Chapter 18
The Markets For the Factors of Production
TRUE/FALSE
1.
If the marginal productivity of the sixth worker hired is less than the marginal productivity of the fifth worker
hired, then the addition of the sixth worker causes total output to decline.
ANS: F
DIF: 2
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Marginal product of labor
MSC: Interpretive
2.
In 2008, the total income of all U.S. residents was approximately $120 billion.
ANS: F
DIF: 1
REF: 18­0
NAT: Analytic
LOC: Labor markets
TOP: Income
MSC: Interpretive
3.
In order to calculate the value of the marginal product of labor, a manager must know the marginal product of
labor and the wage rate of the worker.
ANS: F
DIF: 2
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Value of the marginal product
MSC: Interpretive
4.
Let L represent the quantity of labor and let Q represent the quantity of output. Suppose a certain production
function includes the points (L = 7, Q = 27), (L = 8, Q = 35), and
(L = 9, Q = 45). Based on these three points, this production function exhibits diminishing marginal product.
ANS: F
DIF: 2
REF: 18­1
NAT: Analytic
LOC: The study of economics, and definitions of economics
TOP: Diminishing marginal product
MSC: Applicative
5.
When a competitive firm hires labor up to the point at which the value of the marginal product of labor equals
the wage, it also produces up to the point at which the price of output equals average variable cost.
ANS: F
DIF: 3
REF: 18­1
NAT: Analytic
LOC: The study of economics, and definitions of economics
TOP: Competitive firms | Profit maximization
MSC:
Applicative
6.
The demand for computer programmers is inseparably tied to the supply of computer software.
ANS: T
DIF: 1
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Labor demand
MSC: Interpretive
7.
If Firm X is a competitive firm in the market for labor, it has little influence over the wage it pays its
employees.
ANS: T
NAT: Analytic
MSC: Interpretive
DIF: 1
REF:
LOC: Labor markets
18­1
TOP:
Labor demand
8.
The idea that rational employers think at the margin is central to understanding how many units of labor they
choose to employ.
ANS: T
DIF: 1
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Labor demand
MSC: Interpretive
9.
For competitive firms, the curve that represents the value of marginal product of labor is the same as the
demand for labor curve.
ANS: T
DIF: 2
REF:
NAT: Analytic
LOC: Labor markets
TOP: Labor demand | Value of the marginal product
18­1
MSC:
Interpretive
195
196
10.
Chapter 18/The Markets For the Factors of Production
The value of the marginal product of labor can be calculated as the price of the final good minus the marginal
product of labor.
ANS: F
DIF: 2
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Value of the marginal product
MSC: Analytical
11.
To compute the value of the marginal product of capital, you should multiply the market price of the good by
the marginal product of capital.
ANS: T
DIF: 2
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Value of the marginal product
MSC: Analytical
12.
A profit­maximizing competitive firm will hire workers up to the point at which the wage equals the price of
the final good.
ANS: F
DIF: 2
REF:
NAT: Analytic
LOC: Labor markets
TOP: Labor demand | Value of the marginal product
18­1
MSC:
Analytical
13.
A profit­maximizing competitive firm will hire workers up to the point at which the wage equals the marginal
product of labor.
ANS: F
DIF: 2
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Labor demand | Marginal product of labor
MSC: Analytical
14. Technological advances can cause the labor demand curve to shift.
ANS: T
DIF: 2
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP:
MSC: Applicative
15.
In the United States, technological advances help explain persistently rising employment in the face of rising
wages.
ANS: T
NAT: Analytic
MSC: Applicative
16.
Labor demand
DIF: 1
REF:
LOC: Labor markets
18­1
TOP:
Labor demand
DIF: 1
REF:
LOC: Labor markets
18­1
TOP:
Labor demand
DIF: 1
REF:
LOC: Labor markets
18­1
TOP:
Labor demand
Labor­augmenting technological advances increase the marginal productivity of labor.
ANS: T
NAT: Analytic
MSC: Definitional
20.
TOP:
Labor­saving technological advances decrease the marginal productivity of labor.
ANS: T
NAT: Analytic
MSC: Definitional
19.
18­1
Labor­saving technological advances increase the marginal productivity of labor.
ANS: F
NAT: Analytic
MSC: Definitional
18.
DIF: 2
REF:
LOC: Labor markets
The term Luddite refers to “tekkies” or people who are the first to adopt new technological advances.
ANS: F
NAT: Analytic
MSC: Definitional
17.
Labor demand
DIF: 1
REF:
LOC: Labor markets
18­1
TOP:
Labor demand
Labor­augmenting technological advances decrease the marginal productivity of labor.
ANS: F
NAT: Analytic
MSC: Definitional
DIF: 1
REF:
LOC: Labor markets
18­1
TOP:
Labor demand
Chapter 18/The Markets For the Factors of Production
197
21. An increase in a product’s price will shift the labor demand curve for that product to the left.
ANS: F
DIF: 1
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Labor demand
MSC: Definitional
22. The quantity available of one factor of production can affect the marginal product of other factors.
ANS: T
DIF: 2
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Marginal product of labor | Factor markets
MSC: Applicative
23. In a competitive market for labor, the equilibrium wage always equals the value of the marginal product.
ANS: T
DIF: 2
REF: 18­1
NAT: Analytic
LOC: Labor markets
TOP: Value of the marginal product
MSC: Applicative
24.
From 1960 to 2000, inflation­adjusted wages increased by 131 percent in the U.S. As a result, firms reduced
the amount of labor they employed by nearly 20 percent.
ANS: F
NAT: Analytic
MSC: Interpretive
25.
18­1
TOP:
Labor demand
The labor­supply curve is affected by the trade­off between labor and leisure.
ANS: T
NAT: Analytic
MSC: Interpretive
26.
DIF: 2
REF:
LOC: Labor markets
DIF: 2
REF:
LOC: Labor markets
18­2
TOP:
Labor supply
The opportunity cost of leisure is impossible to measure, since we can't measure leisure time in dollars.
ANS: F
NAT: Analytic
MSC: Interpretive
DIF: 2
REF:
LOC: Labor markets
18­2
TOP:
Labor supply
27.
The labor supply curve reflects how workers' decisions about the labor­leisure tradeoff respond to changes in
the opportunity cost of leisure.
ANS: T
DIF: 2
REF: 18­2
NAT: Analytic
LOC: Labor markets
TOP: Labor supply
MSC: Interpretive
28. Labor supply curves are always upward sloping.
ANS: F
DIF: 2
REF:
NAT: Analytic
LOC: Labor markets
MSC: Interpretive
29.
Labor supply
DIF: 2
REF:
LOC: Labor markets
18­2
TOP:
Labor supply
The supply of labor in any one market depends on the opportunities available in other markets.
ANS: T
NAT: Analytic
MSC: Applicative
31.
TOP:
When an individual’s income goes up, that individual may choose to supply less labor, resulting in a
backward­sloping labor supply curve.
ANS: T
NAT: Analytic
MSC: Interpretive
30.
18­2
DIF: 2
REF:
LOC: Labor markets
18­2
TOP:
Labor supply
Movements of workers from country to country can cause shifts in the labor supply curves for both countries.
ANS: T
NAT: Analytic
MSC: Applicative
DIF: 2
REF:
LOC: Labor markets
18­2
TOP:
Labor supply
198
32.
Chapter 18/The Markets For the Factors of Production
If the demand for labor in a particular industry increases, the equilibrium wage in that industry will also
increase.
ANS: T
NAT: Analytic
MSC: Analytical
DIF: 2
REF:
LOC: Labor markets
18­3
TOP:
Labor­market equilibrium
33.
If the demand for labor decreases and the supply of labor is unchanged, then the opportunity cost of leisure
will decrease.
ANS: T
DIF: 2
REF: 18­3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Opportunity cost | Wages
MSC: Interpretive
34.
Profit maximization by firms ensures that the equilibrium wage always equals the value of the marginal
product of capital.
ANS: F
DIF: 2
REF: 18­3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Marginal product | Wages
MSC: Interpretive
35.
As the number of concrete workers in the United States falls, the wage paid to the remaining concrete workers
will necessarily fall as well.
ANS: F
DIF: 2
REF: 18­3
NAT: Analytic
LOC: Labor markets
TOP: Labor­market equilibrium
MSC: Applicative
36. Oil field workers' wages are directly tied to the world price of oil.
ANS: T
DIF: 1
REF: 18­3
NAT: Analytic
LOC: Labor markets
TOP:
MSC: Applicative
Labor­market equilibrium
37. Changes in supply and demand in the labor market will cause changes in wages.
ANS: T
DIF: 1
REF: 18­3
NAT: Analytic
LOC: Labor markets
TOP: Labor­market equilibrium
MSC: Definitional
38. In general, less productive workers are paid less than more productive workers.
ANS: T
DIF: 1
REF: 18­3
NAT: Analytic
LOC: Labor markets
TOP: Labor­market equilibrium
MSC: Applicative
39. Increases in productivity are not responsible for increased standards of living in the United States.
ANS: F
DIF: 2
REF: 18­3
NAT: Analytic
LOC: Labor markets
TOP: Factor markets
MSC: Applicative
40. Average productivity can be measured as total output divided by total units of labor.
ANS: T
DIF: 1
REF: 18­3
NAT: Analytic
LOC: Labor markets
TOP: Factor markets
MSC: Definitional
41. The rental price of capital is the price a person pays to own the capital indefinitely.
ANS: F
DIF: 2
REF: 18­4
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Capital market
MSC: Interpretive
42. The marginal product of land depends on the quantity of land that is available.
ANS: T
DIF: 2
REF: 18­4
NAT: Analytic
LOC: Labor markets
TOP: Land markets
MSC: Interpretive
Chapter 18/The Markets For the Factors of Production
199
43. For a snow­removal business, the capital stock would include inputs such as snow blowers and shovels.
ANS: T
DIF: 1
REF: 18­4
NAT: Analytic
LOC: Labor markets
TOP: Capital
MSC: Definitional
44. The demand curve for each factor of production equals the value of the marginal product of that factor.
ANS: T
DIF: 2
REF: 18­4
NAT: Analytic
LOC: Labor markets
TOP: Factor markets
MSC: Interpretive
45. Capital income does not include income paid to households for the use of their capital.
ANS: F
DIF: 2
REF: 18­4
NAT: Analytic
LOC: Labor markets
TOP: Capital income
MSC: Definitional
46.
Firms pay out a portion of their earnings in the form of interest and dividends, and those payments are a
portion of the economy's capital income.
ANS: T
NAT: Analytic
MSC: Definitional
47.
Capital income
DIF: 2
REF:
LOC: Labor markets
18­4
TOP:
Capital
DIF: 2
REF:
LOC: Labor markets
18­4
TOP:
Capital
A change in the supply of any one factor alters the earnings of all the other factors.
ANS: T
NAT: Analytic
MSC: Interpretive
50.
TOP:
Capital owners are compensated according to the value of the marginal product of that capital.
ANS: T
NAT: Analytic
MSC: Interpretive
49.
18­4
When a firm decides to retain its earnings instead of paying dividends, the stockholders necessarily suffer.
ANS: F
NAT: Analytic
MSC: Interpretive
48.
DIF: 2
REF:
LOC: Labor markets
DIF: 2
REF:
LOC: Labor markets
18­4
TOP:
Factor markets
If the output price of a product rises, the demand for capital will increase, raising the rental price of capital.
ANS: T
NAT: Analytic
MSC: Applicative
DIF: 1
REF:
LOC: Labor markets
18­4
TOP:
Capital
51.
Suppose the supply of capital decreases. As a result, the quantity of capital used in production and the rental
price of capital will both fall.
ANS: F
DIF: 2
REF: 18­4
NAT: Analytic
LOC: Labor markets
TOP: Capital
MSC: Analytical
52.
Suppose an influenza pandemic were to significantly decrease the population of a country. We would predict
a decrease in the marginal product of land in that country.
ANS: T
NAT: Analytic
MSC: Analytical
DIF: 2
REF:
LOC: Labor markets
18­4
TOP:
Land markets
200
Chapter 18/The Markets For the Factors of Production
SHORT ANSWER
1.
Describe the difference between a diminishing marginal product of labor and a negative marginal product of
labor. Why would a profit­maximizing firm always choose to operate where the marginal product of labor is
decreasing (but not negative)?
ANS:
Diminishing marginal product of labor means that the last worker hired contributes less to the total output of the
firm than the worker who was hired just previous to her. Negative marginal product of labor suggests that the last
person hired actually causes total output of the firm to decline. The firm evaluates the benefit of hiring (added
revenue) versus the added cost of hiring (wage). In competitive markets, the cost and benefit converge only when
marginal product declines. If the marginal product of labor is negative, hiring an additional worker would actually
decrease revenue. A profit­maximizing firm would never choose to operate where marginal product is rising because
hiring an additional worker would increase the “value” a worker contributes to the firm, while costs remain constant.
Thus, the firm will choose to operate where marginal product of labor is decreasing.
DIF:
TOP:
2.
2
REF: 18­1
Diminishing marginal product
MSC: Analytical
Explain how a firm values the contribution of workers to its profitability. Would a profit­maximizing
competitive firm ever stop increasing employment as long as marginal product is rising? Explain your answer.
ANS:
A firm values the contribution of a worker by evaluating the worker's individual contribution to firm revenue. This
is done by multiplying the worker’s marginal product by the output price received for his production. A profit­
maximizing firm would never choose to operate where marginal product is rising because hiring an additional
worker would increase the "value" a worker contributes to the firm and cost would remain constant. As such, value
and cost diverge as long a marginal product is increasing, and it is always more profitable to continue to hire more
workers.
DIF: 2
MSC: Analytical
3.
REF:
18­1
TOP:
Marginal product of labor
In the 1980s, the dangerous Ebola virus entered the United States through contaminated monkeys that were
imported for use in medical experiments. Suppose this virus had not been contained but had spread to the
general population. Assume that the virus is lethal in half of the people who are exposed to it. Describe the
resulting effect on labor productivity.
ANS:
There are two possible direct effects: One effect would be that people would be absent from work if they caught the
virus (but did not die) and so marginal productivity would be higher for the remaining workers. The other effect is
that people who caught the virus would die, the labor supply would decrease, and the remaining workers would have
a higher marginal product of labor. While the marginal productivity of the remaining workers increases, total output
would still fall.
DIF: 2
MSC: Analytical
4.
REF:
18­3
TOP:
Marginal product of labor
Using the theory of wage determination, explain why wages in developing countries. where levels of capital
are small, are typically quite low.
ANS:
Wages are determined by the value of workers to firms. In many developing countries, the level of capital is quite
small, and so worker productivity is quite low. Workers are not able to contribute as much value to a firm as their
counterparts in countries that have more capital to complement their labor efforts. Since marginal productivity is
low, wages are low.
DIF: 2
MSC: Analytical
REF:
18­3
TOP:
Capital
Chapter 18/The Markets For the Factors of Production
5.
201
A recent flood in the Midwest has destroyed much of the farmland that lies in fertile regions near the rivers.
Describe the effect of the flood on the marginal productivity of land, labor, and capital. How would the flood
affect the price of inputs? Provide some examples.
ANS:
The flood would increase the marginal product of unflooded land, lower the marginal product of labor, and lower
the marginal product of capital. As such, the price of unflooded land should rise, and the prices of both labor and
capital should fall.
DIF: 2
MSC: Analytical
6.
REF:
18­3
TOP:
Land markets
Describe the process by which the market for capital and the market for land reach equilibrium. As part of
your description, elaborate on the role of the stock of the resource versus the flow of services from the
resource.
