EC 302 Chapter 3
A favorable supply shock would
shift the production function up and increase marginal products at every level of employment.
If a country's working-age population declines and its wealth increases, then the labor supply curve
shifts to the left
Suppose the economy's production function is Y = AK0.3N0.7. Suppose K = 200, N = 2000, and A = 1. Calculate the marginal product of capital.
1.5
Suppose the economy's production function is Y = AK^0.3N^0.7. Suppose K = 200, N = 2000, and A = 1. Calculate the marginal product of capital.
1.5
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?
10
An adverse supply shock would
shift the production function down and decrease marginal products at every level of employment.
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.
substitution effect
How would each of the following events affect Cheryl Shirker's supply of labor? (a) Cheryl's firm announces a reorganization plan, in which she will get a big promotion and raise in six months. (b) Cheryl's speculative investment in plutonium futures pays off big, netting her a profit of $300 thousand. (c) Cheryl's father, who had planned to leave her a large bequest, must spend all his wealth on medical bills after a prolonged illness
(a) The higher future real wage reduces current labor supply. (b) Higher wealth reduces labor supply. (c) Lower wealth increases labor supply.
Suppose that Freedonia 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 = AK0.25N0.75. Total factor productivity of the economy is approximately equal to
12.87
Suppose that Freedonia 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
12.87
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. If a supply shock increases the marginal product of labor by 10 (MPN = 210 − 0.5 N), by how much does employment increase?
16
Let the production function be Y = AK0.3N0.7. If K=1000, N=50, and A = 15, what is Y?
1842
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. If a supply shock increases the marginal product of labor by 10 (to MPN =210 - 0.5 N), by how much does the real wage increase?
2
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 and N both rise by 20%, and A is unchanged, by how much does Y increase?
20%
The marginal product of labor (measured in units of output) for Expando Corp. is given by MPN = A(400 - 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 = 2.0. What will be the demand for labor if the nominal wage is $18?
397
Suppose the marginal product of labor is MPN = 200 - 0.5N where N is aggregate employment. The aggregate quantity of labor supplied is 100 + 4w, where w is the real wage. The government imposes a minimum wage of 60. How much unemployment will this create among unskilled labor?
60
What is a production function?
A mathematical relationship relating the amount of output produced to the quantities of capital and labor used
What is a production function?
A mathematical relationship relating the amount of output produced to the quantities of capital and labor used.
An adverse oil-price shock reduces labor demand. What happens to current employment and the real wage rate?
Both employment and the real wage rate would decrease
How would each of the following affect Helena Handbasket's supply of labor? A temporary income tax surcharge raises the percentage of her income that she must pay in taxes, for the current year only.
A temporary income tax surcharge raises the percentage of her income that she must pay in taxes, for the current year only.
Which of the following factors can cause a nation's production function to shift over time?
An improvement in technology.
Which of the following best explains why the profit-maximizing level of employment for a firm occurs when the marginal revenue product of labor (MRPN) equals the nominal wage (W)?
At that level of employment, the marginal benefit from the last worker is equal to the marginal cost of the last worker.
Suppose that the government levies a lump-sum tax on workers. Which of the following best explains the effect on the supply of labor?
A lump-sum tax has only an income effect, so increasing the tax will cause the supply of labor to increase.
An adverse oil-price shock reduces labor demand. What happens to current employment and the real wage rate?
Both employment and the real wage rate would decrease
A beneficial oilminus−price shock increases labor demand. What happens to current employment and the real wage rate?
Both employment and the real wage rate would increase.
Which of the following is a factor that could cause a decrease in GDP other than an increase in oil prices?
Contractionary fiscal or monetary policy
How would each of the following affect Helena Handbasket's supply of labor? The value of Helena's home triples in an unexpectedly hot real estate market.
Helena will supply less labor due to the income effect.
A bird flu epidemic causes many people to flee the country, but does not affect labor demand significantly because almost all the goods produced within the country are exported. What happens to current employment and the real wage rate?
Employment would decrease and the real wage would increase
The government announces a tax increase on workers' wages to take effect in the future. What happens to current employment and the real wage rate?
Employment would increase and the real wage would decrease.
the marginal product of capital is the increase in
output from a one-unit increase in capital
How can this profit-maximizing condition be expressed in real terms? In the equations below, MPN is the marginal product of labor, MRPN is the marginal revenue product of labor, W is the nominal wage, and P is the price level.
MPN = W/P
Calculating marginal productivity
Marginal productivity is calculated as the change in output divided by the change in labor input. In this case, when N = 85, Y =218439. When N = 120, Y = 221909. The marginal product of labor = (221909−218439)/(120-85) = 99.1
Suppose oil prices fall temporarily, as oil becomes more plentiful. What impact is this likely to have on the production function, the marginal products of labor and capital, labor demand, employment, and the real wage?
More output can now be produced by the same amounts of capital and labor, since oil is more abundant and cheaper. The production function shifts upward, with the marginal products of labor and capital rising. Since the marginal product of labor is higher, so is labor demand. As a result of the shift to the right in the labor demand curve, employment rises, as does the real wage.
How can the MPK be shown graphically?
The MPK is the slope of the production function when labor is held constant.
How is the MPN curve related to labor demand?
The MPN curve is identical to the labor demand curve. -The MPN curve shows the marginal product of labor at each level of employment. It is related to the production function because the marginal product of labor is equal to the slope of the production function (where output is plotted against employment). The MPN curve is related to labor demand, because firms hire workers up to the point at which the real wage equals the marginal product of labor. So the labor demand curve is identical to the MPN curve.
How would each of the following affect Helena Handbasket's supply of labor? Originally an unskilled worker, Helena acquires skills that give her access to a job with a higher hourly wage.
The effect on Helena's labor supply is ambiguous because substitution and income effects go in opposite directions in this case.
What two factors should you equate in deciding how many workers to employ?
The marginal product of labor and the real wage rate
What do you have to know besides an economy's production function to know how much output the economy can produce?
The quantities of capital and labor that the economy has
What do you have to know besides an economy's production function to know how much output the economy can produce?
The quantities of capital and labor that the economy has.
Suppose in this situation, the government passes minimum-wage legislation that requires firms to pay a real wage greater than or equal to $11.30 Which of the following best explains the effect on the labor market?
The wage rises to $11.30, the quantity of labor demanded decreases, and there is now unemployment. -Since the minimum wage is above the equilibrium wage, the wage in the market equals the minimum wage, the quantity demanded of labor decreases, the quantity supplied of labor increases, and there is unemployment.
Suppose the economy's production function is Y = AK0.3N0.7. Suppose K = 200, N = 2000, and A = 1. Calculate the marginal products of labor and capital.
Using calculus, the marginal product of capital is dY/dK = 0.3A(N/K)0.7 and dY/dN = 0.7A(K/N)0.3. Plugging in the values for N and K gives: MPK = 0.3 (2000/200)0.7 = 1.5; MPN = 0.7 (200/2000)0.3 = 0.35. If you do not use calculus, you can arrive at the same answer (rounded) by plugging the values of for A, N and K into the production function to find Y = 1002.37. Increase K by 1 and recalculate Y; it is now 1003.88. The difference is the MPK = 1003.88 - 1002.37 = 1.51. Increase N by 1 and recalculate Y; it is 1002.73. The difference is the MPN = 1002.73 - 1002.37 = 0.36.
A mathematical expression relating the amount of output produced to quantities of capital and labor utilized is the
production function
An increase in the real wage rate will cause
a movement along the labor demand curve
As a result of the superb economics essay that you wrote during this quarter, you won the Adam Smith prize of $100. The receipt of these funds would be an example of
a pure income effect
An invention that speeds up the internet is an example of
a supply shock
The production function slopes upward, but its slope declines from left to right. The production function slopes upward because
additional units of input lead to additional output.
What factor can cause a nation's production function to shift over time?
an improvement in technology
What would cause an increase in the demand for labor?
an increase in the productivity of workers
The marginal productivity of labor ____ as the amount of labor increases.
decreases
How would each of this affect the current level of full-employment output? -Energy supplies become depleted. -Depletion of energy supplies _________________ and thus full-employment output ____________ .
decreases other factors of production; decreases
How would each of this affect the current level of full-employment output? -A new law mandates the shutdown of some unsafe forms of capital. -Shutting down unsafe forms of capital _________________ and thus full-employment output ____________ .
decreases the capital stock; decreases .
How would each of this affect the current level of full-employment output? -New teaching techniques improve the educational performance of high school seniors. -Improving the educational performance of current students _______ and thus full-employment output ____________ .
does not change anything; does not change
A winter ice storm has paralyzed the entire east coast, reducing productivity sharply. This supply shock shifts the marginal product of labor curve
down and to the left, reducing the quantity of labor demanded at any given real wage
A sharp increase in stock prices makes people much wealthier. If the main effect of this increased wealth is felt on labor supply, what happens to current employment and the real wage rate?
employment would decrease and the real wage would increase
If Jeff's wage rate rises, he decides to work fewer hours. From this, we can infer that
for Jeff, the substitution effect is less than the income effect
If Jeff's wage rate rises, he decides to work more hours. From this, we can infer that
for Jeff, the substitution effect is greater than the income effect.
The equilibrium level of employment, achieved after the complete adjustment of wages and prices, is known as the
full-employment level of employment.
One reason that firms hire labor at the point where w = MPN is
if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers.
How would each of this affect the current level of full-employment output? -A large number of immigrants enter the country. -A large number of immigrants entering the country _________ and thus full-employment output _________ .
increases the labor force; increases
If the marginal product of capital doesn't change as the amount of capital increases, a figure showing the relationship between output and capital
is a straight line with constant upward slope.
Economists often treat the economy's capital stock as fixed because
it takes a long time for new investment and the scrapping of old capital to affect the overall quantity of capital.
Research on labor supply generally shows that
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.
A permanent increase in the real wage rate has a ________ income effect on labor supply than a temporary increase in the real wage, so labor supply is ________ with a permanent wage increase than for a temporary wage increase.
larger; less
A technological breakthrough in using photons for computers will increase the productivity of those working with computers a hundredfold. You would expect this breakthrough to shift the
marginal product of labor curve up and to the right, raising the quantity of labor demanded at any given real wage.
Your boss wants to know if you should lay off any workers. You answer that you should lay off workers if the
marginal product of labor is less than the real wage rate.
a decrease in the real wage would result in a
movement along the labor demand curve, causing an increase in the number of workers hired by the firm
Firms hire labor at the point where the
nominal wage rate equals the marginal revenue product of labor.
The income effect of a higher real wage on the quantity of labor supply is the
tendency of workers to supply less labor in response to becoming wealthier.
The marginal product of capital (MPK) is
the additional amount of output produced when one unit of capital is added.
What is the marginal product of labor (MPN)?
the additional amount of output produced when one unit of labor is added.
The marginal revenue product of labor represents...
the benefit to a firm of hiring an additional worker, while the nominal wage is the cost. Comparing the benefit to the cost, the firm will hire additional workers as long as the marginal revenue product of labor exceeds the nominal wage, since doing so increases profits. Profits will be at their highest when the marginal revenue product of labor just equals the nominal wage.
What are the primary factors that cause the aggregate labor supply curve to shift?
the expected future real wage, wealth, the size of population, and factors that influence labor force participation
What 2 variables are related by the aggregate labor supply curve?
the quantity of labor supplied and the real wage
The fact that the production function relating output to capital becomes flatter as we move from left to right means that
there is diminishing marginal productivity of capital.
The fact that the production function relating output to labor becomes flatter as we move from left to right means that
there is diminishing marginal productivity of labor.
The slope of the production function declines from left to right because
there is diminishing marginal productivity, because at least one input is fixed.
In the production function Y = AF(K, N), A is ________, K is ________, and N is _______.
total factor productivity; the capital stock; the number of workers employed