chapter 7
A firm produces 8 TVs with 1 unit of labor, 15 TVs with 2 units of labor, and 21 TVs with 3 units of labor. Its marginal revenue on each TV is $300. The value of the marginal product of the third unit of labor is
$1800. Explanation: VMP = MR × MP. Marginal product of the third unit is 6 (21 − 15).
Examine the graph below. If the wage rate is $15 per hour, the firm will hire
3 units of labor. Explanation: At $15, the wage rate equals the MRP at 3 units of labor.
A high elasticity of demand for labor means that
A small change in the wage rate causes a larger percentage change in the quantity of labor demanded. Explanation: The elasticity ratio is grater than 1; therefore the demand is elastic.
Which of the following does not cause the labor demand curve to shift?
Changes in the wage rate Explanation: Changes in the wage rate motivate the firm to hire a a smaller or greater quantity of labor. this change is movement along a demand curve.
If a monopsonist hires labor, it will choose to hire that quantity at which ___________ and pay a wage rate that is _______________.
MRP = MFC; less than MRP Explanation: At the quantity of labor that the firm would choose to hire, it pays a wage that is less than labors MRP for that quantity of labor. It pays the wage indicated by the intersection of the supply curve and the MRP curve.
Which of the following would not be considered capital in a business?
The employees Explanation: In economics, most models assume that the inputs are capital and labor. Labor includes all the employees.
Why may a household's labor supply curve bend backwards at some wage rate?
The household substitutes leisure for labor. Explanation: As wage rates rise, housholds may experience the "income effect." When this occurs, households may choose to consume more leisure and work fewer hours because they can maintain the same level of income as before the wage increase.
A firm that is perfectly competitive will hire labor as long as which of the following is true?
VMP > W. Explanation: When the VMP = W, the firm stops hiring. As long as VMP > W, the firm continues to hire.
Which of the following employment situations would most closely approximate a monopsony?
a large factory in a small town. Explanation: A monopsony is a market in which the employer has labor market power. If one employer dominates the town it resembles a monopsony.
If a firm uses both labor and capital in producing TVs, which of the following events will likely increase the firm's demand for labor?
an increase in the marginal product of labor. Explanation: An increase in the marginal productivity of labor would increase the MP / P of labor ratio. Assuming that the firm was previously equalizing the ratios of marginal product of labor / price of labor to marginal product of capital / price of capital, the firm should now buy more labor.
If the marginal product of labor divided by the price of labor is greater than the marginal product of capital divided by the price of capital, a firm could minimize costs by
buying more labor and less capital. Explanation: The firm should buy more of the resource that has the highest ratio. The MP of labor will decrease as more labor is added, and the MP of capital will increase as more cvapital is added. At some point the ratios will be equal.
The VMP curve slopes downward at some point because
congestion in the work place lowers marginal product. Explanation: VMP = P × MP. As congestion occurs in the work place, MP decines. Therefore, the VMP curve has a decreasing slope after this point.
The increase in the value of a firm's capital as it increases in age and use is depreciation.
false Explanation: Depreciation is the decrease in the value of capital as it wears out. Capital willeventually become worthless and must be replaced.
In the long run, a firm cannot minimize costs between two inputs because only one of the inputs is variable.
false Explanation: In the long run, all inputs are variable.
Marginal revenue product is the name applied to value of the marginal product when a firm is in a perfectly competitive market.
false Explanation: Value of the marginal product (VMP) is the name of marginal revenue product (MRP) when applied to a perfectly competitive market. It is P × MP. In a perfectly competitive firm, P = MR.
Derived demand for labor means that when a firm hires labor, it has to derive its demand
from the demand for the product that the labor produces. Explanation: Derived in this case means that the demand is based on the demand for the firm's product.
The marginal factor cost for a monopsonist is
greater than the wage rate because the monopsonist has to raise the wage rate for all employees if it wants to hire another employee. Explanation: The monopsonist must raise the wage rate for all previously hired employees. Therefore, MFC lies above the supply curve for labor.
A firm produces 8 TVs with 1 unit of labor, 15 TVs with 2 units of labor, and 21 TVs with 3 units of labor. Its marginal revenue on each TV is $300. This would indicate that the firm
is a price taker (perfectly competitive firm). Explanation: Marginal revenue is constant. Therefore, the firm is a perfectly competitve firm because the MR = price.
Suppose a firm employs both labor and capital. If the ratio of marginal product to price of labor is 50/$10 and the ratio of marginal product of capital to price of capital is 60/$12, the firm should
maintain the current combination capital and labor. Explanation: The ratios are equal at 5/$1. Therefore the firm cannot further reduce costs by reallocating its budget.
In the labor market, the substitution effect predicts that, as wage rates increase, households will
substitute labor for leisure. Explanation: Households substitute away from leisure and provide more labor. This fact produces the upward-sloping labor supply curve.
Present value is
the current value of a future income stream using the market rate of interest to discount it. Explanation: Present value tell us the discounted value of an income stream. It is a method used to tell us the current value of some future income.
On a labor market graph, a firm's demand for labor is
the marginal revenue product curve. Explanation: The marginal revenue product shows the addition to total revenue that an additional worker adds. It slopes downward because of diminishing marginal productivity. It represents the firm's demand for labor.
A firm's demand for capital is a function of
the market rate of interest. Explanation: The firm's demand for capital is inversely related to the market rate of interest. As the market rate falls, a firm finds more projects that produce an IRR at least as great as the market interest rate, and therefore borrow funds to buy the capital.
For a firm in perfect competition, the value of the marginal product is
the price of the product multiplied by the additional output resulting from an additional unit employed. Explanation: For a competitive firm, marginal revenue is the same as the product's price. Therefore, the definition of VMP is the same as the definition of MRP.
The labor demand curve slopes downward because it is the firm's marginal revenue product curve and the firm experiences diminishing marginal product.
true Explanation: MRP = MR × MP. As more labor is hired, MP diminishes, thus causing a downward slope.
The significance of the internal rate of return is that it tells the firm whether it should invest in a capital project by comparing the IRR to the market rate of interest.
true Explanation: The IRR compares what the firm could earn by buying the factory with what it could earn using the same funds to invest in something else.
The substitution effect is usually stronger than the income effect, thus creating an upward sloping labor supply curve.
true Explanation: The substitution effect describes households' behavior in substituting labor for leisure as the wage rate rises. When they do this, the supply curve slopes upward. The substitution effect usually is stronger than the income effect.
The supply curve for labor that a monopsonist faces is the supply curve for the industry.
true Explanation: The supply curve is the industry supply. Because of this fact, the firm's MFC is greater than the wage rate.
If a firm is a monopsony, then it
will have to pay a higher wage to hire additional employees. Explanation: The firm must raise the wage of all previous employees to be able to hire new emplyees.
