Question 1

The purchase price of capital is the price a person pays to own that factor of production indefinitely, while the rental price of capital is the price paid to use capital for a limited time period.

Accepted Answer

The statement correctly defines the difference between the purchase price and rental price of capital.

Question 2

A competitive, profit-maximising firm hires workers until marginal product equals zero.

Accepted Answer

A competitive, profit-maximizing firm hires workers until marginal product equals marginal cost, not until marginal product equals zero. If the firm hired workers until marginal product equals zero, it would be producing inefficiency and not maximizing profits.

Question 3

Capital income does not include income paid to households for the use of their capital.

Accepted Answer

Capital income includes income paid to households for the use of their capital, such as interest, dividends, or rental income.

Question 4

For any given quantity of labour, an increase in price will cause the value of the marginal product of labour to increase.

Accepted Answer

This is known as the Law of Diminishing Marginal Returns, which states that as the quantity of a factor of production (such as labour) increases while the quantity of other inputs is held constant, the marginal product of that factor of production will eventually decrease. However, if the price of that factor of production (such as the wage rate for labour) increases, then the value of the marginal product of that factor will increase, as firms are willing to pay more for each unit of output produced by that factor.

Question 5

In the fishing industry, the capital stock includes the fishing-boats, nets and lines.

Accepted Answer

The fishing industry relies heavily on the use of fishing boats, nets, and lines as capital stock for their operations. Without these physical assets, they would not be able to catch and harvest fish effectively. Therefore, the statement is true.

Question 6

The basic purpose of the theory of factor markets is to explain how income is distributed among factors of production.

Accepted Answer

The theory of factor markets studies the interaction between factors of production (land, labor, capital, and entrepreneurship) and firms in order to determine how income is distributed among them. Therefore, the basic purpose of this theory is to explain the distribution of income among the factors of production.

Question 7

If land used for forestry loses its fertility, then over time the value of the marginal product of land will fall and the rental price on that land will fall.

Accepted Answer

This is because the productivity and yield of the land will decrease due to the loss of fertility, resulting in a decrease in profitability for the landowner and lower demand for renting the land.

Question 8

Firms pay out all of their earnings in the form of interest and dividend payments.

Accepted Answer

Firms may choose to retain a portion of their earnings for reinvestment in the business or other purposes such as debt repayment. Therefore, not all earnings are paid out as interest and dividend payments.

Question 9

If workers respond to an increase in the opportunity cost of leisure by taking less of it, their labour supply curve is backward sloping, while if workers respond to an increase in the opportunity cost of leisure by taking more of it, their labour supply curve is upward-sloping.

Accepted Answer

The statement is reversed. If workers respond to an increase in the opportunity cost of leisure by taking less of it (i.e., working more), their labor supply curve is upward-sloping, indicating that as wages increase, they supply more labor. Conversely, if they respond by taking more leisure (i.e., working less), the labor supply curve could be backward sloping, showing that as wages increase beyond a certain point, they supply less labor.

Question 10

The demand curve for each factor reflects the marginal productivity of that factor.

Accepted Answer

The demand curve for a factor of production is based on its marginal productivity, meaning that as the marginal productivity increases, the demand for the factor also increases. As the marginal productivity decreases, the demand for the factor decreases. Therefore, the demand curve for each factor reflects its marginal productivity.

Question 11

The value of the marginal product of any input is equal to the marginal product of that input multiplied by the market price of the output.

Accepted Answer

This is the definition of marginal product of an input and its relationship to the market price.

Question 12

Changes in the capital stock will often lead to changes in wages.

Accepted Answer

Changes in the capital stock, which refers to the machines, tools, and equipment used in production, can increase productivity and efficiency. This, in turn, allows firms to pay higher wages to workers, as they are able to produce more output in less time. Conversely, a decrease in the capital stock may lead to lower wages as productivity and efficiency decline. Therefore, changes in the capital stock can have a significant impact on wages.

Question 13

For any given quantity of labour, an increase in price will cause the marginal product of labour to increase.

Accepted Answer

An increase in price does not directly affect the productivity of labour. It may lead to an increase in the quantity of labour supplied or changes in technology or techniques of production, which may affect the marginal product of labour. However, the relationship between price and marginal product of labour is not straightforward and depends on various factors.

Question 14

Capital owners are compensated according to the value of the marginal product of that capital.

Accepted Answer

Capital owners are compensated according to the value of the marginal product of that capital, meaning their compensation is based on the additional output or revenue generated by their capital. This is a basic principle in economics known as marginal productivity theory.

Question 15

Productivity is low in most Asian countries.

Accepted Answer

This statement is not necessarily true for all Asian countries as productivity levels vary widely between countries. Some Asian countries such as Singapore, Japan, and South Korea have consistently high productivity levels compared to others.

Question 16

A massive power surge wipes out half of all computers in Melbourne.This will result in a lower demand for office workers, increasing their marginal product of labour and, hence, raising the wage of office workers.

Accepted Answer

A power surge wiping out half of all computers in Melbourne would result in a decrease in productivity and output, leading to a decrease in demand for office workers. This would lower their marginal product of labour and, in turn, decrease their wages.

Question 17

When a firm decides to retain its earnings instead of pay dividends, the shareholders are not being rewarded.

Accepted Answer

When a firm retains its earnings, the shareholders are indirectly rewarded through the increase in the company's share value or the potential for future growth and profitability.

Question 18

If there is a change in the supply of labour there is no change to the earnings from capital and land.

Accepted Answer

Changes in the supply of labor can affect the distribution of income between labor and other factors of production such as capital and land. For example, an increase in labor supply could potentially lower wages if demand for labor does not match the increase, potentially increasing the returns to capital and land owners if they can produce more with the same capital and land inputs at lower labor costs. Conversely, a decrease in labor supply could increase wages, potentially reducing returns to capital and land if the cost of labor increases.

Question 19

Increases in productivity are not responsible for increased standards of living in Australia.

Accepted Answer

Increases in productivity lead to increased efficiency, which can ultimately result in increased standards of living as the costs of goods and services decrease, making them more accessible to the population.

Question 20

During the Black Death, with fewer workers available to farm the land, employers were able to choose better skilled labour to employ.

Accepted Answer

During the Black Death, there was a severe shortage of labor, which increased the demand for labor and led to the rise in wages for workers. This also led to a decrease in the power of the employers, as they had to compete for the available labor pool and were forced to hire workers regardless of their skill level.

Quiz 19: The Markets for the Factors of Production