ANS:
Equilibriums in the markets for land and capital are governed by the value of marginal product for these factors
relative to their supply. One difference between these markets and the market for labor is that in land and capital
markets there is both a rental value (flow) and purchase price (stock). The difference between the rental value and
purchase price is reconciled by noting that in efficient markets, the purchase price should reflect the value of the
stream of services provided by the land or capital (or the sum of rental values appropriately discounted).
DIF:
TOP:
7.
3
REF: 18­4
Capital markets | Land markets
MSC: Analytical
Describe the difference between the purchase price of capital and the rental price of capital. If you know the
value of marginal product from the flow of capital services, how would you determine the market price for the
capital stock?
ANS:
The purchase price of capital is a reflection of the flow of value in using that capital to produce goods and services
over its life span. The rental price of capital is the period­specific contribution of capital to production of goods and
services. The discounted present value of rental prices over the life of the capital equipment should be equal to its
purchase price.
DIF: 3
MSC: Analytical
REF:
18­4
TOP:
Capital
Sec00 ­ The Markets for the Factors of Production
MULTIPLE CHOICE
1.
In 2008, the total income of all U.S. residents was about
a. $12 billion.
b. $14 billion.
c. $12 trillion.
d. $14 trillion.
ANS: D
NAT: Analytic
MSC: Definitional
2.
DIF: 1
REF:
LOC: Labor markets
18­0
TOP:
Factor markets
TOP:
Factors of production
Capital, labor, and land
a. have derived demands.
b. are factors of production.
c. are inputs used in the production of goods and services.
d. All of the above are correct.
ANS: D
NAT: Analytic
MSC: Definitional
DIF: 1
REF:
LOC: Labor markets
18­0
202
3.
Chapter 18/The Markets For the Factors of Production
Most of the total income earned in the U.S. economy is ultimately paid to
a. households in the form of wages and fringe benefits.
b. landowners in the form of rent.
c. landowners in the form of interest.
d. landowners in the form of profit.
ANS: A
NAT: Analytic
MSC: Definitional
4.
18­0
TOP:
Factor markets
Since workers in the U.S. economy receive most of the total income earned, which of the following factors of
production is considered to be the most important?
a. Profit
b. Wages
c. Interest
d. Labor
ANS: D
NAT: Analytic
MSC: Definitional
5.
DIF: 2
REF:
LOC: Labor markets
DIF: 1
REF:
LOC: Labor markets
18­0
TOP:
Factor markets
How much of the income in the United States is earned by workers in the form of wages and fringe benefits?
a. about 25 percent
b. about 50 percent
c. about 75 percent
d. about 87 percent
ANS: C
NAT: Analytic
MSC: Definitional
DIF: 1
REF:
LOC: Labor markets
18­0
TOP:
Factor markets
Sec01 ­ The Markets for the Factors of Production ­ The Demand for Labor
MULTIPLE CHOICE
1.
The production function is the
a. increase in the amount of output from an additional unit of labor.
b. marginal product of an input times the price of output.
c. relationship between the quantity of inputs and output.
d. shift in labor demand caused by a change in the price of output.
ANS: C
DIF:
LOC: Labor markets
MSC: Definitional
1
REF:
TOP:
18­1
NAT: Analytic
Production function
Chapter 18/The Markets For the Factors of Production
203
Table 18­1
Number of
Workers (L)
1
2
3
4
2.
Output of
Firm A
100
200
300
400
Output of
Firm B
100
300
600
1,000
Output of
Firm C
100
190
270
340
Output of
Firm D
100
80
60
40
Refer to Table 18­1. Which firm’s production function exhibits diminishing marginal product?
a. Firm A
b. Firm B
c. Firm C
d. Firm D
ANS: C
DIF:
LOC: Labor markets
MSC: Analytical
2
REF:
TOP:
18­1
NAT: Analytic
Diminishing marginal product
Scenario 18­1
Harry owns a snow­removal business. He hires workers to shovel driveways for him during the winter. The first
worker he hires can shovel twelve driveways in one day. When Harry hires two workers, they can shovel a total of
22 driveways in one day. When Harry hires a third worker, he shovels an additional eight driveways in one day.
3.
Refer to Scenario 18­1. What is the marginal productivity of the second worker?
a. 7
b. 10
c. 12
d. 22
ANS: B
DIF:
LOC: Labor markets
MSC: Analytical
4.
REF:
TOP:
18­1
NAT: Analytic
Marginal product of labor
Refer to Scenario 18­1. What is the total productivity of three workers?
a. 12
b. 22
c. 30
d. 42
ANS: C
DIF:
LOC: Labor markets
MSC: Analytical
5.
2
2
REF:
TOP:
18­1
NAT: Analytic
Marginal product of labor
Refer to Scenario 18­1. Suppose that Harry pays each worker $80 per day and that he charges each customer
$20 to have his driveway shoveled. What is the value of the marginal product of labor for the second worker?
a. $200
b. $240
c. $800
d. $960
ANS: A
DIF:
LOC: Labor markets
MSC: Analytical
2
REF:
TOP:
18­1
NAT: Analytic
Value of the marginal product
204
6.
Chapter 18/The Markets For the Factors of Production
Refer to Scenario 18­1. Suppose that Harry pays each worker $80 per day and that he charges each customer
$20 to have his driveway shoveled. What is the value of the marginal product of labor for the third worker?
a. $160
b. $640
c. $1,600
d. $2,400
ANS: A
DIF:
LOC: Labor markets
MSC: Analytical
2
REF:
TOP:
18­1
NAT: Analytic
Value of the marginal product
Table 18­2
The following table shows the production function for a particular business. The numbers represent the various
labor and output combinations the firm may choose for its output on a daily basis.
