Chapter 11
Practice Quiz
Labor Markets
1
1. Marginal revenue product measures the
increase in
a. output resulting from one more unit of
labor.
b. TR resulting from one more unit of
output.
c. revenue per unit from one more unit of
output.
d. total revenue resulting from one more
unit of labor.
D. MRP is the increase in total revenue to a
firm resulting from hiring an additional unit
of labor or other variable resource.
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2. Troll Corporation sells dolls for $10.00 each in a market
that is perfectly competitive. Increasing the number of
workers from 100 to 101 would cause output to rise from
500 to 510 dolls per day. Troll should hire the 101st worker
only when the wage is
a. $100 or less per day.
b. more than $100 per day.
c. $5.10 or less per day.
d. none of the above.
A. Under perfect competition, the firm hires
workers until the MRP equals the wage rate.
MRP equals $10 x MP (510 - 500) = $100.
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3. Derived demand for labor depends on the
a. cost of factors of production used in the
product.
b. market supply curve of labor.
c. consumer demand for the final goods
produced by labor.
d. firm’s total revenue less economic profit.
C. If consumers do not purchase goods, there
is no MRP and no workers are hired.
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4. If demand for a product falls, the
demand curve for labor used to produce
the product will
a. shift leftward.
b. shift rightward.
c. shift upward.
d. remain unchanged.
A. If consumers demand for a product
decreases and supply remains constant,
the price of the product falls and the
MRP (P x MP) decreases.
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5. The owner of a restaurant will hire
waiters if the
a. additional labor’s pay is close to the
minimum wage .
b. marginal product is at the maximum.
c. additional work of the employees adds
more to total revenue than to costs.
d. waiters do not belong to a union.
C. If MRP exceeds the wage rate paid
waiters, it is profitable for the restaurant
to hire more waiters.
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6. In a perfectly competitive market, the
demand curve for labor
a. slopes upward.
b. slopes downward because of
diminishing marginal productivity.
c. is perfectly elastic at the equilibrium
wage rate.
d. is described by all of the above.
B. As output expands in the short run, a fixed
factor results in diminishing returns causing MP
to decrease. Correspondingly, MRP decreases.
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7. A union can influence the equilibrium
wage rate by
a. featherbedding.
b. requiring longer apprenticeships.
c. favoring trade restrictions on
foreign products.
d. all of the above.
e. none of the above.
D. Featherbedding and trade protectionism
increase the demand for labor. Requiring
longer apprenticeship decreases the
demand for labor.
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8. In which of the following market
structures is the firm not a price taker
in the factor market?
a. Oligopoly.
b. Monopsony.
c. Monopoly.
d. Perfect competition.
B. Monopsony is a labor market in which a
single firm hires labor. For example, the
“company town” where everyone works
for the same employer.
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9. The extra cost of obtaining each additional
unit of a factor of production is called the
marginal
a. physical product.
b. revenue product.
c. factor cost.
d. implicit cost.
C. The assumption of MFC is that the firm
must pay a higher wage to each additional
worker as well as to all previously hired
workers.
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10. A monopsonist’s marginal factor cost curve lies
above its supply curve because the firm must
a. increase the price of its product to sell more.
b. lower the price of its product to sell more.
c. increase the wage rate to hire more labor.
d. lower the wage rate to hire more labor.
C. The monopsonist can hire an additional
worker only by raising the wage rate for
all workers. Therefore, the MFC
exceeds the wage rate along the labor
supply curve.
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11. To maximize profits, a monopsonist will
hire the quantity of labor to the point
where the marginal factor cost is equal to
a. marginal physical product.
b. marginal revenue product.
c. total revenue product.
d. any of the above.
B. The MRP curve is the contribution of each
worker to total revenue and MFC the
addition to total cost. When MRP > MFC,
the firm hires more workers.
12
12. BigBiz, a local monopsonist, currently hires
50 workers and pays them $6 per hour. To
attract an additional worker to its labor
force, BigBiz would have to raise the wage
rate to $6.25 per hour. What is BigBiz’s
marginal factor cost?
a. $6.25 per hour.
b. $12.50 per hour.
c. $18.75 per hour.
d. $20.00 per hour.
C. Its total cost would increase by $18.75 to
hire that additional worker (25 x 50 + 6.25).
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13. Suppose a firm can hire 100 workers at
$8.00 per hour, but must pay $8.05 per hour
to hire 101 workers. Marginal factor cost
(MFC) for the 101st worker is approximately
equal to
a. $8.00.
b. $8.05.
c. $13.05.
d. $13.00.
C. The firm’s total cost would increase $13.05
to hire the 101st worker (.05 x 100 + 8.05).
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14. A monopsonist in equilibrium has a
marginal revenue product of $10 per worker
hour. Its equilibrium wage rate must be
a. less than $10.
b. equal to $10.
c. greater than $10.
d. equal to $5.
A. Because of its monopoly in the labor
market, a monopsony hires fewer workers
and pays a lower wage than a firm in a
competitive labor market.
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Exhibit 12 A Labor Market
18
.
14
12
Wage rate
(dollars per
hour)
Marginal
factor cost
(MFC)
B
•
10
8
.
6
.
4
2
•• ••X •• Y
••
A
••
Z
W
Labor
demand
(MRP)
T
0
200
400
600
Labor
supply
80o
Quantity of labor
(workers per hour)
1,000
16
15. If the labor market shown in Exhibit 12 is a monopsony,
the wage rate and number of workers employed will be
determined at point
a. A.
b. W.
c. C.
d. Y.
e. Z.
B. The intersection of the MFC and MRP curves at point A
determines that the monopsony hires 400 workers per
hour and pays only $4 per hour, which is enough to
attract this number of workers.
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