Deck 17: The Markets for Labor and Other Factors of Production

Question 1

In a market economy,the high salaries of some star baseball players such as Adrian Gonzalez,are determined by

A) team owners, based on the total number of star athletes they plan to hire.
B) advertising companies, based on what they are willing to pay to advertise their products at baseball games.
C) the interaction of the demand for star athletes and the supply of star athletes.
D) consumers, based on their willingness to watch baseball games.

Answer 1

C

Question 2

Which of the following is not an example of a derived demand?

A) Several of the animated films released between 1999 and 2001 failed to earn a profit, which caused some companies to stop making these films, thereby decreasing the demand for animators.
B) Seth Bullock, a personal-injury attorney, complains that he is earning far less now than a few years ago largely because personal injury cases have been undercut by state laws limiting class-action suits and payouts on damages.
C) Millicent Manning, the owner of a furniture store, is concerned that her sales have fallen for the past six months. She attributes this to the downturn in the real estate market.
D) As advancements in medical technology increase the safety and success of laser eye surgery, the demand for opticians has decreased.

Answer 2

C

Question 3

What is the difference between labor's marginal product and marginal revenue product?

A) The marginal product of labor is the increase in output as a result of hiring an additional worker while the marginal revenue product of labor is the increase in profit as a result of hiring an additional worker.
B) The marginal revenue product of labor is the dollar value of hiring an additional worker while the marginal product of labor is the increase in the firm's physical output as a result of hiring an additional worker.
C) The marginal product of labor is the additional labor's contribution to the firm's total output while the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.
D) Labor's marginal product is a measure of labor's productivity while labor's marginal revenue product is a measure of labor's ability to sell the firm's products.

Answer 3

C

Question 4

Suppose you have worked at a local sandwich shop for six months and now you plan to ask your manager for a raise.How can you convince your manager that you are worth more money than you are currently being paid?

A) by threatening to quit if he refuses to give you a raise
B) by demonstrating to your manager the marginal revenue product your employment contributes to the sandwich shop
C) by explaining to him how difficult it is for you to save enough money to go to college
D) by convincing him that you are a dedicated worker and ready to take on more responsibilities at the shop

Question 5

A reason why a perfectly competitive firm's demand for labor curve slopes downward is that

A) each additional unit of labor hired is less efficient than previously hired units.
B) in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns.
C) the extra cost of hiring additional units of labor increases as a firm hires more units of labor.
D) the firm's demand curve for the product that uses labor is downward sloping.

Question 6

What is the difference between a firm's marginal revenue and its marginal revenue product?

A) Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the profit earned from hiring one more worker.
B) Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the change in total revenue from hiring one more worker.
C) Marginal revenue is the increase in revenue when a firm raises its output price while marginal revenue product is the increase in marginal product when a firm hires an additional worker.
D) There is no difference between the two terms.

Question 7

Table 17-1

Refer to Table 17-1.If the output price is $3,what is the marginal revenue product of the fifth unit of labor?

A) $1,050
B) $360
C) $210
D) $150

Question 8

The labor market is considered as one of the more important markets in an economy because

A) most people typically earn the bulk of their income from wages and salaries.
B) most people are concerned that wages determined in the labor market are unfair.
C) the usual market forces do not hold in the labor market.
D) the labor market does not reach an equilibrium.

Question 9

Demand in factor markets differs from demand in product markets in that

A) the demand for a factor of production is difficult to determine.
B) the demand for a factor of production is influenced by workers' productivity and by the producers' expected sales revenues, not by tastes and preferences of consumers.
C) demand for a factor of production is based on the tastes and preferences of firms.
D) demand for a factor of production is based on the tastes and preferences of resource owners.

Question 10

Figure 17-1
Figure 17-1 shows the marginal revenue product for Dale's Hand-Sewn Doilies, a producer of linen doilies.

-Refer to Figure 17-1.Suppose the market price of doilies rises to $3.What happens to the curve given in the diagram?

A) Nothing, because labor's productivity has not changed.
B) There will be a movement along the curve.
C) The curve shifts to the right.
D) We cannot answer the question without knowing if Dale would want to hire more workers.

Question 11

Marginal revenue product of labor for a competitive seller is

A) the change in total product from hiring one more worker.
B) equal to the marginal product of labor multiplied by the output price.
C) the output price multiplied by the quantity sold.
D) the marginal revenue of the product multiplied by the output price.

Question 12

The demand for labor is described as a derived demand because

A) it is derived by workers seeking to earn income to fund the consumption of goods and services.
B) it is derived by producers seeking to make profits by starting new businesses.
C) it is derived from the demand for products that use labor in the production process.
D) it is derived from government institutions which rely on labor markets for the purpose of raising tax revenue.

Question 13

Table 17-1

Refer to Table 17-1.The marginal product of the fourth unit of labor is

A) 300.
B) 75.
C) 60.
D) 15.

Question 14

Figure 17-1
Figure 17-1 shows the marginal revenue product for Dale's Hand-Sewn Doilies, a producer of linen doilies.

-Refer to Figure 17-1.If the wage rate is $40,how many workers should Dale hire?

A) 6 units
B) 5 units
C) 4 units
D) 3 units

Question 15

Firms use information on labor's marginal revenue product to determine

A) how much to produce at each output price.
B) how many workers to hire at each wage rate.
C) how much marginal product to produce at each wage rate.
D) how much labor services to supply at each wage rate.

Question 16

Table 17-1

Refer to Table 17-1.Suppose the output price is $3.If the wage rate is $90,what is the profit-maximizing quantity of labor that the firm should hire?

A) 7 units
B) 5 units
C) 4 units
D) 3 units

Question 17

Figure 17-1
Figure 17-1 shows the marginal revenue product for Dale's Hand-Sewn Doilies, a producer of linen doilies.

-Refer to Figure 17-1.If Dale can sell her doilies at $2 each,what is the marginal product of the 5th worker?

A) $28
B) 28 doilies
C) 14 doilies
D) $56

Question 18

Table 17-1

Refer to Table 17-1.Suppose the output price is $3.If the firm represented in the table is maximizing its profit by hiring six workers,what is the wage rate?

A) $120
B) $65
C) $40
D) There is insufficient information to answer the question.

Question 19

A firm's demand for labor curve is also called its

A) marginal revenue product of labor curve.
B) marginal factor cost of labor curve.
C) marginal valuation curve.
D) marginal benefit of labor curve.

Question 20

Marginal revenue product for a perfectly competitive seller is equal to

A) the output price multiplied by the total product of labor.
B) the output price multiplied by the number workers hired.
C) the change in total revenue that results from hiring another worker.
D) the marginal cost of production.

Question 21

Table 17-2

Refer to Table 17-2.The firm represented in the diagram

A) has market power in the factor market.
B) has market power in the output market.
C) has market power in both the factor and product market.
D) has no market power in the factor or product market.

Question 22

Let MP = marginal product,P = output price,and W = wage,then the equation that represents the condition where a competitive firm would hire another worker is

A) P × MP = W.
B) P × MP < W.
C) P × MP > W.
D) P × W > MP.

Question 23

Which of the following will not cause the labor demand curve to shift to the right?

A) an increase in the price of the firm's product
B) a technological improvement that increases labor productivity
C) an increase in human capital in the labor force
D) an increase in the market wage rate

Question 24

Table 17-2

Refer to Table 17-2.What is the profit-maximizing quantity of labor that the firm should hire?

A) 5 units
B) 4 units
C) 3 units
D) 2 units

Question 25

An increase in a perfectly competitive firm's demand for labor could be caused by

A) a decrease in the market wage rate.
B) an increase in the market demand for the firm's product.
C) a decrease in the marginal product of workers.
D) an increase in the quantity of labor supplied.

Question 26

In the legal sector,some practice areas have declined in recent years.For example,personal-injury and medical-malpractice cases have been undercut by state laws limiting class-action suits,out-of-state plaintiffs and payouts on damages,and securities class-action litigation has declined in part because of a buoyant stock market.How does this affect the market for lawyers?

A) The demand for lawyers shifts to the left.
B) The supply of lawyers shifts to the left.
C) The quantity of lawyers demanded decreases and this is represented by a movement along the demand curve.
D) Both the demand and supply curves decrease.

Question 27

A decrease in the wage rate causes

A) an increase in the quantity of labor demanded.
B) a rightward shift of the firm's labor demand curve.
C) a leftward shift of the firm's labor demand curve.
D) a decrease in labor's productivity.

Question 28

Suppose a competitive firm is paying a wage of $12 an hour and sells its product at $3 per unit.Assume that labor is the only input.If the last worker hired increases output by three units per hour,then to maximize profits the firm should

A) not change the number of workers it currently hires.
B) lay off some of its workers.
C) hire additional workers.
D) There is not enough information to answer the question.

Question 29

Suppose a competitive firm is paying a wage of $12 an hour and sells its product at $3 per unit.Assume that labor is the only input.If hiring another worker would increase output by three units per hour,then to maximize profits the firm should

A) not change the number of workers it currently hires.
B) not hire an additional worker.
C) hire another worker.
D) There is not enough information to answer the question.

Question 30

If education reform leads to a more skilled and better trained public,the economy would experience

A) an increase in human capital.
B) an increase in the supply of labor.
C) an increase in comparable worth.
D) a decrease in compensating differentials.

Question 31

The firm's gain in profit from hiring another worker is

A) the marginal revenue product of the extra worker.
B) the difference between marginal revenue product and the wage of the worker.
C) the extra output of the extra worker.
D) the reduction in costs from hiring another worker.

Question 32

Suppose a competitive firm pays a wage of $12 an hour and sells its product at $3 per unit.Assume that labor is the only input.If hiring another worker would increase output by five units per hour,then to maximize profits the firm should

A) not change the number of workers it currently hires.
B) lay off some of its workers.
C) hire the additional worker.
D) There is not enough information to answer the question.

Question 33

Education reform could lead to a more skilled and better trained public.A more skilled and better trained public would

A) cause the market supply curve for labor to shift to the right.
B) cause the market demand curve for labor to shift to the right.
C) not shift the market demand curve for labor.
D) cause both the market demand curve for labor and the market supply curve for labor to shift to the left.

Question 34

Table 17-2

Refer to Table 17-2.The marginal profit from hiring the second unit of labor is

A) $4,200.
B) $1,960.
C) $1,800.
D) $1,450.

Question 35

Marginal revenue product can be calculated using the formula marginal product × output price

A) only if output price is constant.
B) only if the marginal product of labor is constant.
C) only if the both marginal product of labor and the output price are constant.
D) only if the firm has market power in the labor market

Question 36

An increase in the wage rate causes

A) a rightward shift of the firm's labor demand curve.
B) a leftward shift of the firm's labor demand curve.
C) a decrease in the quantity of labor demanded.
D) an increase in labor's marginal productivity.

Question 37

Table 17-2

Refer to Table 17-2.The marginal revenue product of labor from the third unit of labor is

A) $5,460.
B) $1,560.
C) $1,260.
D) $780.

Question 38

A firm's primary interest when it hires an additional worker is

A) the cost of hiring the additional worker.
B) how the average output of the firm will be affected by this new worker.
C) the extra revenue the firm realizes from hiring that worker.
D) whether or not the new worker gets along with the firm's existing workers.

Question 39

Let MP = marginal product,P = output price,and W = wage,then the equation that represents a situation where a competitive firm should lay off some workers to maximize profits is

A) P × MP = W.
B) P × MP > W.
C) P × MP < W.
D) MP × W = P.

Question 40

If a worker can produce 20 units of output which can be sold for $4 per unit,what is the maximum wage that firm should pay to hire this worker?

A) $80
B) $80 minus the firm's profit markup
C) It depends on what the going wage rate is in the labor market.
D) There is insufficient information to answer the question.

Question 41

Labor demand is considered a derived demand because producers do not demand labor for itself but only because labor is used to produce output that consumers desire.

Question 42

How will an increase in population affect the labor market?