Labor
0
1
2
3
4
5
7.
Refer to Table 18­2. What is the marginal product of the third unit of labor?
a. 40 units
b. 50 units
c. 60 units
d. 180 units
ANS: B
DIF:
LOC: Labor markets
MSC: Analytical
8.
1
REF:
TOP:
18­1
NAT: Analytic
Marginal product of labor
Refer to Table 18­2. What is the marginal product of the fifth unit of labor?
a. 30 units
b. 40 units
c. 50 units
d. 250 units
ANS: A
DIF:
LOC: Labor markets
MSC: Analytical
9.
Output
0
70
130
180
220
250
1
REF:
TOP:
18­1
NAT: Analytic
Marginal product of labor
Refer to Table 18­2. Suppose this firm charges a price of $5 per unit of output and pays workers a wage
equal to $160 per day. What is the value of the marginal product of labor for the second worker?
a. $300
b. $650
c. $9,600
d. $20,800
ANS: A
DIF:
LOC: Labor markets
MSC: Analytical
2
REF:
TOP:
18­1
NAT: Analytic
Value of the marginal product
Chapter 18/The Markets For the Factors of Production
10.
Refer to Table 18­2. Suppose this firm charges a price of $5 per unit of output and pays workers a wage
equal to $160 per day. What is the value of the marginal product of labor for the fourth worker?
a. $200
b. $1,000
c. $6,400
d. $32,000
ANS: A
DIF:
LOC: Labor markets
MSC: Analytical
11.
2
REF:
TOP:
18­1
NAT: Analytic
Value of the marginal product
Refer to Table 18­2. Suppose this firm charges a price of $5 per unit of output and pays workers a wage
equal to $160 per day. How many workers should this firm hire to maximize its profit?
a. 2 workers
b. 3 workers
c. 4 workers
d. 5 workers
ANS: C
DIF: 2
REF: 18­1
LOC: Labor markets
TOP: Value of the marginal product | Profit maximization
12.
MSC: Analytical
2
REF:
TOP:
18­1
NAT: Analytic
Value of the marginal product
Which of the following statements is correct?
a. An increase in the supply of other factors, such as capital, will increase the demand for labor.
b. Labor­saving technology will increase the demand for labor.
c. Labor­augmenting technology will decrease the demand for labor.
d. A decrease in the price of output will increase the demand for labor.
ANS: A
DIF:
LOC: Labor markets
MSC: Interpretive
14.
NAT: Analytic
The value of the marginal product of labor
a. increases when the price of output decreases.
b. is the firm’s demand for labor.
c. equals the marginal product of labor divided by the wage rate.
d. All of the above are correct.
ANS: B
DIF:
LOC: Labor markets
MSC: Analytical
13.
205
3
REF:
TOP:
18­1
NAT: Analytic
Labor demand
Suppose that a competitive firm hires labor up to the point at which the value of the marginal product equals
the wage. If the firm pays a wage of $700 per week and the marginal product of labor equals 20 units per
week, then the marginal cost of producing an additional unit of output is
a. $35
b. $70
c. $700
d. We do not have enough information to answer this question.
ANS: A
DIF:
LOC: Labor markets
MSC: Analytical
3
REF:
TOP:
18­1
NAT: Analytic
Marginal product of labor
206
15.
Chapter 18/The Markets For the Factors of Production
Suppose that a competitive firm hires labor up to the point at which the value of the marginal product equals
the wage. If the firm pays a wage of $700 per week and the marginal product of labor equals 100 units per
week, then the marginal cost of producing an additional unit of output is
a. $7
b. $70
c. $700
d. We do not have enough information to answer this question.
ANS: A
DIF:
LOC: Labor markets
MSC: Analytical
3
REF:
TOP:
18­1
NAT: Analytic
Marginal product of labor
Figure 18­1. On the graph, L represents the quantity of labor and Q represents the quantity of output per week.
Q
420
390
345
285
210
120
1
16.
2
3
4
6
L
Refer to Figure 18­1. The figure illustrates the
a. demand for labor.
b. supply of labor.
c. production function.
d. wage function.
ANS: C
DIF: 1
REF: 18­1
LOC: The study of economics, and definitions of economics
MSC: Definitional
17.
5
NAT: Analytic
TOP: Production function
Refer to Figure 18­1. The marginal product of the second worker is
a. 90 units of output.
b. 105 units of output.
c. 210 units of output.
d. 330 units of output.
ANS: A
DIF: 2
REF: 18­1
LOC: The study of economics, and definitions of economics
MSC: Applicative
NAT: Analytic
TOP: Marginal product of labor
Chapter 18/The Markets For the Factors of Production
18.
Refer to Figure 18­1. The marginal product of the fourth worker is
a. 60 units of output.
b. 75 units of output.
c. 285 units of output.
d. 345 units of output.
ANS: A
DIF: 2
REF: 18­1
LOC: The study of economics, and definitions of economics
MSC: Applicative
19.
