Question 1

According to a recent report from the OECD, the increasing income inequality of recent decades in Canada is the result of:
A)decreases in the rates of skill-biased technological advancement and increases in the self-employment rates.
B)decreases in the rates of skill-biased technological advancement and in the self-employment rates.
C)increases in the rate of skill-biased technological advancement and in the self-employment rates.
D)decreases in the rates of skill-biased technological advancement and stagnant self-employment rates.

Accepted Answer

The OECD report attributes increasing income inequality in Canada to skill-biased technological advancements, which favor high-skilled workers, and rising self-employment rates, which often result in lower and more variable incomes.

Question 2

Since 1960, the Canadian ratio of labour income to total income has:
A)been about 2.5 to 1.
B)remained relatively steady.
C)increased steadily.
D)decreased steadily.

Accepted Answer

The Canadian ratio of labour income to total income has remained relatively steady since 1960, without significant long-term trends of increase or decrease.

Question 3

Assuming that all firms maximize profits, 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)no firms are competitive.
D)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 inputs are being compensated exactly according to their contribution to output, leaving no excess profit.

Question 4

What determines the ratio of the wage to rental rate of capital in a competitive, profit-maximizing economy with constant returns to scale?
A)the quantity of economic profits earned by firm owners
B)the interest rate
C)the ratio of public saving to private saving
D)the marginal productivity of labour relative to the marginal productivity of capital

Accepted Answer

In a competitive, profit-maximizing economy with constant returns to scale, the wage to rental rate of capital ratio is determined by the marginal productivity of labor relative to the marginal productivity of capital.

Question 5

With a Cobb-Douglas production function, the share of output going to labour:
A)decreases as the amount of labour increases.
B)increases as the amount of labour increases.
C)increases as the amount of capital increases.
D)does not depend on the amount of labour in the economy.

Accepted Answer

In a Cobb-Douglas production function, the share of output going to labor is constant and determined by the exponent on labor in the function, regardless of the amount of labor or capital.

Question 6

The real rental price of capital is the price per unit of capital measured in:
A)dollars.
B)units of output.
C)units of labour.
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 is because the real rental price of capital is the amount of output that must be given up in order to obtain one unit of capital.

Question 7

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

Accepted Answer

An increase in the productivity of labor typically leads to higher real wages, as workers can produce more output per hour, increasing their value to employers.

Question 8

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 deals with the determination of the relative shares of income earned by factors of production (i.e. land, labor, capital), based on their respective contributions to the production process. Therefore, it explains how income is allocated among factors of production.

Question 9

In the classical model, what adjusts to eliminate any unemployment of labour 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 ensure that the labor market clears, eliminating any unemployment of labor.

Question 10

In a Cobb-Douglas production function, the marginal product of capital will increase if:
A)the quantity of labour increases.
B)the quantity of capital increases.
C)labour's share of output increases.
D)average capital productivity decreases.

Accepted Answer

In a Cobb-Douglas production function, the marginal product of capital increases if the quantity of labor increases, as it enhances the productivity of capital due to the complementary relationship between labor and capital.

Question 11

If Y = AK^0.5L^0.5 and A, K, and L are all 100, the marginal product of capital is: A)50. B)100. C)200. D)1,000.

Accepted Answer

The answer of If Y = AK^0.5L^0.5 and A, K,...

Question 12

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 labour used in production.
B)partly between labour and capital used in production, with the surplus going to the owners of the firm as profits.
C)equally between the labour and capital used in production.
D)between the labour and capital used in production, according to their marginal productivities.

Accepted Answer

In neoclassical theory, under competitive markets and constant returns to scale, income is distributed based on the marginal productivity of labor and capital.

Question 13

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 and the production function has constant returns to scale, the sum of all factor payments will equal total output. Therefore, the correct answer is D.

Question 14

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labour 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, total output is divided based on the marginal productivity of each factor of production, meaning that capital and labor are paid according to their respective contributions to production.

Question 15

If output is described by the production function Y = AK^0.2L^0.8, 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 production function Y = AK^0.2L^0.8 exhibits constant returns to scale because the sum of the exponents of K (capital) and L (labor), 0.2 + 0.8 = 1, indicates that if all inputs are increased by a certain percentage, output will increase by the same percentage.

Question 16

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)increase the marginal product of capital.

Accepted Answer

An increase in the supply of capital typically leads to a decrease in the real rental price of capital due to the increased availability of capital, which reduces its scarcity and price.

Question 17

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 total revenue of a business minus its explicit costs. Explicit costs include expenses such as rent, salaries, and utilities. The return to capital, which is the opportunity cost of the capital invested in the business, is not an explicit cost but is included in accounting profit as a deduction from total revenue. Therefore, accounting profit is equal to economic profit plus the return to capital.

Question 18

Skill-biased technological change _____ the demand for high-skilled workers, while a slowdown in the pace of educational advancement reduces the supply of skilled workers. If we observed both of these phenomena, we would expect _____ wages for skilled workers.
A)increases; higher
B)increases; lower
C)decreases; higher
D)decreases; lower

Accepted Answer

Skill-biased technological change increases the demand for high-skilled workers, and if the supply of skilled workers does not keep up due to a slowdown in educational advancement, it would lead to higher wages for skilled workers due to the increased demand and limited supply.

Question 19

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

Accepted Answer

In a Cobb-Douglas production function like Y = 100 K^0.25 L^0.75, the exponent of L (0.75) represents the share of output going to labor, which is 75 percent.

Question 20

In a Cobb-Douglas production function, the marginal product of labour will increase if:
A)the quantity of labour increases.
B)the quantity of capital increases.
C)capital's share of output increases.
D)average labour productivity decreases.

Accepted Answer

The marginal product of labor increases when the quantity of capital increases because more capital makes labor more productive, assuming diminishing returns have not set in.

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

According to a recent report from the OECD, the increasing income inequality of recent decades in Canada is the result of:

Since 1960, the Canadian ratio of labour income to total income has:

Assuming that all firms maximize profits, economic profit is zero if:

What determines the ratio of the wage to rental rate of capital in a competitive, profit-maximizing economy with constant returns to scale?

With a Cobb-Douglas production function, the share of output going to labour:

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

The real wage will increase if:

The neoclassical theory of distribution explains the allocation of:

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

In a Cobb-Douglas production function, the marginal product of capital will increase if:

If Y = AK^0.5L^0.5 and A, K, and L are all 100, the marginal product of capital is:

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:

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:

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

If output is described by the production function Y = AK^0.2L^0.8, then the production function has:

An increase in the supply of capital will:

Accounting profit is:

Skill-biased technological change _ the demand for high-skilled workers, while a slowdown in the pace of educational advancement reduces the supply of skilled workers. If we observed both of these phenomena, we would expect _ wages for skilled workers.

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

In a Cobb-Douglas production function, the marginal product of labour will increase if: