Principles of Economics 1 - Microeconomics
Quiz 9         
Due by 10 a.m., Tuesday, April 22, 2008
Mr. Vice

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This quiz covers Chapters 11 (second half) and 12

Exhibit 11-6

 

Machines

Output

Price

per machine

0

  0

$3  

1

  7

3

2

12

3

3

15

3

4

17

3

5

18

3

____ 1. In Exhibit 11-6, diminishing returns first becomes evident with the addition of the __________ machine. (Hint:  Create a new column for the marginal product.  Marginal product is the change in total product (output) divided by the change in the quantity of input (machines))

a.

first

b.

second

c.

third

d.

fourth

e.

fifth

____ 2. Which of the following is true of marginal revenue product (MRP) and marginal product (MP)? (Hint:  MRP = MP x MR for all market structures.  The question then becomes, Is marginal revenue the same as the price in the particular case? (price searcher? price taker?)

a.

MRP = MP price, whether the firm is a price searcher or not.

b.

MRP = MP price only if the firm is a price searcher.

c.

MRP = MP price only if the firm sells in a perfectly competitive market.

d.

MRP = MP marginal cost only if the firm is a price searcher.

e.

MRP = MP/price only if the firm is a price taker.

____ 3. A firm will purchase additional units of a resource as long as each unit's. 

a.

marginal revenue product is greater than zero

b.

marginal revenue product equals the product price

c.

marginal revenue product is greater than or equal to its marginal resource cost

d.

marginal revenue product is less than its marginal resource cost

e.

total revenue product is greater than its marginal resource cost

Exhibit 11-9

Units of

variable

resource

Total

product

Product

price

0

  0

$22  

1

15

20

2

29

18

3

42

16

4

54

14

5

65

12

6

75

10

7

84

8

8

92

6

9

99

4

10  

105  

2

____ 4. How low would the wage rate have to fall before the firm in Exhibit 11-9 would hire nine workers? (Hint:  Create a table similar to the one on page 247.)

a.

$198

b.

$4

c.

$396

d.

$28

e.

The firm would have to be paid to hire nine workers.

____ 5. If a firm hires a resource in a perfectly competitive resource market, 

a.

it must also be a price taker in the product market

b.

it must also be a monopolist in the product market

c.

it faces a horizontal marginal resource cost curve

d.

it faces an upward-sloping marginal resource cost curve

e.

it faces a downward-sloping marginal resource cost curve

____ 6. If an insurance company hires a resource in a perfectly competitive resource market and it wants to maximize profit, it will hire where marginal revenue product equals (See the general rule on page 250)

a.

the price of the resource, which equals its marginal resource cost

b.

the price of the resource, which is greater than its marginal resource cost

c.

the price of the resource, which is less than its marginal resource cost

d.

marginal product

e.

the price of the product

____ 7. An improvement in technology that allows workers to process twice as many insurance forms in an hour than before will cause (First, what happened to the MRP of labor?)

a.

more labor to be employed because its marginal revenue product has fallen

b.

an increase in insurance premiums

c.

fewer workers to be employed because their marginal revenue product has decreased

d.

more workers to be employed because their marginal revenue product has increased

e.

fewer workers to be employed because their marginal revenue product has increased

____ 8. If coal and oil are substitute inputs in the production of electricity, an increase in the price of oil  (Hint:  Keep in mind the difference between a change in demand and a change in quantity demanded as well as the difference between a change in supply and a change in the quantity supplied.  A change in demand or supply (by definition) results when one or more of the determinants changes.  A change in the quantity demanded or supplied results from a change in the price of the good.  See page 251)

a.

will increase the demand for coal

b.

will reduce the demand for coal

c.

will increase the supply of coal

d.

will reduce the supply of coal

e.

will not affect the demand for coal

____ 9. Increases in the minimum wage

a.

have more support among economists than among the general public

b.

raise the opportunity cost of staying in school

c.

raise the opportunity cost of working

d.

have no effect on the actual wages workers receive

e.

raise overall employment in the economy

____ 10. The quantity of labor an individual supplies to any market

a.

always increases as the market wage rate rises

b.