REF:
TOP:
18­1
NAT: Analytic
Marginal revenue product
2
REF:
TOP:
18­1
NAT: Analytic
Marginal revenue product
Refer to Figure 18­1. Suppose the firm hires each unit of labor for $700 per week, and each unit of output
sells for $9. How many workers will the firm hire to maximize its profit?
a. 2
b. 3
c. 4
d. 5
ANS: A
DIF:
LOC: Labor markets
MSC: Applicative
22.
2
Refer to Figure 18­1. Suppose the firm sells its output for $12 per unit, and it pays each of its workers $700
per week. The value of the marginal product of the fifth worker is
a. $540
b. $700
c. $720
d. $1,080
ANS: A
DIF:
LOC: Labor markets
MSC: Applicative
21.
NAT: Analytic
TOP: Marginal product of labor
Refer to Figure 18­1. Suppose the firm hires each unit of labor for $600 per week, and each unit of output
sells for $9. What is the value of the marginal product of the third worker?
a. $540
b. $600
c. $675
d. $810
ANS: C
DIF:
LOC: Labor markets
MSC: Applicative
20.
207
2
REF:
TOP:
18­1
NAT: Analytic
Marginal revenue product | Profit maximization
Refer to Figure 18­1. Suppose the firm sells its output for $12 per unit, and it pays each of its workers $700
per week. How many workers will the firm hire to maximize its profit?
a. 2
b. 3
c. 4
d. 5
ANS: C
DIF:
LOC: Labor markets
MSC: Applicative
2
REF:
TOP:
18­1
NAT: Analytic
Marginal revenue product | Profit maximization
208
23.
Chapter 18/The Markets For the Factors of Production
Refer to Figure 18­1. Suppose the firm sells its output for $15 per unit, and it pays each of its workers $750
per week. When output increases from 210 units to 285 units,
a. the marginal cost is $10 per unit of output.
b. the marginal revenue is $5 per unit of output.
c. the value of the marginal product of labor is $4,275
d. the firm’s profit decreases.
ANS:
LOC:
TOP:
MSC:
24.
C
DIF: 3
REF: 18­1
Labor markets
Marginal revenue | Marginal cost | Marginal revenue product
Applicative
2
REF:
TOP:
18­1
NAT: Analytic
Profit maximization
Refer to Figure 18­1. Suppose the firm sells its output for $20 per unit, and it pays each of its workers
$1,250 per week. The firm maximizes profit by hiring
a. 3 workers.
b. 4 workers.
c. 5 workers.
d. 6 workers.
ANS: A
DIF:
LOC: Labor markets
MSC: Analytical
27.
NAT: Analytic
Refer to Figure 18­1. Suppose the firm sells its output for $25 per unit, and it pays each of its workers
$1,000 per week. Also, the firm’s non­labor costs are fixed and they amount to $2,000. The firm maximizes
profit by hiring
a. 2 workers.
b. 3 workers.
c. 4 workers.
d. 5 workers.
ANS: D
DIF:
LOC: Labor markets
MSC: Applicative
26.
NAT: Analytic
Refer to Figure 18­1. Suppose the firm sells its output for $10 per unit, and it pays each of its workers $400
per week. When the number of workers increases from 4 to 5,
a. the marginal revenue is $450 per unit of output and the marginal cost is $400 per unit of output.
b. the value of the marginal product of labor is $3,900 and the marginal cost per unit of output is
$400.
c. the value of the marginal product of labor is $450 and the marginal cost per unit of output is about
$8.89.
d. the firm’s profit increases.
ANS:
LOC:
TOP:
MSC:
25.
A
DIF: 3
REF: 18­1
Labor markets
Marginal cost | Marginal revenue | Marginal revenue product
Applicative
2
REF:
TOP:
18­1
NAT: Analytic
Profit maximization
Refer to Figure 18­1. The shape of the curve suggests the presence of
a. an inverted production function.
b. diminishing total product.
c. increasing marginal product.
d. diminishing marginal product.
ANS: D
DIF:
LOC: Labor markets
MSC: Analytical
2
REF:
TOP:
18­1
NAT: Analytic
Diminishing marginal product
Chapter 18/The Markets For the Factors of Production
209
Figure 18­2. The figure shows a particular firm’s value­of­marginal­product (VMP) curve. On the horizontal axis,
L represents the number of workers. The time frame is daily.
400 VMP
360
320
280
240
200
160
120
80
40
VMP
1
28.
4
5
6
7
L
1
REF:
TOP:
18­1
NAT: Analytic
Marginal revenue product | Labor demand
Refer to Figure 18­2. The firm would choose to hire three workers if
a. the market wage for a day’s work is $220.
b. the market wage for a day’s work is $260.
c. the output price is $220.
d. the output price is $260.
ANS: A
DIF:
LOC: Labor markets
MSC: Applicative
30.
3
Refer to Figure 18­2. The value­of­marginal­product curve that is drawn could be relabeled as the firm’s
a. production function.
b. total revenue curve.
c. labor supply curve.
d. labor demand curve.
ANS: D
DIF:
LOC: Labor markets
MSC: Interpretive
29.
2
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
Refer to Figure 18­2. Suppose the marginal product of the fifth unit of labor is 30 units of output per day.
The figure implies that the
a. price of output is $4.
b. price of output is $6.
c. price of output is $8.
d. daily wage is $120.
