Deck 4: Consumer and Firm Behavior: the Workleisure Decision and Profit Maximization

Question 1

For macroeconomic purposes, it is assumed that all consumers in the economy

A)exhibit different preferences.
B)are diverse.
C)are identical.
D)exhibit differences.
E)are not identical.

Answer 1

C

Question 2

The following question(s)deal with The Gizmo Company, which has the following production function:
If the real wage is equal to 8 widgets, and only an integer number of workers can be hired, The Gizmo Company should hire

A)2 workers.
B)3 workers.
C)4 workers.
D)5 workers.
E)6 workers.

Answer 2

A

Question 3

"More is always preferred to less" refers to

A)choices between consumption and leisure.
B)choices between consumption and work.
C)choices between work and leisure.
D)choices between happiness and utility.
E)more consumption and less leisure.

Answer 3

A

Question 4

Question 5

The shape of the indifference curve depends on

A)the relative price of good Y.
B)the level of happiness for the household.
C)the substitutability between goods for the household.
D)the family income.
E)the price of goods.

Question 6

The marginal rate of substitution

A)can only be computed if we know the prices of all goods.
B)can be deduced from the budget line.
C)cannot be deduced from the properties of the indifference curve.
D)can be computed by measuring the curvature of the indifference curve.
E)can be computed by measuring the slope of the indifference curve.

Question 7

Perfect substitutes will have

A)reverse L-shaped indifference curves.
B)curved indifference curve, bowed out from the origin.
C)L-shaped indifference curves.
D)straight line indifference curves.
E)curved indifference curves, bowed in from the origin.

Question 8

An economy without monetary exchange is called

A)a barter economy.
B)an autarky economy.
C)a socialist economy.
D)a perfectly competitive economy.
E)a primitive economy.

Question 9

We assume that the representative consumer's preferences exhibit the properties that

A)more is always preferred to less and that each consumer has one strictly favourite good.
B)more is always preferred to less and that consumers do not like diversity in his or her consumption bundle.
C)consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundle.
D)they be convex and that more is always preferred to less.
E)each consumer has one strictly preferred good and that consumption and leisure are both normal goods.

Question 10

An increase in real dividend income minus taxes represents

A)a combination of income and substitution effects.
B)a pure income effect.
C)a pure substitution effect.
D)an income effect that is greater than the substitution effect.
E)neither a pure income effect nor a pure substitution effect.

Question 11

In a one-period economy

A)consumption equals disposable income plus the value of non-market work.
B)consumption equals disposable income.
C)consumers may increase their consumption by borrowing.
D)consumers save more than they consume.
E)savings is always positive.

Question 12

The principle that consumers and firms optimize

A)is not helpful because some economic agents may behave irrationally.
B)is helpful because it determines the available technology.
C)is explained by their work-leisure choices.
D)only applies to perfectly competitive markets.
E)is helpful because it allows us to analyze how economic agents respond to changes in their environment.

Question 13

An increase in total factor productivity shifts the production function

A)upward and increases the marginal product of labour.
B)downward and decreases the marginal product of labour.
C)upward and decreases the marginal product of labour.
D)upward and increases the marginal product of capital.
E)downward and increases the marginal product of labour.

Question 14

The slope of the indifference curve is defined as

A)the marginal rate of transformation.
B)the relative price of good Y.
C)the marginal propensity to substitute.
D)the marginal rate of substitution.
E)the marginal propensity to consume.

Question 15

In macroeconomic analysis, the representative consumer

A)is always a misleading fiction.
B)denotes the consumer with the average amount of income.
C)plays the role of a stand-in for all consumers in the economy.
D)is the consumer with an average standard of living.
E)is the consumer who bargains with firms for all workers in the economy.

Question 16

The real wage denotes

A)the number of units of labour time that can be exchanged for one unit of leisure time.
B)the number of units of leisure time that can be exchanged for one unit of labour time.
C)the purchasing power of income earned after taxes are paid.
D)the number of units of labour time that can be exchanged for one unit of consumption goods.
E)the number of units of consumption goods that can be exchanged for one unit of labour time.

Question 17

The consumer's work-leisure choice problem focuses on how a consumer's work-leisure decision is affected by the consumer's

A)preferences and psychology.
B)preferences and productivity.
C)preferences and constraints.
D)productivity and psychology.
E)psychology and preferences.

