefactors relativetotheirsupply.Onedifferencebetweenthesemarketsandthemarketforlaboristhedistinctionbetween rentalvalue(flow)andpurchaseprice(stock).Thisdifferenceisreconciledbynotingthatinefficientmarkets,the purchasepriceshouldreflectthevalueofthestreamofservicesprovidedbythelandorcapital(orthesumofrental valuesappropriatelydiscounted). TYPE:SDIFFICULTY:3SECTION:18.4 7. Describethedifferencebetweenthepurchasepriceofcapitalandtherentalpriceofcapital.Ifyouknowthevalueof marginalproductfromtheflowofcapitalservices,howwouldyoudeterminethemarketpriceforthecapitalstock? ANSWER:Thepurchasepriceofcapitalisareflectionoftheflowofvalueinusingthatcapitaltoproducegoodsand servicesoveritslifespan.Therentalpriceofcapitalistheperiodspecificcontributionofcapitaltoproductionof goodsandservices.Thediscountedpresentvalueofrentalpricesoverthelifeofthecapitalequipmentshouldbe equaltoitspurchaseprice. TYPE:SDIFFICULTY:3SECTION:18.4