Test 4 Review Microeconomics

A plot of land close to the beach could earn its owners $300/day as a parking lot or $500/day as a campground. Calculate the weekly economic rent of using the land as a campground.

$1400 ($500-$300= $200*7= $1,400) The owners will earn $200 more per day ($1,400 per week) if they use the plot of land as a campground rather than a parking lot. Economic rent is the difference between what a factor of production earns and what it could earn in the next-best alternative.

A firm can determine whether or not it is using its resources efficiently by calculating the value of the marginal product for each resource and dividing it by the cost of that resource. This will tell the firm the bang per buck of each factor of production. The firm can then decide to increase or decrease its use of each factor of production. When the revenue per dollar spent is equal for all resources, the firm will be using its resources in the most efficient manner.

A firm does not want the bang per buck of its resources to be too high or too low. The company will adjust how it uses each factor of production until the relative benefits of all resources are the same.

Which of the following statements are true?

A more desirable job might entice you to accept a lower wage. The location of a job might entice you to accept a lower wage. Working for a particular cause might cause you to accept a lower wage.

Akua's Paint Supply charges $15 per gallon of paint. Akua started with three employees, who together produced 40 gallons of paint a day. He recently hired a fourth worker, and production increased to 48 gallons of paint a day. If Akua pays each worker $50/day, what is his marginal profit for the fourth employee? Ignore the added cost of raw materials.

$70 Akua's fourth worker is responsible for an additional 8 gallons per day, and thus increases profit by (8 × $15) - $50 = $70 per day.

Suppose that the average income of a typical person in the richest 20% of citizens of Japan is $165,000. What is the average income of a person who is among the poorest 20% of citizens in Japan? (Round to the nearest dollar.) (if the income ratio is 5.4)

30556

Suppose that the income of the average person among the poorest 20% of citizens in Namibia is $2000. What is the average income of a person who is among the richest 20% of citizens in Namibia? (Round to the nearest dollar.) (the inequality ratio is 19.6)

39200

One year, a family earns $25,000 and receives $8,000 in cash assistance from the government. The next year, an additional family member finds part-time work and earns $4,000, so now the family's total income is $29,000. Because of the increased income, cash assistance from the government drops to $5,000. The reduction of benefits that resulted from the additional family income effectively feels like a tax of what percentage?

75% The family earned $4,000 more, but benefits were reduced by $3,000. This creates a major disincentive to the second family member working.

Grace owns a house. She can rent her house for two years to one tenant for a profit of $24,000 a year, or she can rent it to two tenants each year for a profit of $10,000 per tenant per year. Calculate the economic rent over the course of two years of renting to one tenant.

8000 24000-20000=4000 4000*2=8000

Which of the following is a benefit of a college education?

Benefit of college higher marginal productivity higher wages greater human capital signals to potential employers the ability to learn quickly and perform well under stress Not a benefit greater debt stronger union protections greater physical capital

The article describes a change in the labor market for on-demand summer jobs during the weekends. Assume that the demand for labor remains at D2,as shown in the graph below, throughout this problem. Suppose workers' hours are originally fixed but that the situation changes. Workers can now have flexible schedules, and the supply curve in the graph below shifts from S1 to S2.The items below describe particular groups that are made either better off or worse off by this change. Drag the groups that are now better off into the "Better off" category. "Better off" can sometimes mean higher wages, but can also mean better working conditions, such as increased flexibility.Drag the groups that are now worse off into the "Worse off" category. "Worse off" can mean a decrease in wages or less desireable working conditions.

Better off: the firm Uber college students who want to work one weekend a month stay-at-home parents who would like to work two hours on Thursdays when their children are in school Worse off: people who work in this industry and who typically work 40 hours a week

Researchers have inferred that "wage discrimination" accounts for less than 5% of differences in wages among individuals. Which of the following are unambiguous examples of wage discrimination?

Correct Answer(s) A fast-food restaurant owner pays homosexual employees less than their heterosexual counterparts because he is morally opposed to the former's lifestyle. A bank pays young female tellers more than older female tellers because customers prefer to interact with young tellers even when there is no difference in ability. Incorrect Answer(s) A modeling agency pays the highest salary to the best-looking models because its marketing data show that advertisements featuring the best-looking models are the most effective at generating new sales. A male financial analyst makes almost three times as much as his female secretary.

Sunny wants to rent a beachfront cottage and is trying to decide between a summer date and an off-season date. Which aspects of Sunny's situation can be illustrated with this graph?

Correct Answer(s) Demand is higher in the summer than during the off season. The supply of rental units does not depend on the season. Rental rates are higher in the summer than in the off season. Incorrect Answer(s) It will be difficult for Sunny to find a high-quality cottage in the summer.

Twenty people live on a tiny, privately owned island: 10 groundskeepers and 10 gamekeepers. Gamekeepers receive a higher salary than groundskeepers. Which of the following events would tend to decrease the island's income inequality ratio (as traditionally defined)?

Correct Answer(s) Groundskeepers get a raise, while the gamekeeper salary remains the same. All 10 gamekeepers retire. Incorrect Answer(s) One gamekeeper switches to groundskeeping. One groundskeeper switches to gamekeeping. Gamekeepers get a raise, while the groundskeeper salary remains the same.

Josephine is a savvy restaurant owner who is striving to improve her business. She takes several actions to raise productivity and expand her customer base. Which of the following actions are examples of efficiency wages?

Correct Answer(s) Hoping to reduce turnover and thereby increase productivity, Josephine decides to raise her cooks' wage from the market rate of $15/hour, which is what her competitors pay, to a rate of $20/hour. Incorrect Answer(s) Josephine decides to sell alcohol at her establishment, meaning her servers must now be age 21 or older and, therefore, many of her servers must be replaced. While her original servers were paid an average of $8/hour, her new servers are paid an average of $9/hour. Hoping to increase her restaurant's popularity, Josephine decides to stay open later than any of her competitors. However, she is unable to find any cooks willing to work the late shift for $15/hour, so she raises her offer to $20/hour. The term "efficiency wages" only applies when higher than equilibrium wages are offered to increase worker productivity. Paying workers more to incentivize them to work at night is an example of a compensating differential.Employers always have the option to hire workers at the equilibrium wage. However, employers may choose to pay workers a higher wage in order to incentivize productivity.

What are some criticisms of in-kind assistance programs for those in poverty?

Correct Answer(s) It is paternalistic and disrespectful. In-kind assistance is inefficient. Incorrect Answer(s) The assistance can be used for undesirable purposes. Assistance comes in a limited range of forms.

Which of the following scenarios could lower a firm's demand for labor?

Correct Answer(s) James operates a restaurant in a seaside tourist town. It is winter and all the tourists have left. Rex invests in new computer software that will automate his bookkeeping. Amy must pay more money to obtain the wood needed to construct chairs at her factory. Incorrect Answer(s) Calvin's bookstore is located near a college campus. School has just started and many students are returning to the area. Katie owns a coffee shop that used to have to compete with a nearby café. The café recently went out of business.

A company is evaluating the value of the marginal product per dollar spent across the three factors of production to make sure it is utilizing its resources efficiently. The firm discovers that it gets $100 in relative benefits from labor, $10 in relative benefits from land, and $70 in relative benefits from capital. Knowing this information, how should the company use its resources?

Correct Answer(s) The company should increase its use of labor. The company should decrease its use of land. Incorrect Answer(s) The company should do nothing. The company should increase its use of land.

Which of the following are potential sources of income inequality?

Correct Answer(s) corruption unequal access to education life-cycle wage pattern compensating differentials winner-take-all competitions Incorrect Answer(s) ceteris paribus high cost of energy income mobility

Which items are common bases for bias-related wage discrimination?

Correct Answer(s) gender beauty Incorrect Answer(s) willingness to be exposed to danger education experience

Which of the following are problems in making accurate assessments of income inequality in the United States?

Correct Answer(s) no accounting for in-kind transfers no accounting for the underground economy use of pretax rather than disposable income Incorrect Answer(s) lack of payroll records no income data available

What is the definition of derived demand?

Demand for goods and services that are factors of production for other goods and services Derived demand is the demand for resources needed to produce a finished good or service in another market.A single product can have many derived demands. For example, bike producers need wheel spokes, but they also need rubber for the tires and metal for the frame, gears, and chain.

Which of the following are potential problems with using the minimum wage as a poverty-fighting tool?

Employers might shift to more capital-intensive production because labor is relatively more expensive. Fewer low-income workers will be employed.

Consider income data for three fictional nations. In Smithland, the top half of earners make $100,000 per year, while the bottom half make $20,000. Hayektopia's bottom half also make $20,000 per year, while its top half make $200,000. In Englestan, everyone earns $45,000 per year.Place these three nations in order of inequality ratio, lowest to highest.

Englestan Smithland Hayektopia Although the lowest earners in Smithland and Hayektopia earn the same amount, the greater earnings of Hayektopia's top earners results in a higher income inequality ratio.

Which of the following are necessary conditions needed to achieve income equality?

Every job would have to be equally attractive. All workers would have to be perfectly mobile. Every worker would have to have the same skills, ability, and productivity.

It always makes sense for a firm to invest in new capital.

False New capital is not a good investment if it costs more money than it saves and does not contribute to the marginal product.

In the long run, it hurts the economy when employees lose their jobs because of technology.

False New technology makes certain work more efficient, so companies will benefit from replacing workers with technology. Displaced workers will find new jobs in the long run and will rejoin the workforce in other ways.

