Question 1

The fact that monopoly and monopsony exist in resource markets means that

Accepted Answer

The existence of monopoly and monopsony in resource markets suggests that resource owners may not receive prices that accurately reflect their contributions to output. Therefore, resource prices do not always measure contributions to output. This challenges the validity of the marginal productivity theory of income distribution (option A) and the ethical correctness of resulting income distribution (option C). Furthermore, the fact that income shares do not exhaust the total output means that there may be unearned profits or losses for owners and users of resources.

Question 2

The marginal productivity theory of income distribution suggests that

Accepted Answer

The marginal productivity theory of income distribution suggests that each individual receives income based on his or her contribution to total output. This means that those who contribute more to the production process receive a higher share of the total income. This theory is based on the idea that people are paid according to their productivity, and it is one of the most widely accepted theories of income distribution. Options A, C, and D are not supported by the marginal productivity theory.

Question 3

Suppose a firm hires both labor (L) and capital (C) under purely competitive conditions. The price of labor is P_L, and that of capital is P_C. The marginal product of labor is MP_L, and that of capital is MP_C. The firm sells its product competitively at a price of P_X. In competitive labor markets, the marginal cost of an additional unit of labor

Accepted Answer

In competitive labor markets, the marginal cost of an additional unit of labor is simply the wage rate, which is P_L.

Question 4

Suppose a firm is hiring resources l and m under purely competitive conditions to produce product Y, which sells for $2 in a purely competitive market. The prices of l and m are $10 and $4, respectively. In equilibrium, the MPs of l and m, respectively, are

Accepted Answer

In equilibrium, the firm hires resources such that the marginal revenue product (MRP) equals the resource price. MRP is calculated as the marginal product (MP) times the price of the product. For resource l: MRP = MP * $2 = $10, so MP = 5. For resource m: MRP = MP * $2 = $4, so MP = 2.

Question 5

Assume a firm purchases resources a and b under purely competitive conditions and combines these resources to produce X. Product X is sold in a purely competitive market. The MPs of a and b are 6 and 3, respectively, and the prices of a and b are $12 and $6, respectively. If equilibrium exists, the price of X will be

Accepted Answer

In equilibrium, the firm will hire resources such that the marginal product per dollar spent on each resource is equal. MPa/Pa = MPb/Pb. Here, 6/12 = 3/6 = 0.5. The price of X must be such that the value of the marginal product (VMP) equals the resource cost. VMPa = MPa * Px = 6 * Px = 12, so Px = $2.

Question 6

The equation MP_L/ P_L= MP_C/ P_C

Accepted Answer

The equation represents the necessary condition for profit maximization, but it may not be sufficient. The condition states that for profit maximization, the ratio of the marginal product of labor to its price should be equal to the ratio of the marginal product of capital to its price. However, other factors such as market demand and technology may also affect profit maximization. Additionally, the equation does not imply anything about the level of competition in the market, so B is incorrect. The equation also does not directly designate the MR=MC level of output, so A and C are incorrect.

Question 7

The marginal productivity theory of income distribution has been criticized because

Accepted Answer

The marginal productivity theory of income distribution is criticized because it does not account for income derived from inherited property, which is not based on productivity.

Question 8

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
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Question 9

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

Accepted Answer

Labor demand is inelastic because the percentage change in employment (5%) is less than the percentage change in wages (10%).

Question 10

Assuming pure competition, which of the following are equivalents?

Accepted Answer

In pure competition, the market price is determined by the intersection of demand and supply at the point where demand equals marginal cost (P = MC). Therefore, option C which states that the price of the product is equal to its marginal cost (P_x = MC) is correct. 
Moreover, in pure competition, all factors of production are paid according to their marginal revenue product (MRP) which is the additional revenue generated by the last unit of the factor. In equilibrium, the MRP of labor (MRP_L) divided by the price of labor (P_L) is equal to the MRP of capital (MRP_C) divided by the price of capital (P_C). Hence, option C is correct because it satisfies both conditions: P_x = MC and MRP_L/P_L = MRP_C/P_C = 1. The other options either include an incorrect statement or do not satisfy both conditions.

Question 11

If a firm is hiring variable resources D and F in perfectly competitive input markets, it will minimize the cost of producing any level of output by employing D and F in such amounts that

Accepted Answer

In a perfectly competitive input market, firms should hire variable resources in such amounts that the marginal product per dollar spent on each input is equal. Therefore, the optimal employment of inputs D and F will occur when the ratio of the marginal product to the price of each input is equal, i.e. $\mathrm{MP} _ { D } / P _ { D } =\mathrm{MP} _ { F } / P _ { F }$. This ensures a minimum cost for producing any given level of output. Therefore, the correct choice is C.

Question 12

If MP_a/ P_a= MP_b/ P_band MRP_a/ P_a= MRP_b/ P_b> 1, this firm is

Accepted Answer

The expression indicates that the firm is producing its output with the least costly combination of resources, but it is not producing the profit-maximizing output. This suggests that the firm is operating at an inefficient level of output, which means that it could increase its profits by producing more output or by using a different combination of resources.

Question 13

"Income receivers should be paid in accordance with the value of output each produces." This statement is consistent with the

Accepted Answer

The statement is consistent with the marginal productivity theory of income distribution, which states that factors of production (such as labor) should be rewarded according to the marginal contribution that each makes to the total output. Therefore, if an income receiver produces more output, they should be paid more.

Question 14

Assume that an appliance manufacturer is employing variable resources X and Y in such amounts that the 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

Accepted Answer

The firm should hire more of both X and Y because their MRP (Marginal Revenue Product) is greater than their cost of hiring. This implies that the firm will earn more revenue than the cost of hiring these resources by hiring more of them. Specifically, hiring one more unit of X will increase revenue by $100 and hiring one more unit of Y will increase revenue by $60, while the costs of hiring them are $50 and $20, respectively. Therefore, hiring more of both resources will increase profits for the firm.

Question 15

Which of the following statements is true? Other things equal, the demand for labor will be less elastic the

Accepted Answer

The demand for labor is less elastic when labor costs constitute a smaller portion of total costs, as changes in labor costs have a smaller impact on overall production costs.

Question 16

Suppose a firm hires both labor (L) and capital (C) under purely competitive conditions. The price of labor is P_L, and that of capital is P_C. The marginal product of labor is MP_L, and that of capital is MP_C. The firm sells its product competitively at a price of P_X. If MP_C/ P_C> MP_L/ P_L, the firm

Accepted Answer

The firm is not maximizing profits or minimizing costs because the marginal product per dollar spent on capital is greater than that of labor, indicating an inefficient allocation of resources.

Question 17

The profit-maximizing and the least-cost combination of inputs are

Accepted Answer

Maximizing profits involves finding the level of output where marginal revenue equals marginal cost. To maximize profits, a firm must produce at the output level where marginal revenue equals marginal cost and then choose the least-cost combination of inputs to produce that level of output. Therefore, maximizing profits always entails the least-cost combination of inputs. Thus option D is the correct answer.

Question 18

A firm is hiring resources X, Y, and Z in the profit-maximizing amounts when

Accepted Answer

The profit-maximizing condition is that the marginal revenue product of each resource divided by its price should be equal to 1.

Question 19

Assuming a competitive resource market, a firm is hiring resources in the profit-maximizing amounts when the

Accepted Answer

A firm is hiring resources in the profit-maximizing amounts when the marginal revenue product of each resource is equal to its price. This means that the firm is getting the optimal amount of output from each resource at the lowest possible cost, maximizing its profits.

Question 20

Suppose a firm hires both labor (L) and capital (C) under purely competitive conditions. The price of labor is P_L, and that of capital is P_C. The marginal product of labor is MP_L, and that of capital is MP_C. The firm sells its product competitively at a price of P_X. Which of the following must pertain if the firm is to minimize the cost of producing any output?

Accepted Answer

The firm will minimize the cost of producing any output when the ratio of the marginal product to the price is equal for both labor and capital. In other words, the firm should hire labor and capital until MP/P ratio for both is the same. So, the correct answer is C, where MPc/Pc= MPl/Pl.

Quiz 16: The Demand for Resources