Intermediate Econ Test Two Multiple Choice

What is the production function?

Y=AF(K,N)

Suppose the economy's production function is Y = AK^0.3N^0.7. If K = 2000, N = 100, and A = 1, then Y = 246. If K rises by 10%, and A and N are unchanged, by how much does Y increase? A) 30% B) 10% C) 6% D) 3%

B. 10%

Firms hire additional workers until the __________________ of an extra worker equals the _________________

Benefit, Cost

MPK is a function of ________________________ and always ________________

Capital, Positive

In the production function, Capital(_____) and Labor(____) are known as _____________________ _______ ____________________

K, N, Factors of Production

A graph of the negative relationship between the real wage w and the quantity of labor that firms demand

Labor Demand Curve

MPN is a function of _________________ (N) and always _______________________

Labor, Positive

Negative supply shocks change the economy's production function by ______________ the amount of output that can be produced for given quantities of K and N

Lowering

The labor demand curve is the same as the ______________________ ____________________

MPN Curve

Marginal revenue product of labor

MRPN

What does MPK mean?

Marginal product of capital

What does MPN mean?

Marginal product of labor

Firms maximize ______________

Profits

Positive supply shocks change the economy's production function by ____________________ the amount of output that can be produced for given quantities of K and N

Raising

What are the two main properties of the shape of the production function?

Slopes upward, diminishing marginal productivity

Change in an economy's production function

Supply Shock

A in the production function represents what?

Total Factor Productivity

In the production function, the effectiveness at which capital and labor are used

Total Factor Productivity

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment? a. $1.5 million b. $2.0 million c. $2.5 million d. $3.5 million

a. $1.5 million

The nominal interest rate is 10%, the expected inflation rate is 5%, and the combined state-federal tax rate is 35%. The expected real after tax interest rate is a. 1.50% b. 3.25% c. 5.00% d. 6.50%

a. 1.50%

The nominal interest rate is 10%, the expected inflation rate is 5%, and the tax rate is 35%. The expected after-tax real interest rate is A) 1.50%. B) 3.25%. C) 5.00%. D) 6.50%.

a. 1.50%

What is the unemployment rate if there are 150 million people employed, 25 million people unemployed, and 25 million not in the labor force? a. 14.3% b. 13.4% c. 12.5% d. 25.0%

a. 14.3%

Suppose the economy's production function is Y = AK^0.3N^0.7 When K = 1000, N = 50, and A = 15, what is Y? A) 1842 B) 6106 C) 750,000 D) 123

a. 1842

Desired national saving would increase unambiguously if there were a. An increase in both current output and expected future output b. An increase in both expected future output and government purchases c. An increase in both expected future output and the expected real interest rate d. A fall in both government purchases and expected future output

a. An increase in both current output and expected future output

When a person gets an increase in current income, what is likely to happen to consumption and saving? a. Consumption increases and saving increases b. Consumption increases and saving decreases c. Consumption decreases and saving increases d. Consumption decreases and saving decreases

a. Consumption increasing and saving increases

If a firm's expected marginal product of capital exceeds its tax-adjusted user cost of capital, the firm will a. Increase its investment spending on capital goods b. Reduce its investment spending on capital goods c. Not change its investment spending on capital goods d. Increase the tax adjusted user cost of capital

a. Increase its investment spending on capital goods

In the production function Y = AF(K, N), A is ________, K is ________, and N is ________. A) total factor productivity; the capital stock; the number of workers employed B) total factor productivity; investment; the number of workers employed C) the productivity of labor; the capital stock; the size of the labor force D) the productivity of labor; investment; the size of the labor force

a. Total factor productivity, the capital stock, the number of workers employed

Last year, you earned a salary of $25,000 and spent $24,000, thus saving $1,000. At the end of the year, you received a bonus of $1,000 and spent $500 of it, saving the other $500. What was your marginal propensity to consume? a. .96 b. .50 c. .04 d. .03

b. .50

Suppose the marginal product of labor is MPN = 200 -0.5N where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is the real wage. What is the equilibrium real wage? A) 5 B) 10 C) 15 D) 20

b. 10

You consume 140 in the current period (this year) and 210 in the future period(next year). The real interest rate is 5% per period. Your present value of lifetime consumption is a. 210 b. 340 c. 350 d. 400

b. 340

An adverse oil-price shock reduces labor demand. What happens to current employment and the real wage rate? A) Both employment and the real wage rate would increase. B) Both employment and the real wage rate would decrease. C) Employment would increase and the real wage would decrease. D) Employment would decrease and the real wage would increase.

b. Both employment and the real wage rate would decrease

When a person receives an increase in wealth, what is likely to happen to consumption and saving? a. Consumption increases and saving increases b. Consumption increases and saving decreases c. Consumption decreases and saving increases d. Consumption decreases and saving decreases

b. Consumption increases and saving decreases

The substitution effect of a decrease in real interest rates is to cause a consumer to a. Increase future consumption and decrease current consumption b. Decrease future consumption and increase current consumption c. Increase current consumption and increase saving d. Decrease current consumption and increase saving

b. Decrease future consumption and increase current consumption

The desired level of the capital stock will increase if the A) user cost of capital increases. B) expected future marginal product of capital increases. C) effective tax rate increases. D) price of capital increases.

b. Expected future marginal product of capital increases

The two main characteristics of the production function are A) it slopes downward from left to right, and the slope becomes flatter as the input increases. B) it slopes upward from left to right, and the slope becomes flatter as the input increases. C) it slopes upward from left to right, and the slope becomes steeper as the input increases. D) it slopes downward from left to right, and the slope becomes steeper as the input increases.

b. It slopes upward from left to right, and the slope becomes flatter as the input increases

The marginal product of capital is the increase in A) capital needed to produce one more unit of output. B) output from a one-unit increase in capital. C) labor needed to accompany a one-unit increase in capital. D) output from a one-dollar increase in capital.

b. Output from a one unit increase in capital

An adverse supply shock would A) shift the production function up and decrease marginal products at every level of employment. B) shift the production function down and increase marginal products at every level of employment. C) shift the production function down and decrease marginal products at every level of employment. D) shift the production function up and increase marginal products at every level of employment.

b. Shift the production function down and increase marginal products at every level of employment

The ________ is the number of unemployed divided by the labor force and the ________ is the number of employed divided by the adult population. A) unemployment rate; employment rate B) unemployment rate; employment ratio C) unemployment ratio; participation rate D) discouraged worker ratio; employment rate

b. Unemployment rate, employment ratio

Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%, when the real interest rate is 3% and the tax rate revenue is 5%. a. $1,238 b. $1,300 c. $1,368 d. $1,800

c. $1,368

Calculate the user cost of capital of a machine that costs $100,000 and depreciates at a rate of 25%, when the nominal interest rate is 4% and the expected inflation rate is 1%. A) $3,000 B) $25,000 C) $28,000 D) $29,000

c. $28,000

What is the unemployment rate if there are 170 million people employed, 25 million people unemployed, and 35 million not in the labor force? A) 14.7% B) 13.7% C) 12.8% D) 10.9%

c. 12.8%

The marginal product of labor (measured in units of output) for Macropia Corp. is given by MPN=A(300-N) where A measures productivity and N is the number of labor hours used in production. Suppose the price of output is $3 per unit and A=4.0. What will be the demand for labor if the nominal wage is $24? a. 304 b. 302 c. 298 d. 296

c. 298

) Which of the following events would lead to an increase in the marginal product of labor for every quantity of labor? A) An increase in the real wage B) A decrease in the real wage C) A favorable supply shock such as a fall in the price of oil D) An adverse supply shock, such as a reduced supply of raw materials

c. A favorable supply shock such as a fall in the price of oil

As a result of the superb economics essay that you wrote during the summer, you won the MC prize of $3000. The receipt of these funds would be an example of A) the substitution effect being stronger than the income effect. B) the income effect being stronger than the substitution effect. C) a pure income effect. D) a pure substitution effect.

c. A pure income effect

A temporary decrease in government purchases would cause A) a rightward shift in the saving curve and a leftward shift in the investment curve. B) a rightward shift in the saving curve and a rightward shift in the investment curve. C) a rightward shift in the saving curve, but no shift in the investment curve. D) no shift in the saving curve, but a leftward shift in the investment curve.

c. A rightward shift in the saving curve, but no shift in the investment curve

A decrease in the number of workers hired by a firm could result from a. An increase in the marginal product of labor b. A positive productivity shock c. An increase in the real wage d. A decrease in the real wage

c. An increase in the real wage

An increase in the personal income tax rate on interest income will A) increase desired saving because the expected real after-tax interest rate rises. B) decrease desired saving because the expected real after-tax interest rate rises. C) decrease desired saving because the expected real after-tax interest rate falls. D) increase desired saving because the expected real after-tax interest rate falls.

c. Decrease desired saving because the expected real after tax interest rate falls

If an economy's labor force participation rate declines and its wealth increases, then the labor supply curve A) shifts to the left if the effect of the change in wealth is bigger than the effect of the change in the labor force participation rate. B) shifts to the right if the effect of the change in wealth is bigger than the effect of the change in the labor force participation rate. C) shifts to the left. D) shifts to the right

c. Shifts to the left

Changes in the capital stock (machines such as ovens at a bakery shop) occur ________, and changes in the amount of labor that firms employ occur ________. A) quickly; quickly B) slowly; slowly C) slowly; quickly D) quickly; slowly

c. Slowly, Quickly

A person is more likely to increase labor supply in response to an increase in the real wage, the ________ is the income effect and the ________ is the substitution effect. A) larger; larger B) larger; smaller C) smaller; larger D) smaller; smaller

c. Smaller, Larger

The tendency of workers to supply more labor in response to a larger reward for working is called the ________ of a higher real wage on the quantity of labor supplied. A) homogeneous labor supply effect B) negative correlation effect C) substitution effect D) income effect

c. Substitution Effect

The desire to have a relatively even pattern of consumption over time is known as a. Excess Sensitivity b. The Substitution Effect c. The Consumption-Smoothing Motive d. Forced Saving

c. The Consumption-Smoothing Motive

The fact that the production function relating output to labor becomes flatter as we move from left to right means that A) the marginal product of labor is positive. B) the marginal product of capital is positive. C) there is diminishing marginal productivity of labor. D) there is diminishing marginal productivity of capital.