is contingent upon the wage rates offered in other labor markets

c.

always decreases as the market wage rate rises

d.

could never be zero over the realistic range of wage rates

e.

depends only on the opportunity cost of the individual's time in other labor markets

____ 11. Leisure is (Hint:  See page 261)

a.

not subject to the law of diminishing utility because you can never have enough leisure time

b.

not subject to the law of diminishing utility because you can derive utility only from goods and services

c.

subject to the law of diminishing utility, just as the consumption of goods and services is

d.

subject to the law of diminishing utility only if it involves the consumption of goods and services

e.

not considered in maximizing utility

____ 12. Work is an attractive use of your time

a.

if the utility of consumption made possible by work exceeds the disutility of work itself

b.

whenever you are paid a wage equal to or greater than the minimum wage

c.

whenever you derive utility from the consumption made possible through work

d.

unless time spent working is a source of disutility

e.

only when marginal utility is negative for an additional unit of leisure

____ 13. People make mistakes in allocating their time

a.

because they always act irrationally

b.

despite always having expectations fulfilled

c.

only when leisure is a normal good

d.

because acquiring information is costly

e.

more often when the cost of making a mistake is high

____ 14. People who can earn higher market wages, other things constant, will (Hint:  Think opportunity cost.)

a.

provide more labor to nonmarket work

b.

be more inclined to supply their labor to market work than to nonmarket work

c.

be more inclined to supply their labor to nonmarket work than to market work

d.

provide more labor to nonmarket work even if the market can provide the services more cheaply

e.

provide less labor to market work and more labor to nonmarket work

____ 15. If leisure is a normal good, then a decrease in income __________ the time allocated to __________.

a.

decreases; market work

b.

decreases; leisure

c.

decreases; nonmarket work

d.

increases; leisure

e.

increases; market work, nonmarket work, and leisure time

____ 16. Along a backward-bending labor supply curve, the (Hint:  See pages 263-4)

a.

income effect always dominates the substitution effect

b.

substitution effect always dominates the income effect

c.

substitution effect is always equal to the income effect

d.

substitution effect dominates the income effect at high wage rates

e.

substitution effect dominates the income effect at low wage rates

____ 17. A large inheritance from a relative will tend to

a.

cause movement up and to the right along your labor supply curve

b.

cause movement down and to the left along your labor supply curve

c.

shift your labor supply curve outward

d.

shift your labor supply curve inward

e.

make the income effect of a wage increase positive

____ 18. If union demands result in a surplus of labor in some industries, the resulting

a.

increased demand for labor in the nonunion sector drives nonunion wages up

b.

decreased demand for labor in the nonunion sector drives nonunion wages down

c.

increased supply of labor in the nonunion sector drives nonunion wages down

d.

increased supply of labor in the nonunion sector drives nonunion wages up

e.

decreased supply of labor in the nonunion sector drives nonunion wages up

____ 19. If an industrial union is able to negotiate a wage above the market-clearing wage, employment in the industry will  (Hint:  This is just regular supply and demand analysis where the price is held above the equilibrium price)

a.

increase

b.

decrease

c.

increase, if the union can restrict the supply of labor

d.

increase, if the union can increase the supply of labor

e.

decrease due to the strike-breaking activity of the firm

____ 20. If a union is able to restrict the supply of a non-union-made substitute product,

a.

wages will increase but employment will decrease

b.

wages will increase and employment will increase

c.

wages will decrease but employment will increase

d.

wages will decrease and employment will decrease

e.

the demand for non-union labor will increase

Economics 1  Answers for Quiz 9

1. ANS: C.  Calculate the Marginal Product by finding the change in total product (Output) as each machine is added.  The marginal product of the first machine is 7 units (7 - 0).  The marginal product of the second machine is 5 (12 - 7) and the marginal product of the third machine is 3 (15 - 12).  Diminishing returns aka diminishing marginal returns begin when the marginal product first starts to decline (decrease) which is with the addition of the first machine.

