CHAPTER 13 MICRO QUIZ
Assume the Apex Manufacturing Company operates in competitive labor and product markets. Its: A) labor demand curve is perfectly elastic at the going wage B) labor demand curve is identical with its marginal product of labor curve C) labor supply curve is perfectly elastic at the going wage D) labor supply curve is upward sloping
C In a competitive labor market, the firm can hire as much or as little labor as it desires, provided it pays the market wage rate. Its labor demand curve is identical with its marginal revenue product curve.
According to the marginal productivity theory of income distribution, each resource owner receives income: A) equal to the value of her contribution to total output B) in proportion to her need C) in proportion to the amount of property she inherits D) equal to marginal product divided by price
A In competitive markets, firms minimize average cost and maximize profit by combining resources in such a way that price times marginal product for each resource is equal to the price of the resource. P x MP is equal to the value of the resource's contribution to output, and the price of the resource is the amount of payment (income) received by the resource owner.
Assume that a purely competitive firm uses only labor and capital to produce a service. Which of the following resource combinations is consistent with maximum profits? .....MRPl....MRPk.......Pl...........Pk A.....$20.........$10........$20........$10 B......$20........$20........$10.........$10 C......$10.........$10........$20........$20 D......$10.........$20.......$20........$10 A) A B) B C) C D) D
A Maximum profit requires that the price of each input be equated to its marginal revenue product.
Compared to an otherwise identical firm selling its output competitively, a firm with monopoly power: A) must lower price to sell additional output, making labor demand more elastic B) must lower price to sell additional output, so MRP declines faster than MP C) hires more workers D) must pay a higher wage
B An imperfectly competitive firm faces a downward-sloping demand for its product, so price must fall to induce additional sales. The firm's input demand—its MRP—declines both because marginal product is declining and product price is declining.
A simultaneous increase in product price and the price of substitute input capital will: A) increase the demand for labor B) increase the demand for labor if the substitution effect is stronger than the output effect C) increase the demand for labor if the output effect is stronger than the substitution effect D) reduce the demand for labor
B An increase in the price of capital, even with an increase in product price, could reduce the demand for labor if the output effect of the price change is strong enough. However, if the substitution effect is stronger, this is a sufficient condition for the demand for labor to increase.
Other things equal, the demand for labor will be more elastic: A) the greater the demand for the product B) the more substitutable is labor with other inputs C) higher the price of capital D) smaller the elasticity of product demand
B If labor is easily substituted, any change in the price of labor will cause the firm to make such a substitution, leading to a relatively large change in the quantity of labor demanded; demand will be relatively elastic.
Use the following diagram to answer the next question. Refer to the diagram. Initially, labor demand is given by D1. If labor and capital are complementary inputs, a decrease in the price of capital will cause: A) a shift in labor demand to D2 B) a shift in labor demand to D3 C) either a shift in labor demand to D2 or D3, depending on the relative strengths of the substitution and output effects D) a move from a to b along D1
B There is no substitutability between complementary inputs, so they must be used in fixed proportions. With only an output effect, a decrease in the price of one increases the demand for the other.
All else equal, the demand for labor will be least elastic when labor and capital are: A) highly substitutable and labor costs are a small proportion of total costs B) highly substitutable and labor costs are a large proportion of total costs C) not easily substituted and labor costs are a small proportion of total costs D) not easily substituted and labor costs are a large proportion of total costs
C If labor and capital are not easily substituted, an increase in the price of labor will make it difficult or costly for the firm to offset any reduction in labor by expanding the use of other inputs. If costs are a small proportion of total cost, any increase in the price of labor will have little impact on total cost and result in a relatively small output effect as well.
If two resources are substitutable, an increase in the price of one will always increase the demand for the other. A) True B) False
FALSE When the price of one of the resources increases, two opposing effects are put into motion. First, the higher price increases the cost of production and the firm responds by reducing output. Less output implies less need for all resources. At the same time, the firm will alter its input mix, using relatively less of the input whose price has increased and relatively more of the input whose price has not changed. Whether the demand for the other input increases or decreases depends on the relative size of these two effects, known as the output effect and the substitution effect, respectively.
All else equal, the demand for labor will be most elastic when labor and capital are: A) highly substitutable and product demand is elastic B) highly substitutable and product demand is inelastic C) not easily substituted and product demand is elastic D) not easily substituted and product demand is inelastic
A If labor and capital are easily substituted, an increase in the price of labor will cause the firm to make the substitution, reducing the quantity of labor demanded. An increase in the price of labor also increases the firm's costs and will likely lead to an increase in price. Should this happen, high product demand elasticity means a large reduction in quantityof the product demanded and a large reduction in the labor needed to produce it.
A purely competitive firm is paying twice as much for labor per unit as for capital. Although the average productivity of labor is twice that of capital, their marginal products are the same. In order to minimize cost, this firm: A) should use relatively more capital B) should use relatively more labor C) should use both more labor and more capital D) is using the correct proportion of labor and capital
A Minimum cost is achieved if the marginal product per dollar of resource is the same for both resources. In this example, the marginal product per dollar of labor is half that of capital and the firm could reduce its total cost by utilizing relatively more capital.
Assume a candle manufacturer is employing two resources L and C in such quantities that the MRPs are $20 and $15, respectively. The prices of the resources are $16 and $12, respectively. This firm: A) is using the least-cost combination of resources to produce its output but should use more of both B) is using the least-cost combination of resources to produce its output but should use less of both C) should use relatively more C D) should use relatively more L
A The firm is producing its current output at least cost, because the MRPs per dollar spent is the same for each: $20 / $16 = $15 / $12 = 1.25. However, each input's MRP exceeds its price, suggesting the firm could increase its profits by employing more of each resource.
For a firm that both sells its output and buys its inputs in purely competitive markets, the labor demand curve: A) slopes downward and the labor supply curve is perfectly elastic B) slopes downward and the labor supply curve is upward sloping C) is perfectly elastic and the labor supply curve is upward sloping D) is perfectly elastic and the labor supply curve is perfectly inelastic
A The firm's labor curve is identical with its marginal revenue product, which is downward sloping because of the law of diminishing returns. The labor supply curve is perfectly elastic: the firm can hire as much or as little labor as it desires at the competitive wage.
A purely competitive firm is currently hiring the profit-maximizing number of workers at a wage of $16 per hour. If the marginal product of the last worker hired is 4, the firm must be selling its output for: A) $4 B) $8 C) $64 D) more information is required
A The profit-maximizing rule is to hire labor up to the point where marginal resource cost is equal to marginal revenue product. Under the conditions stated, marginal resource cost is equal to the wage of $16 and marginal revenue product is equal to product price times marginal product. Using a little algebra, $4 x 4 = $16. 10 INCORRECT
WAGE RATE.........Q LABOR DEM 20..................................200 18....................................170 16....................................140 14.....................................110 12......................................80 Refer to the data. For the $20 to $18 range of wage rates, labor demand is A) perfectly elastic B) elastic C) inelastic D) perfectly inelastic
B Elasticity of labor demand is equal to the percentage change in quantity demanded divided by the percentage change in the wage. Over the given range, the change in quantity demanded is about 15% while the percentage change in the wage is about 10%, so elasticity is about 1.5; demand is elastic.
Suppose an additional unit of labor increases a firm's output from 90 to 100 per hour. If the firm has to reduce its price from $1 to $.99 to sell the additional output, the marginal revenue product of the last worker is: A) $.99 B) $9.00 C) $9.90 D) $10.00
B Initially, the firm's revenue is $90—$1 times 90. Upon hiring an additional worker, revenue rises to $99—$.99 times 100. Marginal revenue product is simply the increase in total revenue from the additional worker, or $9.00 in this example.
Use the data from the following table for the next question. Selena's Designs sells designer knock-off dresses for $100 each. Selena has discovered the following relationship between the size of her sales staff and her total revenue: WORKERS............$REVINUE 1....................................1000 2...................................1900 3...................................2700 4...................................3400 5...................................4000 Refer to the data. The marginal revenue product of the 5th worker is: A) 6 dresses B) $600 C) $800 D) $4000
B MRP is the increase in revenue attributable to the next worker. In this example, the MRP of the 5th worker is $4000 - $3400 = $600.
Use the data from the following table for the next question. A law firm has discovered the following relationship between the number of junior associates and its total revenue. WORKERS............$REVINUE 1....................................2000 2...................................3800 3...................................5400 4...................................6800 5...................................8000 Refer to the data. If the market pay for a junior associate is $1500, the law firm should hire: A) 2 associates B) 3 associates C) 4 associates D) 5 associates
B The third associate adds $1600 to total revenue, which adds $100 to the firm's profit. The fourth associate adds only $1400 to total revenue, $100 less than the associate's pay.
Other things equal, a firm's demand for unskilled labor will be more elastic than its demand for skilled labor if: A) the cost of unskilled labor is a smaller proportion of total cost than the cost of skilled labor B) the demand for the product is elastic C) it is easier to substitute capital for unskilled labor than for skilled labor D) skilled labor and unskilled labor must be used in direct proportion to one another
C Resource demand is more elastic the easier it is to substitute other resources. If other resources are easier to substitute for unskilled workers, the demand for unskilled workers will be more elastic.
A small accounting firm has two CPAs on staff, each preparing 5 tax returns per 8 hour day. Hiring a third CPA would increase the number of returns per day to 14. If each client is charged $120 per return: A) the third CPA should be hired B) the third CPA should not be hired C) the marginal revenue product of the third CPA is $480 D) the marginal revenue product of the third CPA is $1680
C The third CPA generates 4 additional returns, each of which brings in $120 in revenue. Whether this worker should be hired depends on the cost of hiring the extra CPA.