ANS: A
DIF:
LOC: Labor markets
MSC: Applicative
2
REF:
TOP:
18­1
NAT: Analytic
Marginal revenue product
31. Refer to Figure 18­2. Suppose one point on the firm’s production function is
(L = 3, Q = 180), where L = number of workers and Q = quantity of output. If the firm sells its output for $5 per
unit, then
a. a second point on the firm’s production function is (L = 4, Q = 216).
b. the firm’s production function exhibits the property of diminishing marginal product of labor.
c. the firm will maximize profit by hiring four workers if it pays workers $160 per day.
d. All of the above are correct.
ANS: D
DIF:
LOC: Labor markets
MSC: Applicative
3
REF:
TOP:
18­1
NAT: Analytic
Marginal revenue product | Profit maximization
210
Chapter 18/The Markets For the Factors of Production
32. Refer to Figure 18­2. Assume the following:
• Two points on the firm’s production function are (L = 2, Q = 180) and (L = 3, Q = 228),
where L = number of workers and Q = quantity of output.
• The firm pays its workers $120 per day.
• The firm’s non­labor costs are fixed and they amount to $250 per day.
We can conclude that
a. the firm sells its output for $12 per unit.
b. if the firm is currently employing 2 workers per day, then profit could be increased by $48 per day
if a third worker is hired.
c. the marginal cost per unit of output is $2.50 when output is increased from 180 units per day to 228
units per day.
d. the firm’s maximum profit occurs when it hires 3 workers per day.
ANS:
LOC:
TOP:
MSC:
33.
C
DIF: 3
REF: 18­1
NAT: Analytic
Labor markets
Marginal cost | Marginal revenue product | Profit maximization
Analytical
The factors of production are best defined as the
a. output produced from raw materials.
b. inputs used to produce goods and services.
c. wages paid to the workforce.
d. goods and services sold in the market.
ANS: B
DIF:
LOC: Labor markets
MSC: Definitional
34.
18­1
NAT: Analytic
Factor markets
1
REF:
TOP:
18­1
NAT: Analytic
Factors of production
Because a firm's demand for a factor of production is derived from its decision to supply a good in the market,
it is called a
a. differentiated demand.
b. secondary demand.
c. derived demand.
d. hybrid demand­supply.
ANS: C
DIF:
LOC: Labor markets
MSC: Definitional
36.
REF:
TOP:
Economists refer to the inputs that firms use to produce goods and services as
a. derived factors.
b. derived resources.
c. factors of production.
d. instruments of revenue.
ANS: C
DIF:
LOC: Labor markets
MSC: Definitional
35.
1
1
REF:
TOP:
18­1
NAT: Analytic
Factor markets
The term "factor market" applies to the market for
a. labor.
b. capital.
c. land.
d. All of the above are correct.
ANS: D
DIF:
LOC: Labor markets
MSC: Definitional
1
REF:
TOP:
18­1
NAT: Analytic
Factor markets
Chapter 18/The Markets For the Factors of Production
37.
Factor markets are different from product markets in an important way because
a. equilibrium is the exception, and not the rule, in factor markets.
b. the demand for a factor of production is a derived demand.
c. the demand for a factor of production is likely to be upward sloping, in violation of the law of
demand.
d. All of the above are correct.
ANS: B
DIF:
LOC: Labor markets
MSC: Interpretive
38.
2
REF:
TOP:
18­1
NAT: Analytic
Factor markets
2
REF:
TOP:
18­1
NAT: Analytic
Factors of production
Labor markets are different from most other markets because labor demand is
a. represented by a vertical line on a supply­demand diagram.
b. represented by an upward­sloping line on a supply­demand diagram.
c. such an elusive concept.
d. a derived demand.
ANS: D
DIF:
LOC: Labor markets
MSC: Interpretive
41.
18­1
NAT: Analytic
Factor markets
The basic tools of supply and demand apply to
a. markets for goods and services and to markets for labor services.
b. markets for goods and services but not to markets for labor services.
c. markets for goods and services but not to markets for factors of production.
d. all markets except those in which demand is derived demand.
ANS: A
DIF:
LOC: Labor markets
MSC: Interpretive
40.
REF:
TOP:
Factor­market analysis could not be complete without some characterization of
a. product­market demand.
b. the marginal productivities of the different factors.
c. market prices for final goods and services.
d. All of the above are correct.
ANS: D
DIF:
LOC: Labor markets
MSC: Interpretive
39.
2
1
REF:
TOP:
18­1
NAT: Analytic
Factors of production
Which of the following best illustrates the concept of "derived demand?"
a. An increase in the wages of auto workers will lead to an increase in the demand for robots in
automobile factories.
b. An automobile producer's decision to supply more cars will lead to an increase in the demand for
automobile production workers.
c. An automobile producer's decision to supply more minivans results from a decrease in the demand
for station wagons.
d. An increase in the price of gasoline will lead to an increase in the demand for small cars.
ANS: B
DIF:
LOC: Labor markets
MSC: Interpretive
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
211
212
42.
Chapter 18/The Markets For the Factors of Production
When a firm maximizes profit,
a. it will hire workers up to the point where the marginal product of labor is equal to the product price.
b. it will hire workers up to the point where the marginal product of labor is equal to the wage.
c. it will hire workers up to the point where the value of the marginal product of labor is equal to the
product price.
d. it will hire workers up to the point where the value of the marginal product of labor is equal to the
wage.
ANS: D
DIF:
LOC: Labor markets
MSC: Interpretive
43.