c. There is diminishing marginal productivity of labor

At the start of the year, your firm's capital stock equaled $100 million, and at the end of the year it equaled $105 million. The average depreciation rate on your capital stock is 20%. Gross investment during the year equaled a. $1 million b. $5 million c. $7 million d. $25 million

d. $25 million

Suppose an economy has GDP equal to 2000 million, the capital stock is 1700 million, and the number of employees equals 70 million. The production function is Y=AK^0.25N^0.75 Total factor productivity of the economy is approximately equal to A) 0.09. B) 2.61. C) 4.19. D) 12.87

d. 12.87

Assuming that the growth rate of full-employment output is 3%, and that the actual unemployment rate fell 2 percentage points in the last year, Okun's Law predicts that output growth rate over the past year was A) -1% B) 3% C) 5% D) 7%

d. 7%

According to Okun's Law, if the natural rate of unemployment is 5% and the actual unemployment rate is 4%, what is the level of full employment output if output equals $10,125 billion? a. $10,238 Billion b. 10, 226 Billion c. 10, 025 Billion d. 9,926 Billion

d. 9,926 Billion

According to Okun's law, an increase in the unemployment rate will cause ________ in the level of employment and ________ in the level of output. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease

d. A decrease, a decrease

An increase in the real wage rate will cause A) the labor demand curve to shift to the right. B) the labor demand curve to shift to the left. C) the quantity of labor demanded to rise. D) a movement along the labor demand curve.

d. A movement along the labor demand curve

A winter storm has paralyzed the entire east coast, reducing productivity sharply. This supply shock shifts the marginal product of labor curve A) up and to the right, raising the quantity of labor demanded at any given real wage. B) down and to the left, reducing the quantity of labor demanded at any given real wage. C) up and to the right, reducing the quantity of labor demanded at any given real wage. D) down and to the left, raising the quantity of labor demanded at any given real wage.

d. Down and to the left, raising the quantity of labor demanded at any given real wage

Research on labor supply generally shows that a. Labor supply rises in response to a permanent increase in the real wage, but falls in response to a temporary increase in the real wage b. Labor supply rises in response to a temporary increase in the real wage, but falls in response to a permanent increase in the real wage c. Labor supply rises in response to both a temporary and a permanent increase in the real wage d. Labor supply falls in response to both a temporary and permanent increase in the real wage

d. Labor supply falls in response to both a temporary and permanent increase in the real wage

If the substitution effect of the real interest rate on saving is smaller than the income effect of the real interest rate on saving, then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving, for someone who is a lender. A) fall; fall B) fall; rise C) rise; rise D) rise; fall

d. Rise, Fall

If the rate of depreciation increases, then user cost ________________________ and the desired capital stock ____________________ a. Falls, Falls b. Falls, Rises c. Rises, Rises d. Rises, Falls

d. Rises, Falls

In the saving—investment diagram, an increase in current output would A) shift the saving curve to the left. B) shift the investment demand curve to the left. C) not shift the curves. D) shift the saving curve to the right.

d. Shift the saving curve to the right

If a country's working age population declines and its wealth increases, then the labor supply curve a. Shifts to the left if the effect of the change in wealth is bigger than the effect of the change in the working age population b. Shifts to the right if the effect of the change in wealth is bigger than the effect of the change in working age population c. Shifts to the right d. Shifts to the left

d. Shifts to the left

The aggregate supply of labor is the A) total amount of time a person works over his or her lifetime. B) total amount of time a person spends in the labor force over his or her lifetime. C) unemployment rate. D) sum of the labor supplied by everyone in the economy.

d. Sum of the labor supplied by everyone in the economy

You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as a. The expected marginal product of capital is positive b. The expected marginal product of capital is greater than or equal to the marginal product of capital c. The expected marginal product of capital is greater than or equal to the expected marginal product of labor d. The expected marginal product of capital is greater than or equal to the user cost of capital

d. The expected marginal product of capital is greater than or equal to the user cost of capital

One reason that firms hire labor at the point where w = MPN is A) if w < MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers. B) if w > MPN, the cost (w) of hiring additional workers is less than the benefits (MPN) of hiring them, so they should hire more workers. C) if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers. D) if w < MPN, the cost (w) of hiring additional workers equals the benefits (MPN) of hiring them, so they have the right number of workers.

d. if w < MPN, the cost (w) of hiring additional workers equals the benefits (MPN) of hiring them, so they have the right number of workers.