Question 1

In the long run, what determines the level of total production of goods and services in an economy?

Accepted Answer

The level of total production of goods and services in an economy is determined by the quantity of capital, the quantity of labor, and production technology. These factors are known as the factors of production and determine the economy's potential output. Consumption, investment, and government spending are important components of aggregate demand but do not determine the economy's long-run production capacity. The interest rate and the amount of national saving are important for determining investment and capital accumulation, but they are not the only factors that determine production levels. The marginal products of capital and labor, constant returns to scale, and competition are all important for determining the economy's production possibilities, but they are subsumed under the broader categories of capital, labor, and technology.

Question 2

In the circular flow diagram, firms receive revenue from the _____ market, which is used to purchase inputs in the _____ market.

Accepted Answer

In the circular flow diagram, firms receive revenue from the goods market (where they sell their products or services) and use this revenue to purchase inputs (like labor, raw materials) in the factor market.

Question 3

A competitive firm:

Accepted Answer

A competitive firm is characterized by being small relative to the market, meaning it takes the market price as given and cannot influence it through its own actions.

Question 4

The neoclassical theory of distribution:

Accepted Answer

The neoclassical theory of distribution is a theory of how national income is divided among the factors of production. It states that in a competitive market, each factor of production (labor, land, and capital) will be paid its marginal product, which is the value added to production by one additional unit of that factor. This theory is still widely accepted among economists today.

Question 5

If bread is produced by using a constant returns to scale production function, then if the:

Accepted Answer

Constant returns to scale means that doubling inputs would lead to a doubling of output. Therefore, if both the amount of workers and equipment are doubled, the output should also be doubled. Option A and B are incorrect because they only double one input, while option D overestimates the output increase as it assumes a doubling of each input results in a quadrupling of output.

Question 6

An economy's factors of production and its production function determine the economy's:

Accepted Answer

Factors of production (land, labor, capital, and entrepreneurship) and the production function (how these factors are combined to produce goods and services) determine an economy's output of goods and services. The other options listed are not directly determined by these factors.

Question 7

The price received by each factor of production for its services is determined by:

Accepted Answer

The price received by each factor of production for its services is determined by the demand and supply of factors. The supply of each factor depends on its marginal cost of production while the demand for each factor depends on its marginal revenue product (the additional revenue generated by an additional unit of the factor). Therefore, the equilibrium price of each factor is determined by the intersection of the demand and supply curves for that factor.

Question 8

The circular flow model shows that households use income for:

Accepted Answer

The circular flow model illustrates that households primarily use their income for consumption (buying goods and services), paying taxes to the government, and saving (setting aside money for future use). Factor payments refer to wages, rent, interest, and profits paid to households for the use of their factors of production, which is not something households use their income for, but rather, how they earn their income.

Question 9

The production function feature called "constant returns to scale" means that if we:

Accepted Answer

Constant returns to scale means that output will increase proportionally to an equal increase in capital and labor inputs. Therefore, if we increase both inputs by 10 percent, output will also increase by 10 percent. Option A describes the production function feature of "homogeneous of degree one," while options C and D do not accurately represent constant returns to scale.

Question 10

The marginal product of labor is:

Accepted Answer

The marginal product of labor is the additional output produced when one additional unit of labor is added. The other options (A, C, D) do not accurately describe the concept of marginal product of labor.

Question 11

In the long run, the level of national income in an economy is determined by its:

Accepted Answer

The level of national income in an economy is determined by its factors of production (land, labor, capital, and entrepreneurship) and production function (how these factors are combined to produce goods and services). Factors of production and their productivity determine the economy's capacity to produce goods and services, and the production function determines how efficiently these factors are combined to produce output. Therefore, A is the best choice. B, C, and D are incorrect as they do not determine the level of national income in the long run.

Question 12

A production function is a technological relationship between:

Accepted Answer

A production function is a relationship between inputs or factors of production and the quantity of output that can be produced. It provides information about the maximum amount of output that can be produced with a given set of inputs. The production function does not take into account the prices of the inputs or the output produced.

Question 13

A firm's economic profit is:

Accepted Answer

Economic profit is the difference between revenue and all costs, including both explicit and implicit costs. Thus, option B correctly defines economic profit as revenue minus costs. Option A only considers the explicit costs (wage and rental price of capital) and ignores implicit costs, while option C incorrectly adds capital costs to revenue. Option D only considers labor costs and ignores other costs such as capital and opportunity costs.

Question 14

A competitive firm chooses the:

Accepted Answer

A competitive firm chooses the quantity of labor and capital to employ in order to maximize its profits. The firm can adjust its inputs of labor and capital to find the optimal combination that yields the highest level of output while minimizing costs. The price at which to sell the product, wage to pay labor, and rental price to pay capital are determined by the market and may not be within the control of the firm.

Question 15

In the circular flow model, households receive income from the _____ market and save through the _____ market.

Accepted Answer

In the circular flow model, households are the owners of factors of production and they sell these factors (such as labor and capital) to firms in the factor market. So, households receive income from the factor market. Then, households can save their income by investing it in the financial market. Therefore, households save through the financial market.

Question 16

The two most important factors of production are:

Accepted Answer

The two most important factors of production are capital and labor. Capital represents the tools, equipment, and infrastructure necessary for production, while labor represents the human effort involved in producing goods and services. Together, they are essential for economic growth and development. Saving and investment are also important for economic growth, but they are not factors of production themselves. Goods and services are the output of production, not factors of production, and energy is a resource that can be used, but it is not a factor of production in and of itself.

Question 17

When factor supply is fixed and quantity of the factor is graphed on the horizontal axis while factor price is graphed on the vertical axis, the factor:

Accepted Answer

When factor supply is fixed, the supply curve becomes vertical as the quantity of the factor supplied cannot be increased at different prices. This is because the amount of the factor available is fixed, regardless of the price. Therefore, as factor price increases, the quantity supplied does not change, and thus the supply curve becomes vertical.

Question 18

At any particular point in time, the output of the economy:

Accepted Answer

At any particular point in time, the output of the economy is fixed because the supplies of capital and labor and the technology are fixed. These factors determine the production capacity at that moment.

Question 19

If an increase of an equal percentage in all factors of production results in an increase in output of the same percentage, then a production function has the property called:

Accepted Answer

Constant returns to scale means that when all inputs are increased by the same percentage, the output also increases by that same percentage. Therefore, an increase in equal percentage of all factors of production results in an increase of output of the same percentage, which is the definition of constant returns to scale. Choice A and B refer to marginal productivity, which is not relevant to this question. Choice D refers to increasing returns to scale, which means that when all inputs are increased by the same percentage, the output increases by a greater percentage, which is not the case in this question.

Question 20

Unlike the real world, the classical model with fixed output assumes that:

Accepted Answer

The classical model with fixed output assumes that all factors of production are fully utilized, therefore there is no unemployment of labor or idleness of capital.

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