A) It will shift the market supply curve.
B) It will cause a decrease in the quantity of labor demanded.
C) It will increase the supply of jobs.
D) It will increase the opportunity cost of leisure.

Question 43

Figure 17-2
Refer to Figure 17-2.Which of the panels in the diagram best represents an individual's labor supply curve?

A) Panel A
B) Panel B
C) Panel C
D) Panel D

Question 44

All of the following will shift the labor supply curve except

A) an increase in labor force participation rate among women.
B) an increase in the average age of retirement.
C) an increase in the wage rate.
D) a change in a country's immigration policy.

Question 45

Which of the following best explains why unemployment rates are higher in the European economies than in the United States?

A) More Europeans go to school fulltime and are therefore not able to participate in the labor market.
B) Unemployment benefits are more generous in Europe than in the United States.
C) Workers in Europe are less productive than workers in the United States.
D) European industries pay a lower wage rate than industries in the United States.

Question 46

The combined effect (both income and substitution)of a wage increase is that

A) the substitution effect always dominates, leading to more work at a higher wage.
B) the income effect always dominates, leading to less work at a higher wage.
C) if the substitution effect outweighs the income effect, the labor supply curve slopes upward, but if the income effect outweighs the substitution effect, the labor supply curve is backward bending.
D) if the substitution effect outweighs the income effect, the labor supply curve is backward bending, but if the income effect outweighs the substitution effect, the labor supply curve slopes upward.

Question 47

An individual's labor supply curve shows

A) the maximum wage rates offered to that individual by various potential employers.
B) the relationship between wages and the quantity of labor that she is willing to supply.
C) the relationship between wages and the quantity of labor that a firm is willing to employ.
D) the relationship between the quantity of hours worked and total income earned by that individual.

Question 48

If Molly Bee increases her work hours when her wage increases,then

A) the income effect of the wage increase outweighs the substitution effect.
B) the substitution effect of the wage increase outweighs the income effect.
C) leisure is an inferior good to Molly.
D) Molly is spending beyond her means.

Question 49

Figure 17-2
Refer to Figure 17-2.Which of the following statements is true?

A) Panel B correctly describes a situation in which the income effect dominates the substitution effect at low wages (segment i) and again at very high wages (segment iii).
B) Panel B incorrectly describes a situation in which the income effect dominates the substitution effect at low wages (segment i) and a situation in which the substitution effect dominates the income effect at very high wages (segment iii).
C) Panel B incorrectly describes a situation in which the income effect dominates the substitution effect at low wages (segment i).
D) Panel B incorrectly describes a situation in which the income effect dominates the substitution effect at very high wages (segment iii)

Question 50

A firm's labor demand curve is also its marginal revenue product curve.For both the perfectly competitive firm and the output price maker,the labor demand curve slopes downwards.However,there is a difference in the reasons why the labor demand curve slopes downwards.What is this difference?

Question 51

A profit-maximizing firm should hire workers up to the point where labor's marginal revenue product equals the wage rate.

Question 52

The substitution effect of a wage increase is observed when

A) the higher wage income causes workers to take more leisure and work less.
B) leisure's higher opportunity cost causes workers to take less leisure and work more.
C) the higher wage income causes workers to take more leisure and work more.
D) leisure's higher opportunity cost causes workers to take more leisure and work less.

Question 53

Table 17-3

Refer to Table 17-3.Oil Can Harry's,a new automobile service shop,is ready to start hiring.The table above shows the relationship between the number of mechanics the firm hires and the quantity of oil changes it produces.
a.Suppose the price of an oil change is $20.Complete the table by filling in the values for marginal product and marginal revenue product.
b.Oil Can Harry's is an input price-taker.Suppose the wage paid to mechanics is $80 per day.What is the profit-maximizing number of mechanics?
c.Suppose the wage rate rises to $100 per day.
(i)What happens to the firm's demand curve for mechanics?
(ii)What happens to the profit-maximizing quantity of mechanics?
d.Suppose the wage rate is $60 per day and the price of haircuts is now $15.
(i)What happens to the firm's demand curve for mechanics?
(ii)What happens to the profit-maximizing quantity of mechanics?

Question 54

At low wages,the labor supply curve for most people slopes upward because

A) the supply of labor is perfectly inelastic at low wages.
B) as wages increase the opportunity cost of leisure increases.
C) as wages increase income also increases unless hours worked decrease.
D) the demand for labor is perfectly elastic at low wages.

Question 55

If Alan Shaw reduces his work hours when his salary increases,then

A) the income effect of his salary increase dominates the substitution effect.
B) the substitution effect of his salary increase dominates the income effect.
C) the income effect of his salary increase is completely offset by the substitution effect.
D) leisure is an inferior good to Alan.

Question 56

What are the five most important variables that cause the market demand curve for labor to shift?

Question 57

The labor supply for an industry would decrease if

A) the wage rate falls.
B) the percentage of the population from age 16 to 65 decreases.
C) the government welcomes foreign workers into the country.
D) a greater percentage of women want to work outside the home.

Question 58

Technological advancements that increase labor's productivity shift the labor supply curve to the right.

Question 59

The income effect of a wage increase is observed when

A) the higher wage income causes workers to take more leisure and work less.
B) leisure's higher opportunity cost causes workers to take less leisure and work more.
C) the higher wage income causes workers to take less leisure and work more.
D) leisure's higher opportunity cost causes workers to take more leisure and work less.

Question 60

The marginal product of labor is the increase in output as a result of hiring an additional worker while the marginal revenue product of labor is the increase in profit as a result of hiring an additional worker.

Question 61

If the substitution effect of a wage increase dominates the income effect,the labor supply curve has a positive slope.

Question 62

Consider this quote from an article in the Wall Street Journal: "The stock of educated workers isn't increasing fast enough to keep up with rising demand........Employers are paying the typical four-year college graduate [without graduate school] 75% more than they pay high-school grads.Twenty-five years ago,they were paying 40% more.Employers insist on ever better-educated,skilled workers." Source: David Wessel,"Lack of Well-Educated Workers Has Lots of Roots,No Quick Fix",Wall Street Journal,April 19,2007,Page A2.
Which of the following best explains the rapid increase in the wage differential between college graduates and high school graduates?

A) The demand for college educated workers shifted to the right while the supply of college educated workers shifted to the left.
B) The supply of high-school educated workers shifted to the right faster than the demand for college educated workers shifted to the right.
C) The demand for college educated workers shifted to the right faster than the supply of college educated workers shifted to the right.
D) The demand for high-school educated workers shifted to the left faster than the supply of college educated workers shifted to the right.

Question 63

Figure 17-3
Refer to Figure 17-3.Which of the following is true at W0?

A) The income effect is larger than the substitution effect.
B) The substitution effect is larger than the income effect.
C) The income effect and the substitution effect are equal.
D) The supply curve is positively sloped.

Question 64

If the market wage rate increases,a firm's labor demand curve does not shift but the labor supply curve shifts to the right.

Question 65

Serafina was earning $75 per hour and working 50 hours per week.Serafina's wage rose to $90 per hour,and as a result,she now works 60 hours per week.What can you conclude from this information about the income effect and the substitution effect of a wage change for Serafina?

Question 66

Figure 17-2
Refer to Figure 17-2.Panel D is appropriate when used to represent

A) the quantity of labor demanded by an input price taker.
B) the labor supply curve facing an input price taker.
C) the quantity of labor supplied by someone working a fixed number of hours.
D) the highly-skilled labor market supply curve.

Question 67

What is the substitution effect of a wage increase? What is the income effect of a wage increase? Under what conditions will a worker's labor supply curve become downward sloping?

Question 68

Consider the market for opticians.What is likely to happen to the equilibrium wage and quantity of opticians if more and more people turn to laser eye surgery instead of wearing glasses or contact lens?

A) The equilibrium wage and the equilibrium quantity of opticians rise.
B) The equilibrium wage and the equilibrium quantity of opticians fall.
C) The equilibrium wage rises and the equilibrium quantity of opticians falls.
D) The equilibrium quantity falls and the equilibrium wage of opticians rises.

Question 69

Suppose that Hawaii legalizes casino gambling.By imposing a tax on casino revenues,the state government is able to eliminate the state income tax on wages.What is likely to be the effect on the labor supply curve in Hawaii?

Question 70

Figure 17-2
Refer to Figure 17-2.In Panel A,at low wages (segment i),

A) the substitution effect outweighs the income effect.
B) the income effect outweighs the substitution effect.
C) the substitution effect offsets the income effect.
D) labor suppliers demand more leisure as wages increase.

Question 71

The equilibrium wage and quantity of labor in the market for skilled workers is determined by

A) the strength of labor unions.
B) the monopsony power of firms.
C) the demand and supply of labor.
D) the market value created by the output of these skilled workers.

Question 72

Figure 17-2
Refer to Figure 17-2.In Panel A,at high wages (segment iii),

A) the price of leisure is rising relative to the price of labor.
B) the price of leisure is falling relative to the price of labor.
C) laborers work more as wages increase.
D) labor suppliers take more leisure as wages increase.

Question 73

Figure 17-3
Refer to Figure 17-3.Which of the following is true if the wage rate increases from W1 to W2?

A) The income effect is larger than the substitution effect.
B) The substitution effect is larger than the income effect.
C) The income effect and the substitution effect are equal.
D) The supply curve is unit-elastic.

Question 74

The income effect of a wage decrease examines the effect of the decrease in wage income on a worker's ability to purchase goods and services.

Question 75

Suppose the following two events occur in the domestic market for radiologists: a.Some hospitals are outsourcing some radiology services such as reading x-rays.
B)Some medical schools have closed down their radiology departments as fewer students enroll in this field.
What is likely to happen to the equilibrium wage and quantity of radiologists following these two events?

A) The equilibrium wage and the equilibrium quantity of radiologists rise.
B) The equilibrium wage and the equilibrium quantity of radiologists fall.
C) The equilibrium quantity falls and the effect on the equilibrium wage of radiologists is indeterminate.
D) The equilibrium wage falls and the effect on equilibrium quantity of radiologists is indeterminate.

Question 76

Suppose the following two events occur in the market for elementary school teachers: a.Overcrowded schools and education budget cuts have discouraged young college students from pursuing careers in teaching.
B)With an increasing birth rate,the number of children entering the elementary school system is expected to increase significantly over the next ten years.
What is likely to happen to the equilibrium wage and quantity of teachers as a result of these two events?

A) The equilibrium quantity and the equilibrium wage of elementary school teachers fall.
B) The equilibrium wage rises and the effect on the equilibrium quantity of elementary school teachers is indeterminate.
C) The equilibrium quantity falls and the effect on the equilibrium wage of elementary school teachers is indeterminate.
D) The equilibrium quantity falls and the equilibrium wage of elementary school teachers rises.

Question 77

An increase in wages raises the opportunity cost of leisure and leads to an increase in the quantity supplied of labor.

Question 78

Suppose the government grants child care subsidies to mothers entering the labor force.What is likely to happen to the equilibrium wage and quantity of labor?

A) The equilibrium wage and the equilibrium quantity of labor rise.
B) The equilibrium wage and the equilibrium quantity of labor fall.
C) The equilibrium wage falls and the equilibrium quantity of labor rises.
D) The equilibrium wage rises and the equilibrium quantity of labor falls.

Question 79

What happens to the equilibrium wage and quantity of labor if output price rises?

A) The equilibrium wage and the equilibrium quantity of labor rise.
B) The equilibrium wage and the equilibrium quantity of labor fall.
C) The equilibrium wage falls and the equilibrium quantity of labor rises.
D) The equilibrium wage rises and the equilibrium quantity of labor falls.

Question 80

Consider the market for pilots.What is likely to happen to the equilibrium wage and quantity of pilots if the government enforces a lower mandatory retirement age,say from age 65 to age 62?

A) The equilibrium wage and the equilibrium quantity of pilots rise.
B) The equilibrium wage and the equilibrium quantity of pilots fall.
C) The equilibrium wage falls and the equilibrium quantity of pilots rises.
D) The equilibrium wage rises and the equilibrium quantity of pilots falls.