Two firms, X and Y, have exactly the same marginal product of labor schedules and both sell their output at a price of $2.00. If X's short-run labor demand curve is more elastic than Y's short-run labor demand curve, we can conclude that: A) X is not maximizing profits B) X in an imperfectly competitive seller C) Y should hire more labor D) Y is an imperfectly competitive seller
D Under the stated conditions, if X and Y both sold their output competitively, both would have the same labor demand curve, identical to price times marginal product. Since Y's demand curve is less elastic, it's product demand curve must be less elastic than that of X, which means it must sell its output in an imperfectly competitive market.
Suppose a firm is employing all its inputs such that the marginal product per dollar spent on each is the same. Then: A) the price of each input is the same B) the firm is producing the profit-maximizing level of output C) the quantity of each input is the same D) the firm is using the least-cost combination of inputs
D Alternatively, suppose that the MP per dollar of labor, say, exceeded the MP per dollar of capital. By using one dollar less of capital and one dollar more of labor, the firm could produce more output with the same dollar expenditure; that is, it could lower its cost per unit. Although this condition minimizes the cost of the given level of output, this output level may not be the one that maximizes the firm's profits.
The "derived demand" concept suggests that an increase in the demand for computers will: A) increase the demand for computer software B) decrease the demand for typewriters C) increase the price of computers D) increase the demand for computer design engineers
D Derived demand is the notion that the demand for a resource depends on the demand for the good or service that the resource helps to produce.
If the price of capital is reduced by 10% and yet a particular firm makes no change in the relative quantities of capital and labor employed, that is, its ratio of capital to labor is unchanged, then: A) the substitution effect is stronger than the output effect B) the demand for labor is perfectly inelastic C) the supply of capital is perfectly elastic D) labor and capital are used in fixed proportions
D If labor and capital are at all substitutable for one another, a drop in the price of capital will bring about some substitution of capital for labor; the firm will use relatively more capital. Since this did not happen, labor and capital must be complementary inputs.
To find the amount by which the production of an additional worker increases a purely competitive firm's total revenue: A) subtract the wage from marginal product B) divide marginal product by the wage rate C) subtract marginal cost from marginal revenue D) multiply marginal product by product price
D Marginal product is equal to the amount by which production increases with the addition of one worker. Product price is the amount by which each of these units of output increases the firm's revenue. The increase in revenue from the additional worker, known as marginal revenue product, is the product of the two.
An increase in the price of jet fuel increases the cost of airline travel and reduces the demand for airplane mechanics. This decrease in labor demand would be caused by which change in a determinant of labor demand? A) A fall in labor productivity B) An increase in product demand C) A decrease in product demand D) An increase in the price of another resource
D The change in the price of one resource has reduced the demand for another. In this example, there is little chance that jet fuel and mechanics are substitutable. Therefore, the output effect of the increase in the price of jet fuel has swamped the substitution effect and the demand for labor decreases.
Use the following diagram to answer the next question. Refer to the diagram. Initially, labor demand is given by D1. A move from D1 to D3 could be caused by either: A) an increase in labor productivity or a decrease in the wage rate B) an increase in the price of a complementary input or a decrease in the wage rate C) a decrease in the price of a substitute input or a decrease in the wage rate D) an increase in labor productivity or an increase in demand for the product this labor is helping to produce
D The firm's demand for labor curve is the same as the firm's marginal revenue product curve. The latter has two components: marginal revenue and marginal product. Marginal revenue will increase if there is an increase in the demand for the product and marginal product depends on the productivity of labor. Both of these factors then shift the demand for labor.
Production of Mrs. Field's Cookies uses flour and sugar in fixed proportions. An increase in the price of flour will: A) increase the demand for sugar solely because of the substitution effect B) decrease the demand for sugar solely because of the substitution effect C) increase the demand for sugar solely because of the output effect D) decrease the demand for sugar solely because of the output effect
D The two inputs are complementary, so no substitution is possible. However, the higher price of flour raises production costs and reduces output, reducing the demand for sugar.
The demand for carpenters results from the demand for housing. This is an example of: A) the relatively high elasticity of labor demand B) the inverse relationship between the price of labor and the quantity demanded C) the optimal hiring rule for labor D) the derived demand for labor
D Were it not for a demand for the good or service, there would be no demand for the resources used to produce it. This is known as "derived demand."
Suppose labor's MRP at a particular firm is $20 and the market wage for each worker is $15. If this firm is hiring labor from a purely competitive market, then: A) the firm is making $5 profit for each worker hired B) laying off a worker would increase the firm's profit (or reduce its losses) by $5 C) by hiring another worker, the firm could increase its profits (or reduce its losses) by $5 D) the firm should expand employment until the wage rises to $20
In a competitive market, the firm can hire as much or as little as it desires at the competitive wage: $15 in this example. Hiring another worker will add $5 to the firm's profits. The firm should continue to expand employment until the marginal revenue product falls to the market wage.