Question 18

The preferences of the representative consumer over consumption and leisure are represented by use of a

A)benefit function.
B)production function.
C)dynamic function.
D)utility function.
E)preference function.

Question 19

A production function describes the

A)intellectual possibilities for converting factor inputs into outputs.
B)amount of resources available to the representative firm.
C)technological possibilities for converting factor inputs into outputs.
D)actual process of converting factor inputs into outputs.
E)amount of labour available to produce outputs.

Question 20

A lump-sum tax is a tax that

A)distorts economic decisions.
B)depends on the quantity of taxable goods consumers purchase.
C)does not depend on the actions of the economic agent being taxed.
D)does not depend on the actions of the government.
E)can be avoided by strategic behaviour.

Question 21

As the quantity of capital increases, the marginal product of labour

A)is constant.
B)increases.
C)decreases.
D)may either increase or decrease.
E)gets more expensive.

Question 22

The following question(s)deal with The Widget Company, which produces widgets. Widgets are produced according to:
The marginal product of the second widget worker hired is

A)12.
B)8.
C)2.
D)22.
E)10.

Question 23

That indifference curves are downward sloping

A)follows from the property that consumption and leisure are normal goods.
B)follows from the fact that there is a direct relationship between consumption and leisure bundles.
C)follows from the property that the consumer likes diversity in his or her consumption bundle.
D)follows from the fact that more is preferred to less.
E)is not true.

Question 24

A consumer maximizes satisfaction at the point where his subjective valuation of good X measured as the amount of good Y he or she is willing to give up to obtain an additional unit of X
Equals

A)one over the slope of the indifference curve through that point.

E)the slope of the indifference curve through that point.

Question 25

A consumer's real disposable income equals

A)total income minus wage income minus taxes.
B)total income minus profit income minus taxes.
C)wage income plus profit income minus taxes.
D)consumption plus savings minus taxes.
E)wage income plus consumption expenditures.

Question 26

When consumption and leisure are both normal goods, an increase in real dividend income minus taxation, the rational consumer

A)reduces consumption and increases leisure.
B)increases consumption and increases work.
C)increases consumption and increases leisure.
D)increases consumption and reduces leisure.
E)reduces consumption and reduces leisure.

Question 27

When consumption and leisure are both normal goods, an increase in real dividend income minus taxation, the rational consumer

A)increases consumption and savings.
B)increases consumption and reduces labour supply.
C)reduces consumption and reduces labour supply.
D)reduces consumption and increases labour supply.
E)increases consumption and increases labour supply.

Question 28

The optimal consumption bundle is the point representing a consumption-leisure pair that is on the

A)lowest possible indifference curve and is on or inside the consumer's budget constraint.
B)lowest possible indifference curve that maximizes total utility.
C)highest possible indifference curve and is on or inside the consumer's budget constraint.
D)highest possible indifference curve and is on or outside the consumer's budget constraint.
E)lowest possible indifference curve and is on or outside the consumer's budget constraint.

Question 29

The marginal product of a factor of production

A)is equal to the ratio of the amount that factor of production to the amount of output produced.
B)is equal to the amount of additional output that can be produced with one additional unit of each factor input.
C)is equal to the amount of additional output that can be produced with one additional unit of that factor input, holding constant the quantities of the other factor inputs.
D)is equal to the additional output that can be produced with an additional change in total factor productivity.
E)always exceeds the average product of that factor input, holding constant the quantities of the other factor inputs.

Question 30

The Solow residual is a measure of

A)average capital productivity.
B)the rate of growth of real GDP.
C)total factor productivity.
D)the marginal product of labour.
E)average labour productivity.

Question 31

Two key properties of indifference curves are that an indifference curve slopes

A)downward and is bowed out from the origin.
B)upward and is bowed out from the origin.
C)downward and is bowed in toward the origin.
D)upward and is bowed in toward the origin.
E)downward and is concave from the origin.

Question 32

A good is normal for a consumer if

A)some minimal level of the good must be consumed to assure the consumer's survival.
B)the assumption of "more is always preferred to less" holds.
C)its consumption falls when income rises.
D)its consumption rises when income rises.
E)it is always consumed in a consistent quantity.

Question 33

The profit-maximizing quantity of labour equates the marginal product of labour with

A)the average product of labour.
B)total factor productivity.
C)the slope of the production function.
D)the marginal product of capital.
E)the real wage.

Question 34

Constant returns to scale means that, given any constant x > 0

Question 35

Perfect complements will have

A)curved indifference curve, bowed out from the origin.
B)reverse L-shaped indifference curves.
C)curved indifference curves, bowed in from the origin.
D)L-shaped indifference curves.
E)straight line indifference curves.

Question 36

A consumer is said to be indifferent between two consumption bundles

A)when the consumption bundles contain normal goods.
B)when the consumer doesn't care about his or her consumption bundle.
C)when the two bundles provide equal amounts of utility.
D)when the consumer is indecisive.
E)when the consumer chooses the bundles equally often.

Question 37

An increase in total factor productivity

A)changes neither the slope nor the position of the production function.
B)changes both the slope and the position of the production function.
C)changes the position but not the slope of the production function.
D)keeps the marginal product of labour constant.
E)changes the slope but not the position of the production function.

Question 38

As the quantity of labour increases, the marginal product of labour

A)is constant.
B)increases.
C)decreases.
D)may either increase or decrease.
E)gets more expensive.

Question 39

That indifference curves are bowed in toward the origin

A)follows from the property that the consumer likes diversity in his or her consumption bundle.
B)follows from the fact that there is a direct relationship between consumption and leisure bundles.
C)follows from the property that consumption and leisure are normal goods.
D)is not true.
E)follows from the fact that more is preferred to less.

Question 40

In the goal of consumer optimization, it is assumed that

A)savings are positive.
B)the consumer is rational.
C)the consumer consumes more than his or her disposable income.
D)consumption equals disposable income.
E)more is preferred to less.

Question 41

In practice

A)lump sum taxes affect the effective prices that consumers face in the market.
B)taxes are not lump sum taxes.
C)real wages affect the level of lump sum taxes.
D)the quantity of profits that the consumer received is dictated by lump sum taxes.
E)taxes have no distortionary effect.

Question 42

We typically assume that

A)both consumption and leisure are normal goods.
B)both consumption and leisure and complimentary goods.
C)both consumption and leisure are inferior goods.
D)consumption is an inferior good and leisure is a normal good.
E)consumption is a normal good and leisure is an inferior good.

Question 43

An increase in the real wage

A)has an ambiguous effect on both consumption and labour supply.
B)increases consumption and decreases labour supply.
C)unambiguously increases consumption and increases labour supply.
D)increases consumption and has an ambiguous effect on labour supply.
E)has an ambiguous effect on consumption and increases labour supply.

Question 44

An indifference curve is best defined as

A)the level of consumption where a consumer is indifferent to receiving more consumption.
B)a boundary line defining production possibilities.
C)the set of all bundles that the consumer enjoys equally well.
D)a boundary line between attainable and unattainable choices.
E)a concave curve that ranks preferred consumption bundles.

Question 45

The following question(s)deal with The Widget Company, which produces widgets. Widgets are produced according to:
If the real wage is equal to 7 widgets, and only an integer number of workers can be hired, The Widget Company should hire

A)2 workers.
B)3 workers.
C)4 workers.
D)5 workers.
E)6 workers.

Question 46

When consumers act as price-takers, we say that they behave

A)irrationally.
B)competitively.
C)rationally.
D)monopolistically.
E)cooperatively.

Question 47

A defense for the assumption that consumers maximize is that

A)it allows for many possible outcomes.
B)mistaken consumers may receive counseling from the government.
C)mistakes by the consumer are not likely to last for a long time.
D)mistakes by consumers only last for two periods.
E)consumers never make mistakes.

Question 48

The construct of a representative firm is most helpful in describing the behaviour of all of the firms in the economy when

A)the marginal product of labour is decreasing in the amount of labour input.
B)there are constant returns to scale.
C)there are decreasing returns to scale.
D)the marginal product of labour is increasing in the amount of labour input.
E)there are increasing returns to scale.

Question 49

The time constraint for the consumer is

A)a result of consumers' busy work schedule.
B)expressed as leisure time + time spent working = total time available.
C)the amount of time for decision making.
D)expressed as leisure time - time spent working = total time available.
E)expressed as leisure time - sleep time = time spent working.

Question 50

A consumption bundle

A)only measures a quantity of goods and services, but not the amount of leisure.
B)measures the quality of a particular good.
C)is a method of bringing home consumption goods.
D)is a particular combination of consumption and leisure.
E)is a particular combination of work and leisure.