When outsourcing happens, the firm that outsources labor benefits while the rest of the economy suffers in the long run.

False Outsourcing lowers costs, which also lowers the price of goods for consumers. Outsourcing is a key component in international trade, and trade creates value. The outsourcing of jobs enhances overall social welfare.

Welfare is a government program that provides cash assistance to the poor.

False Welfare is not a single program but a collection of initiatives, and not all welfare-related assistance is in the form of cash.

Helena owns a clothing boutique and pays each of her four employees a base salary of $3,000 per month. In addition, Helena gives a $3,000 bonus to the employee with the highest sales that month. This is an example of efficiency wages.

False This is an example of a winner-take-all competition, since small differences in sales can yield a very large difference in compensation.

Suppose Acme Widget Company (AWC) produces capital using land, labor, and capital. The manager of AWC needs to determine whether the company is using the right mix of these three resources. The table below shows the current value of the marginal product (VMP) of each resource and the wage or rental price of each resource. Resource: VMP: Wage or rental price Capital: $10,000: $500 Labor: $600: $25 Land: $24,000: $2,000

If you were the manager of AWC, you would want to use more labor . As you use more of a resource, the value of the marginal product per dollar spent will decrease . If the manager of AWC is using the best mix of capital, labor, and land, the value of the marginal product per dollar spent on each resource will be equal .

Which items are included among the nonmonetary determinants of workers' wages?

Included efficiency wages lifestyle education cost of living Not Included gender discrimination political affiliation

What effect would doubling the minimum wage have on income inequality?

It depends on how the higher minimum wage affects the equilibrium in the labor market.

Suppose that the current wage rate is $20 per hour, the rental rate of land is $10,000 per acre, and the rental rate of capital is $2000. The manager of a firm determines that the value of the marginal product of labor is $400, the value of the marginal product of an acre of land is $225000, and the value of the marginal product of capital is $40,000. Is the firm maximizing profit?

No, because the marginal product per dollar is not the same for each input. Based on your answer to Part 1, which input has the largest "bang for buck"? Land

Shoshanna owns a hair salon. She starts with one employee and hires a second a week after she opens. Shoshanna notices that after hiring the first and second worker, her total output increases and her marginal profit from each of these two employees is positive.Will it always be beneficial for Shoshanna to continually hire more employees?

No. At some point, adding more employees no longer increases profit.

Bob, the owner of Horn Guitars, is considering expanding his business. To do so, he must hire additional workers. Suppose he has three possible employees: Eric, Carlos, and Jimmy. The table below lists how many guitars each worker can produce per week. Use the information in the table to answer the questions that follow. Worker: Guitars produced per week Eric: 5 Carlos: 3 Jimmy: 2

Suppose Bob can sell a guitar for $400. If Bob pays his workers $750 per week, he will hire Eric Carlos and Jimmy . Bob's marginal profit from hiring these workers is $ 1750.

You win the million-dollar lottery and decide to quit working. How can you explain this decision using economics?

The income effect now governs your behavior as you demand more leisure. The opportunity cost of leisure goes down.

The table below depicts the output of a firm that manufactures tables. Each table can be sold for $225. Number of WorkersTotal Output160 272 382 490 596

The marginal product (MP) of the 2nd worker is 12 The value of the marginal product (VMP) of the 2nd worker is $2700. The marginal product of the 4th worker is 8. The value of the marginal product of the 4th worker is $1800. The firm should pay the 3rd worker a maximum of $ 2250.

The Census Bureau tracks the poverty rate, which is the percentage of the country's population whose income is below the poverty threshold. The threshold is adjusted every year to keep up with inflation.

The poverty rate declined sharply during the 1960s and since then has stayed between 11% and 16%.

Suppose that for years, society had restricted the economic opportunities of blond-haired persons to jobs in education, while brown- or black-haired persons could work any job.Now suppose that blond-haired persons are allowed to work any job they like. What effect would this change have on the wages of blond-haired persons and brown- or black-haired persons over time?

The wage for blond-haired workers will increase and the wage for brown- or black-haired workers will decrease.

What will happen to the equilibrium wage of crop harvesters in Dystopia if the price of the crop falls by 50% and the marginal product of the workers increases by 25%?

The wage will decrease. That's right! Because the decrease in price decreases the value of marginal product (VMP) more than the increase in marginal product increases the VMP, the wage will decrease.

The income inequality ratios in England and in Bolivia are roughly the same. What can explain this finding?

There are many extremely rich people in England, and there are many extremely poor people in Bolivia.

Jobs where the product or service is "non-essential" but is in high demand with a limited pool of qualified workers have higher wages than jobs where the product or service is "essential" but is in low demand and the worker qualifications are minimal.

True For example, athletes can earn very high wages because the supply of talented athletes is relatively low, and the demand for their performance is extremely high.