2. ANS: C.  Marginal Revenue Product = MP x MR (always).  So the Marginal Revenue Product will equal MP x P only when P = MR.  P = MR only in perfect competition in the product market.  In other words, the price received for each additional unit sold is equal to the marginal revenue generated by the sale of that unit.  For every market structure (monopoly, monopolistic competition, and oligopoly) the demand curve faced by the firm is negatively sloped which means that the P > MR.

3. ANS: C.  The marginal revenue product is equal to the additional revenue generated from the production and sale of the additional output that results from adding one more unit of a resource.  If the firm added one more worker and total output for the firm increased by 50 units and each unit of output could be sold for $2, then the MRP would be $100.  The most that the manager of the firm could afford to pay for that worker's labor is $100.  The firm's Marginal Resource cost could not exceed $100.  Thus the firm would continue add units of a resource (maybe labor) as long as the marginal revenue product of that resource was at least equal to the marginal resource cost (the cost to add that last unit of the resource).

4. ANS: E. 

Units of

variable

resource

Total

product

Product

price

Total

Revenue

Marginal

Revenue

Product

0

  0

$22  

$0  

1

15

20

$300 $300

2

29

18

$522 $222

3

42

16

$672 $150

4

54

14

$756 $104

5

65

12

$780 $14

6

75

10

$750 ($30)

7

84

8

$672 ($78)

8

92

6

$552 ($120)

9

99

4

$396 ($156)

10  

105  

2

$210 ($186)

From the table we see that the firm would never purchase more than 5 units of the variable resource and the firm would have to be paid to take a 6th unit because the MRP of the 6th unit is a negative $30.  In other words, the total revenue for the firm would fall by $30 if the firm were to add the 6th unit of the variable resource..

5. ANS: C.  Marginal Resource Cost (MRC) is the additional cost to hire (purchase) one more unit of the variable resource.  Assuming that the variable resource is labor, then a competitive resource market means that the supply curve of labor faced by the firm is horizontal.  The firm can hire as many workers as it wants at the going wage.  Therefore, the MRC doesn't change as more workers are hired.  If  the going wage is $10 per hour, then the firm can hire one worker for $10 per hour or a thousand workers for $10 per hour.  The MRC is equal to the wage rate and does not change.

If the resource is being purchased (hired) in other than a competitive resource market; that is, if the supply of labor faced by the firm is positively sloped, then in order hire additional workers the firm will have to pay more to hire the new workers as well as more to all current workers.  Suppose that the firm is currently employing 1,000 hours of labor and is paying $10 per hour.  The firm wants to hire more workers, but realizes that it will have to raise the wage to $10.05 per hour to get more than 1,000 hour of labor to be offered.  Thus the MRC for the thousand and first hour of labor will be $10.05 PLUS the extra nickel that will have to be paid for all 1,000 hours of labor currently being purchased, so the MRC for that last hour of labor will not be $10.05, but will be $60.05 ($10.05 + 1,000 x $.05).

6. ANS: A.  When hiring a variable resource (e.g., labor) in a competitive resource market the wage rate is equal to the marginal resource cost.  The general rule for adding resources is to continue adding the resource as long as the Marginal Revenue Product (MRP) of the resource at least covers the Marginal Resource Cost (MRC), which in this case would be equal to the wage.

7. ANS: D.  MRPfactor = MPfactor x Pproduct , so an increase in the productivity of a factor means that the MPfactor has increased which increases the  MRPfactor .  The MRPfactor is the demand curve for the factor.  An incrase in the productivity of workers increases the demand for the workers.

8. ANS: A.  This one works just like substitutes in the product market.  When the price of oil increases, users of oil and coal will switch to the lower cost substitute, coal.  The demand curve for coal would shift to the right as a result of the increase in the price of oil.

9. ANS: B.  An increase in the minimum wage would raise the perceived cost of staying in school.  If the minimum wage is $5 per hour, then high school students will reason that each hour spent in school potentially costs them $5.  If the minimum wage increased to $10, then the students would reason that each hour in school (not working at a job for pay) would have an opportunity cost of $10.  The likely result would be that some students would chose to drop out of school because school "costs" too much.

10. ANS: B.  The amount of labor supplied in the furniture industry (market) is dependent on the wage rates in industries that require similar skills.   The problem with answer e is the word "only."  Opportunity cost is important, but is not the only factor.

11. ANS: C.  Leisure is a good because it provides satisfaction or as economists say, leisure provided utility.  However, as we get more and more leisure, the value that we place on an additional hour of leisure decreases.  Conversely, as we work more and more hours (less leisure) then the value of an additional hour of leisure increases.

12. ANS: A.  We assume that leisure provides utility (satisfaction) and consumption of goods and services provides satisfaction, but that work for pay yields disutility (negative utility).  A person will chose to work if the utility gained from the things that could be purchased with the money earned by working exceeds the disutility of working.  Suppose that I could earn $10 for an hour of work and that the things that I could purchase with the $10 give me 200 utils (units of utility), but that the hour of work gives me 150 units of disutility.  By working for an hour, I have a net gain in utility of 50 utils, so I would decide to work for that hour.

13. ANS: D.  The assumption is that if we had complete and perfect information before we make a decision that we would never make a bad or regretted decision; however, information is not free so we make most decisions with incomplete information.  The consequence of this is that we will frequently make "bad" decisions.  Frequently, the cost of acquiring information exceeds the potential value of the information so we decide NOT to acquire full and complete information.  For example, if a person knew that they would fail a particular class, would the person have registered for the class?

14. ANS: B.  For a person with a high wage rate, the opportunity cost of both leisure and non-market work are high, so the person would tend to choose to hire others to do many of the non-market types of work.  For example, a $250 per hour attorney could spend an hour washing their car (opportunity cost $250) or she could pay to have it washed at a car wash in 15 minutes.  A minimum wage worker would be much more likely to wash their own car and would the attorney.

15. ANS: B.  If leisure is a normal good, then a decrease in income _DECREASES_ the time allocated to _LEISURE_.     By definition, a normal good is a good that as your income increases you consume more and as you income decreases you demand (consume) less.  So a decrease in income would decrease your demand for all normal goods including leisure.  If you had a trust fund that gave you $1 million per year; how much time would you spend working for pay?  You would most likely spend your time in leisure and non-paid activities for yourself.

16. ANS: E.  If one effect always dominated the other, then the supply of labor curve would never bend backward.  The bend results when one effect goes from being dominant to the other effect being dominant.  The substitution effect is that as the wage rate rises, the cost of leisure (not working) increases, so you would tend to substitute work for leisure by working more hours.  However, as the wage rate rises so does you income and because leisure is a normal good the higher income would tend to have you working less (taking more leisure) as your income rises.  These two effects work in opposite directions, so when the substitution effect dominates as it does at lower wage rates, then a rise in the wage rate will cause the person to supply more labor.  The supply of labor curve would be positively sloped.  However, as the wage rate and income rise the income effect gets stronger and eventually the income effect (work less) may dominate the substitution effect (work more) and the supply of labor curve would bend backward (work less at the higher wage).

17. ANS: D.  The answer to 17 is similar to the previous two questions.  The inheritance means higher income and because of the income effect you would tend to consume (take) more leisure and therefore less work.  Your supply of labor curve would shift to the left.

18. ANS: C. See the diagram on page 272.  If the union sets the wage above equilibrium ( W ' ) in a particular industry, then the total employment in that industry will decrease compared to the level of employment that would have occurred if the wage was ( W ).  Where do those workers go who are no longer employed in the unionized industry?  They go to other industries, so the supply of labor in the non-unionized industries increases.  The increased supply of labor in the non-unionized industries causes the wage rate in those non-unionized industries to decline.  Just think what happens on a supply and demand graph when the supply curve shifts to the right.

19. ANS: B.  The demand curve for labor is negatively sloped, so an increase in wage will cause a move up the existing demand for labor curve which means fewer hours will be demanded at the higher wage.  The only way to avoid reduced employment when the wage rate is increased is to do something that would cause the demand curve for labor to shift to the right at the same time.  If the industry competes with imported goods, then a government policy that reduces the amount of imports would increase the demand for the domestically produced good, which would shift the derived demand for labor curve to the right. Unfortunately, this would  create bigger problems for consumers in the form of higher prices for products.

20. ANS: B.  Actually, I just answered this one when I wrote the answer for 19..