Question 1

The real rental price of capital is the price per unit of capital measured in:
A)dollars.
B)units of output.
C)units of labor.
D)units of capital.

Accepted Answer

The real rental price of capital is the price per unit of capital measured in units of output. This takes into account the quantity and quality of the capital being rented as well as the productivity of the labor using the capital.

Question 2

According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed:
A)only to the labor used in production.
B)partly between labor and capital used in production, with the surplus going to the owners of the firm as profits.
C)equally between the labor and capital used in production.
D)between the labor and capital used in production, according to their marginal productivities.

Accepted Answer

According to the neoclassical theory of distribution, total income in the economy is distributed between the labor and capital used in production, according to their marginal productivities. This means that each factor of production (i.e. labor and capital) is paid according to the value that it contributes to the production process. If a factor of production is highly productive, it will receive a higher share of total income, and if it is less productive, it will receive a lower share. This ensures that resources are allocated efficiently and that each factor is rewarded in proportion to its contribution to overall output.

Question 3

In the classical model, what adjusts to eliminate any unemployment of labor in the economy?
A)the average price level
B)the interest rate
C)the real rental price of capital
D)the real wage

Accepted Answer

In the classical model, the real wage adjusts to eliminate any unemployment of labor in the economy. The theory behind this is that as long as wages are flexible and can adjust downward, any excess supply of labor (i.e. unemployment) will cause wages to fall, which in turn will increase the demand for labor until equilibrium is reached with full employment.

Question 4

The neoclassical theory of distribution explains the allocation of:
A)output between goods and services.
B)output among consumption, investment, and government spending.
C)income among factors of production.
D)income between saving and investment.

Accepted Answer

The neoclassical theory of distribution explains how income is allocated among the factors of production, such as labor and capital, based on their marginal contributions to the production process. It does not address the allocation of output among different types of goods or between consumption, investment, and government spending, nor does it address the allocation of income between saving and investment.

Question 5

A competitive, profit-maximizing firm hires labor until the:
A)marginal product of labor equals the wage.
B)price of output multiplied by the marginal product of labor equals the wage.
C)real wage equals the real rental price of capital.
D)wage equals the rental price of capital.

Accepted Answer

A competitive, profit-maximizing firm will continue to hire labor until the value of the marginal product of labor (VMPL), which is the price of output multiplied by the marginal product of labor, equals the wage. This is because at this point, the cost of hiring an additional unit of labor (the wage) equals the additional revenue generated by that unit of labor (VMPL), ensuring profit maximization.

Question 6

The marginal product of capital is:
A)output divided by capital input.
B)additional output produced when one additional unit of capital is added.
C)additional output produced when one additional unit of capital and one additional unit of labor are added.
D)value of additional output when one dollar's worth of additional capital is added.

Accepted Answer

The marginal product of capital is the additional output produced when one additional unit of capital is added. It measures the increase in output resulting from a unit increase in the capital input, while holding all other inputs constant.

Question 7

An increase in the supply of capital will:
A)increase the real rental price of capital.
B)decrease the real rental price of capital.
C)increase the productivity of capital.
D)decrease the real interest rate.

Accepted Answer

According to the law of supply and demand, an increase in supply will lead to a decrease in the price of the good or service, in this case, the rental price of capital. Therefore, an increase in the supply of capital will decrease the real rental price of capital.

Question 8

In fourteenth-century Europe, the bubonic plague:
A)reduced the population of Europe by about one-half.
B)substantially increased economic output in Europe.
C)substantially increased real rentals on land in Europe.
D)substantially increased real wages in Europe.

Accepted Answer

The bubonic plague led to a severe shortage of labor in Europe, as a significant portion of the population died. This shortage of labor led to a significant increase in real wages for workers who survived.

Question 9

The real wage is the return to labor measured in:
A)dollars.
B)units of output.
C)units of labor.
D)units of capital.

Accepted Answer

Real wage is measured in units of output, which reflects the purchasing power of wages in terms of goods and services, rather than just the nominal amount of money received.

Question 10

If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:
A)50.
B)100.
C)200.
D)1000.

Accepted Answer

The answer of If Y = AK0.5L0.5 and A, K,...

Question 11

Since 1960, the U.S. ratio of labor income to total income has:
A)been about 2.5 to 1.
B)been about 0.7.
C)increased steadily.
D)decreased steadily.

Accepted Answer

The answer of Since 1960, the U.S. ratio of labor...

Question 12

The real wage will increase if:
A)the supply of labor increases.
B)the productivity of labor increases.
C)the price of output decreases.
D)the supply of capital decreases.

Accepted Answer

The real wage is the purchasing power of the wage which can increase if there is an increase in the productivity of labor. This means that workers can produce more goods and services in the same amount of time, which leads to an increase in their real wage. The other options do not lead to an increase in the real wage.

Question 13

The property of diminishing marginal product means that, after a point, when additional quantities of:
A)a factor are added, output diminishes.
B)both labor and capital are added, output diminishes.
C)both labor and capital are added, the marginal product of labor diminishes.
D)a factor are added when another factor remains fixed, the marginal product of that factor diminishes.

Accepted Answer

The answer of The property of diminishing marginal product means...

Question 14

If the production function describing an economy is Y = 100 K.25L.75, then the share of output going to labor:
A)is 25 percent.
B)is 75 percent.
C)depends on the quantities of labor and capital.
D)depends on the state of technology.

Accepted Answer

The share of output going to labor is determined by the exponent on the labor input in the production function. In this case, the exponent on labor is .75, indicating that 75 percent of output goes to labor. It does not depend on the quantities of capital and labor or the state of technology.

Question 15

According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal:
A)total investment.
B)total saving.
C)total profits.
D)total output.

Accepted Answer

According to Euler's theorem, if competitive firms pay each factor its marginal product, the sum of all factor payments will equal total output. Therefore, the correct choice is D, total output.

Question 16

Economic profit is zero if:
A)all factors are paid their marginal products and the law of diminishing returns is valid.
B)all factors are paid their marginal products and there are constant returns to scale.
C)all firms maximize profits and none are competitive.
D)all firms maximize profits and all factors are paid their marginal products.

Accepted Answer

Economic profit is zero when all factors are paid their marginal products and there are constant returns to scale, as this implies that all income generated by the firm is paid out to the factors of production, leaving no surplus (economic profit).

Question 17

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their:
A)supply.
B)equilibrium growth rates.
C)relative political power.
D)marginal productivities.

Accepted Answer

According to the neoclassical theory of distribution, the total output is divided between payments to capital and payments to labor depending on their marginal productivities. This means that the share of total output received by each factor of production (capital and labor) depends on the additional (marginal) output that they produce. Factors that contribute more to the production of goods and services receive a greater share of the total output. Therefore, the correct choice is D, marginal productivities.

Question 18

If output is described by the production function Y = AK 0.2L0.8, then the production function has:
A)constant returns to scale.
B)diminishing returns to scale.
C)increasing returns to scale.
D)a degree of returns to scale that cannot be determined from the information given.

Accepted Answer

The answer of If output is described by the production...

Question 19

Accounting profit is:
A)economic profit minus the return to capital.
B)equal to economic profit.
C)economic profit plus the return to capital.
D)equal to the economic return to capital.

Accepted Answer

Accounting profit is the difference between total revenue and explicit costs (such as wages, rent, and materials). This means it includes the return to capital or the opportunity cost of using one's own capital in the business. Economic profit, on the other hand, subtracts both explicit and implicit costs (such as the opportunity cost of the entrepreneur's time and effort) from total revenue. Therefore, accounting profit is equal to economic profit plus the return to capital.

Question 20

What determines the distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale?
A)the relative quantity of labor to capital
B)the interest rate
C)the ratio of public saving to private saving
D)the marginal productivity of labor relative to the marginal productivity of capital

Accepted Answer

In a competitive, profit-maximizing economy with constant returns to scale, the distribution of national income between labor and capital is determined by the marginal productivity of labor and the marginal productivity of capital. If the marginal productivity of labor is higher than the marginal productivity of capital, labor will receive a larger share of the national income, and vice versa. Therefore, the correct answer is D, the marginal productivity of labor relative to the marginal productivity of capital.

Quiz 3: National Income: Where It Comes From and Where It Goes

The real rental price of capital is the price per unit of capital measured in:

According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed:

In the classical model, what adjusts to eliminate any unemployment of labor in the economy?

The neoclassical theory of distribution explains the allocation of:

A competitive, profit-maximizing firm hires labor until the:

The marginal product of capital is:

An increase in the supply of capital will:

In fourteenth-century Europe, the bubonic plague:

The real wage is the return to labor measured in:

If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:

Since 1960, the U.S. ratio of labor income to total income has:

The real wage will increase if:

The property of diminishing marginal product means that, after a point, when additional quantities of:

If the production function describing an economy is Y = 100 K.25L.75, then the share of output going to labor:

According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal:

Economic profit is zero if:

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their:

If output is described by the production function Y = AK 0.2L0.8, then the production function has:

Accounting profit is:

What determines the distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale?