Micro Final Practice Chapter 16

MICRO FINAL PRACTICE CHAPTER 16 1. Which of the following statements best illustrates the concept of derived demand? A decline in the demand for shoes will cause the demand for leather as input for shoe manufacturing to decline. 2. Refer to the above table that contains information on the number of workers hired by a firm, the amount of output produced by these workers, and the price at which these outputs are sold in the market. This firm is selling its product in a purely competitive market. 3. Assume the price of capital falls relative to the price of labor and, as a result, the demand for labor increases. Therefore, the output effect (due to lower relative price of capital) is greater than the substitution effect. 4. Harry owns a barbershop and charges $6 per haircut. By hiring one barber at $10 per hour, the shop can provide 24 haircuts per eight-hour day. By hiring a second barber at the same wage rate, the shop can now provide a total of 42 haircuts per day. The marginal product (MP) of the second barber is 18 haircuts. 5. Harry owns a barbershop and charges $6 per haircut. By hiring one barber at $10 per hour, the shop can provide 24 haircuts per eight-hour day. By hiring a second barber at the same wage rate, the shop can now provide a total of 42 haircuts per day. Harry should hire the second barber because he will add $28 to profits. 6. Employers will hire more units of a resource (e.g. labor) if the productivity of the resource increases. 7. Marginal revenue product of a worker measures the amount by which the addition of one more worker increases a firm's total revenue. 8. A competitive employer is using labor in such an amount that labor's marginal revenue product (MRP) is $10 and its wage rate is $8. This firm should hire more labor because this will increase profits. 9. Assume that a restaurant is hiring labor in an amount such that the MRC of the last worker is $16 and her MRP is $12. On the basis of this information, we can say that profits will be increased by hiring fewer workers. 10. Suppose that a union successfully negotiated a 10 percent wage increase and the quantity of labor demanded decreased by 10 percent. Given a fixed labor demand curve, we can conclude that labor demand is unit-elastic. 11. A farmer who has fixed amounts of land and capital finds that total product is 24 for the first worker hired, 32 when two workers are hired, 37 when three are hired, and 40 when four are hired. The farmer's product sells for $3 per unit, and the wage rate is $13 per worker. The marginal product of the second worker is 8. 12. Refer to the above table that contains information on the number of workers hired by a firm, the amount of output produced by these workers, and the price at which these outputs are sold in the market. The data in the table reveal that the firm is selling its product in an imperfectly competitive product market. 13. Assume labor is the only variable input and that an additional input of labor increases total output from 72 to 80 units. If the product sells for $6 per unit in a purely competitive market, the MRP of this additional worker is $48. 14. If two resources (e.g. labor and capital) are highly substitutable for one another, 15. an increase in the price of one will increase the demand for the other. A firm that hires labor in a purely competitive resource market is a "wage taker." 16. Harry owns a barbershop and charges $6 per haircut. By hiring one barber at $10 per hour, the shop can provide 24 haircuts per eight-hour day. By hiring a second barber at the same wage rate, the shop can now provide a total of 42 haircuts per day. The marginal revenue product (MRP) of the second barber is $108. 17. The rapid spread of ATMs reduced the demand for bank tellers initially, but eventually tellers took on tasks that ATMs are not suited to handle. 18. Refer to the above table that contains information on the number of workers hired by a firm, the amount of output produced by these workers, and the price at which these outputs are sold in the market. If the firm is hiring workers under purely competitive conditions at a wage rate of $10, it will employ 5 workers. 19. A farmer who has fixed amounts of land and capital finds that total product is 24 for the first worker hired, 32 when two workers are hired, 37 when three are hired, and 40 when four are hired. The farmer's product sells for $3 per unit, and the wage rate is $13 per worker. The marginal revenue product (MRP) of the second worker is $24. 20. Elasticity of resource demand (e.g. labor) is measured by the percentage change in resource quantity demanded divided by the percentage change in resource price (wage rate). 21. The labor demand curve of a purely competitive producer slopes downward because the marginal product of successive workers declines. 22. If production technology to manufacture a certain product dictates that labor and capital must be used in fixed proportions (e.g. 2 workers for 1 machine), an increase in the price of capital will cause a firm to use less labor as a consequence of the output effect. 23. A firm will employ more of an input whose relative price has fallen and, conversely, will use less of an input whose relative price has risen. Thus, a fall in the price of capital will increase the relative price of labor and thereby reduce the demand for labor. This describes the substitution effect. 24. An employer hiring workers in a competitive labor market should hire additional labor as long as the marginal revenue product (MRP) of the worker exceeds the worker's wage rate. 25. The demand for airline pilots results from the demand for air travel. This fact is an example of the derived demand for labor. 26. All firms have to incur production costs because of the resources that they use for production. 27. The marginal revenue product (MRP) curve for labor for a firm is the firm's labor demand curve. 28. If a 10 percent wage increase in a particular labor market results in a 5 percent decline in employment in that market, labor demand is inelastic. 29. A farmer who has fixed amounts of land and capital finds that total product is 24 for the first worker hired, 32 when two workers are hired, 37 when three are hired, and 40 when four are hired. The farmer's product sells for $3 per unit, and the wage rate is $13 per worker. How many workers should the farmer hire? 3 30. If one worker can pick $30 worth of grapes and two workers together can pick $50 worth of grapes, the marginal revenue product of the second worker is $20. 31. The fact that monopoly and monopsony exist in resource markets means that 32. resource price of an input does not always measure contributions to output, and hence not equal to the marginal revenue product (MRP) of the input. 33. We say that the demand for labor is a derived demand because we demand the product that labor helps to produce rather than labor service per se. 34. Marginal resource cost (MRC) is the increase in total resource cost associated with the hire of one more unit of the resource. 35. The substitution effect due to a change in the relative price of an input indicates that a profit-seeking firm will use more of an input whose price has fallen and less of other inputs in producing a given output. 36. A profit-maximizing firm will always find it profitable to hire workers up to the point at which their marginal resource cost (MRC) is equal to their marginal revenue product (MRP). 37. The general rule for hiring any input (say, labor) in the profit-maximizing amount is marginal resource cost (MRC) = marginal revenue product (MRP). This rule takes the special form W = MRP (where W is the wage rate) only when the firm hires all its workers in a purely competitive labor market. 38. Refer to the above table that contains information on the number of workers hired by a firm, the amount of output produced by these workers, and the price at which these outputs are sold in the market. If the firm is hiring workers under purely competitive conditions at a wage rate of $22, it will employ 3 workers. 39. A farmer who has fixed amounts of land and capital finds that total product is 24 for the first worker hired, 32 when two workers are hired, 37 when three are hired, and 40 when four are hired. The farmer's product sells for $3 per unit, and the wage rate is $13 per worker. What is the farmer's profit-maximizing output? 37 40. Assume the price of capital doubles and, as a result, firms make no change in the relative quantities of capital and labor they currently employ. This implies that labor is not readily substitutable for capital. 41. The marginal revenue product (MRP) curve for labor is downsloping and shows the relationship between wage rates and the quantity of labor demanded. 42. Marginal product of a worker is the amount an additional worker adds to the firm's total output. 43. If the wage rate that a firm will have to pay its workers increases, a purely competitive producer and an imperfectly competitive producer will both hire less labor. 44. The labor demand curve of a firm will shift to the left if the price of the product that the labor is producing falls. 45. In the United States, professional football players earn much higher incomes than professional soccer players. This occurs because consumers have a greater demand for football games than for soccer games. 46. Suppose a technological improvement increases the productivity of a firm's capital and, simultaneously, its workers' union negotiates a wage increase. We can predict that the firm will use relatively more capital and relatively less labor. 47. The marginal productivity theory of income distribution suggests that each individual receives income based on his or her contribution to total output (i.e. its marginal revenue product). 48. The change in a firm's total revenue that results from hiring an additional worker is measured by the marginal revenue product (MRP). 49. Resource X (e.g. labor) has many close substitutes, whereas resource Y (e.g. land) has no close substitutes. Other things equal, we would expect the demand for resource X to be more elastic than the demand for resource Y. 50. Assume that an appliance manufacturer is employing variable resources X and Y in such amounts that the marginal revenue product (MRPs) of the last units of X and Y employed are $100 and $60, respectively. Resource X can be hired at $50 per unit and resource Y at $20 per unit. The firm should hire more of both X and Y.