If employees are more productive, their wages will likely be higher.

True If employees produce more, the value of their marginal product will increase and it will drive up wages.

Unions, which have market power over the supply of labor, can threaten strikes as part of negotiating employment contracts on behalf of union members. What is the effect of unions having this power?

Union wages are generally higher than nonunion wages. Early studies found that union workers earned about 30% more than nonunion workers, whereas a more recent study estimated that union workers earn about 16.5% more.

York community has 10 residents: five who earn $100,000 and five who earn $40,000. Jersey community also has 10 residents: five who earn $90,000 and five who earn $40,000.

What is the income inequality ratio for York? 2.5 What is the income inequality ratio for Jersey? 2.25 The average income in York is higher than Jersey. The people in York experience more income inequality compared to residents of Jersey.

Consider two communities. In Mill Town, two families earn $60000 each, six families earn $75,000 each, and two earn $80,000 each. In Pasture Town, four families earn $50,000 each, four families earn $75000 each, and two earn $100000 each.

What is the income inequality ratio in Mill Town? 1.3 What is the income inequality ratio in Pasture Town? 2 Which community has the more unequal distribution of income? Pasture Town is more unequal because its ratio of the top 20% to the bottom 20% is higher.

Suppose you work as a manager in a firm. Your job is to hire the right number of people to maximize profit. Every worker you hire costs $150 per day, and each unit of output sells for $17 per unit. Given your current labor force, you know that if you hire another worker, that person will increase your output by 40.

What is the marginal product of the worker you are considering hiring? 40 What is the value of the marginal product of labor for this potential employee? $680 What is the marginal profit or loss for hiring this employee? (Use a negative number if hiring this person results in a net loss.)$530 Should this additional worker be hired? Yes.

Suppose that society restricted the economic opportunities of blue-eyed persons to jobs in construction, while brown- or green-eyed persons could work any job they choose.

Would wages in construction be higher or lower than wages for other jobs? Wages would be lower in construction jobs. Because the supply of workers in construction jobs will be much higher than in all other jobs, the wage will be lower. Would brown- or green-eyed workers make more or less than blue-eyed workers? The brown- or green-eyed workers would make more. The brown- or green-eyed workers will have more employment opportunities, so they will seek more lucrative careers than construction, where the supply of labor is artificially high.

Which of the following four people would economists be most likely to identify as "long-term poor"?

a custodial worker whose income and responsibilities as a single parent make it impossible to return to school

Which of the following policy actions do the authors propose to offset the negative consequences of rising income inequality?

a relatively modest boost in the historical growth rate of government redistributive transfers modestly higher average tax rates

In the United States in 2013, female workers earned an average of 18% less than male workers. Which of the following factors would probably not be part of the explanation for this wage gap?

efficiency wages Efficiency wages occur when an employer offers higher than equilibrium wages to all his employees in order to increase worker productivity.

Internships are considered a vital stepping stone to full-time employment after college, but not all internship positions are paid. Suppose you have to decide between taking an unpaid summer internship in your field of study, or working at a factory for the summer earning $10 an hour. If you take the factory job for the summer, what is included in your opportunity cost?

gaining valuable experience and increasing your human capital networking with professionals in your field of study

The United States has attracted many highly productive immigrants who work in fields such as education, health, and technology. These workers have high marginal products of labor, which, therefore, cause the degree of income inequality in the United States to

increase

When will there be a labor surplus? Order the industries from most likely to have a surplus to least likely to have one.

industry C, where new regulations have led to expanded employee benefits and high wages industry B, which has more or less regained equilibrium after a period of upheaval industry A, where firms need to quickly bring all jobs back from overseas, after outsourcing led to quality concerns The return of jobs to the domestic market will mean, in the short term, a labor shortage rather than a surplus because of the dramatic increase in the demand for labor.Labor surpluses occur when there are too many employees and not enough positions for all of them to fill. Unemployment will be high in industries with large labor surpluses.

Which of the following may help to explain the underlying causes of income inequality?

labor union decline globalization rise of stock option-based executive compensation skill-based technological change

Jennifer runs a landscaping business. She is about to buy a new mower that she expects will last her three years. Compared to model A, which is similar to the mower Jennifer is currently using, model B costs $1,500 more but will save about $200 in gas each year. It will also allow her to earn $10 more each week because it mows faster, which allows her to work on more lawns. Which model should Jennifer buy, and why?

model B, because it will improve Jennifer's bottom line by $660 over three years The lawnmower will save $600 in gas over three years and Jennifer will collect $520 more in payments each year. The total of $2,160 is $660 more than the $1,500 cost premium of the better model.

Why would a profit-maximizing firm pay its workers more than what workers are paid at other firms in the same market?

to decrease employee turnover to provide an incentive for workers to reduce slacking to increase worker productivity