REF:
TOP:
18­1
NAT: Analytic
Labor demand
For a competitive, profit­maximizing firm, the labor demand curve is the same as the
a. marginal cost curve.
b. value of marginal product curve.
c. production function.
d. profit function.
ANS: B
DIF:
LOC: Labor markets
MSC: Analytical
44.
2
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
Which of the following is true at the level of output at which a competitive firm maximizes profit?
a. Price = marginal cost
b. Price = Wage/Value of marginal product of labor
c. Price = Marginal product of labor/wage
d. All of the above are correct.
ANS: A
DIF:
LOC: Labor markets
MSC: Applicative
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
45. What causes the labor demand curve to shift?
(i)
changes in productivity
(ii)
changes in wages
(iii)
changes in output prices
a.
b.
c.
d.
(i) and (ii)
(ii) and (iii)
(i) and (iii)
All of the above are correct.
ANS: C
DIF:
LOC: Labor markets
MSC: Applicative
46.
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
If the price of airline tickets falls, what will happen to the demand curve for flight attendants?
a. It will shift to the right.
b. It will shift to the left.
c. The direction of the shift is ambiguous.
d. It will remain unchanged.
ANS: B
DIF:
LOC: Labor markets
MSC: Applicative
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
Chapter 18/The Markets For the Factors of Production
47.
If the demand curve for beef shifts to the right, then the value of the marginal product of labor for butchers
will
a. rise.
b. fall.
c. remain unchanged.
d. rise or fall; either is possible.
ANS: A
DIF:
LOC: Labor markets
MSC: Applicative
48.
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
If the demand curve for computer games shifts to the left, then the value of the marginal product of labor for
computer game authors will
a. rise.
b. fall.
c. remain unchanged.
d. rise or fall; either is possible.
ANS: B
DIF:
LOC: Labor markets
MSC: Applicative
49.
213
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
Competitive firms decide how much output to sell by producing output until the price of the good equals
a. marginal product.
b. the value of marginal product.
c. marginal cost.
d. marginal profit.
ANS: C
DIF:
LOC: Labor markets
MSC: Applicative
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
50. Competitive firms hire workers until the additional benefit they receive from the last worker hired is equal to
(i)
the additional cost of that worker.
(ii)
the wage paid to that worker.
(iii)
the marginal product of that worker.
a.
b.
c.
d.
(i) only
(iii) only
(i) and (ii)
(ii) and (iii)
ANS: C
DIF:
LOC: Labor markets
MSC: Analytical
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
51.
Dan owns one of the many bakeries in New York City. Which of the following events will lead to an increase
in Dan's demand for the services of bakers?
(i)
The price of muffins increases. (Muffins are Dan's specialty.)
(ii)
Dan adds three new ovens to the kitchen area to help the bakers work faster.
(iii)
Local bakers form a union to protect themselves from low wages.
a.
b.
c.
d.
(i) and (ii)
(ii) and (iii)
(i) and (iii)
All of the above are correct.
ANS: A
DIF:
LOC: Labor markets
MSC: Applicative
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
214
52.
Chapter 18/The Markets For the Factors of Production
John owns a number of hot dog stands in New York City. He hires workers to sell hot dogs at his stands.
Which of the following events will lead to a decrease in John's demand for hot dog vendors?
a. Hollywood glamorization of a new movie about a hot dog vendor leads hundreds of high­school
students in New York City to apply for a job at John's.
b. The price of hot dogs falls.
c. The local hot dog vendors form a union increasing hot dog vendor wages.
d. The demand curve for hot dogs shifts to the right.
ANS: B
DIF:
LOC: Labor markets
MSC: Applicative
53.
1
REF:
TOP:
18­1
NAT: Analytic
Labor demand
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
Which of the following events could decrease the demand for labor?
a. An increase in the number of migrant workers
b. An increase in the marginal productivity of workers
c. A decrease in demand for the final product produced by labor
d. A decrease in the supply of labor
ANS: C
DIF:
LOC: Labor markets
MSC: Applicative
56.
18­1
NAT: Analytic
Labor demand
Which of the following events could increase the demand for labor?
a. A decrease in output price
b. A decrease in the amount of capital available for workers to use
c. An increase in the marginal productivity of workers
d. A decrease in the wage paid to workers
ANS: C
DIF:
LOC: Labor markets
MSC: Applicative
55.
REF:
TOP:
A sandwich shop hires workers to make sandwiches and sell them to customers. If the firm is competitive in
both the market for sandwiches and in the market for sandwich­makers, then it has
a. some control over both the price of sandwiches and the wage it pays to its workers.
b. no control over the price of sandwiches but some control over the wage it pays to its workers.
c. some control over the price of sandwiches but no control over the wage it pays to its workers.
d. no control over either the price of sandwiches or the wage it pays to its workers.
ANS: D
DIF:
LOC: Labor markets
MSC: Applicative
54.
2
2
REF:
TOP:
18­1
NAT: Analytic
Labor demand
When we focus on the firm as a supplier of a good or a service, we assume that the firm is a profit maximizer.
When we focus on the firm as a demander of labor, we assume that the firm's objective is to
a. minimize wages.
b. minimize variable costs.
c. maximize the number of workers hired.
d. maximize profit.
ANS: D
DIF:
LOC: Labor markets
MSC: Interpretive
1
REF:
TOP:
18­1
NAT: Analytic
Labor demand