Question 51

An indifference curve

A)connects a set of consumption and income bundles among which the consumer is indifferent.
B)connects a set of consumption bundles among which the consumer is indifferent.
C)connects a set of consumers who each have the same preferences.
D)is only useful in analyzing apathetic consumers.
E)is only useful in microeconomics.

Question 52

The following question(s)deal with The Gizmo Company, which has the following production function:
The marginal product of the fourth Gizmo worker hired is

A)10.
B)5.
C)3.
D)12.
E)1.

Question 53

A utility function

A)captures the maximum satisfaction of consumers.
B)is a stand-in for a more complicated function.
C)captures the representative firm's ability to produce goods and services.
D)is useful only in microeconomics, not macroeconomics.
E)captures the preferences of the representative household over consumption and leisure goods.

Question 54

With consumption on the vertical axis and leisure on the horizontal axis, the slope of the budget line is equal to

Question 55

Question 56

Convexity of the indifference curve follows from

A)the fact that income plays a significant role in consumption and leisure decisions.
B)the fact that more is preferred to less.
C)the fact that consumers are indifferent to consumption and leisure goods.
D)the fact that consumers prefer diversity.
E)the fact that consumption and leisure are normal goods.

Question 57

A utility function

A)measures relative happiness and income of consumers.
B)needs to measure the absolute level of happiness.
C)needs to measure relative amounts of happiness for a single individual.
D)is most useful if it can be influenced by others.
E)helps compare the relative happiness of two separate consumers.

Question 58

The marginal rate of substitution is defined as

A)the feasible rate of substitution given prices.
B)the amount of good Y that a consumer is willing to substitute for good X and stay at a given level of satisfaction.
C)the slope of the utility function.
D)the convexity of the indifference curve.
E)the amount of good Y substituted for good X by a consumer.

Question 59

An increase in the real wage

A)represents a pure income effect.
B)represents a combination of income and substitution effects.
C)leads to no change in labour supply.
D)causes a parallel shift in the consumer's budget line.
E)represents a pure substitution effect.

Question 60

The vertical intercept of the consumer's budget line is equal to

Question 61

The representative consumer acts competitively

A)when he or she is a price-maker.
B)if the consumer is large relative to the size of the market.
C)when he or she has to make decisions regarding work and leisure.
D)when he or she is a price-taker.
E)when he or she can haggle for a lower price.

Question 62

Suppose Ford could triple production of Mustangs by tripling its production facilities for those cars. This is an example of

A)increasing returns to scale.
B)decreasing returns to scale.
C)diminishing marginal rate of substitution.
D)the law of diminishing returns.
E)constant returns to scale.

Question 63

At the optimal consumption bundle, the marginal rate of substitution of leisure for consumption is equal to

A)the real wage and the budget line is tangent to an indifference curve.
B)minus the real wage and the budget line intersects the indifference curve.
C)the real wage and the budget line intersects the indifference curve.
D)minus the real wage and the budget line is tangent to the indifference curve.
E)the real wage and on the highest possible indifference curve.

Question 64

In a one-period economy, real consumption

A)is typically greater than disposable income.
B)can be greater than, less than, or equal to disposable income.
C)is exactly equal to disposable income.
D)can be less than savings.
E)is always less than disposable income.

Question 65

We assume that the representative consumer's preferences exhibit the properties that

A)they evolve over time and that more is always preferred to less.
B)more is preferred to less and that the consumer prefers diversity.
C)less consumption is preferred to more leisure and that consumption and leisure are both normal goods.
D)more is sometimes preferred to less and that consumption and leisure are both normal goods.
E)the consumer likes diversity and that more is sometimes preferred to less.

Question 66

In a typical aggregate production function, total factor productivity denotes the quantity of aggregate output
that we cannot explain solely by the contributions of the labour and capital inputs. a)In reality, what explains
total factor productivity and its movements over time? b)Discuss the problems we might face in trying to
measure the factors contributing to changes in productivity over time.

Question 67

The property of diminishing marginal rate of substitution follows from the property that the indifference curve is

A)upward sloping.
B)downward sloping.
C)bowed in toward the origin.
D)concave from the origin.
E)bowed out from the origin.

Question 68

A good is inferior for a consumer if

A)its consumption rises when income rises.
B)its consumption falls when income rises.
C)the assumption of "more is always preferred to less" holds.
D)some minimal level of the good must be consumed to assure the consumer's survival.
E)it is never included in his or her consumption bundle.

Question 69

A barter economy

A)is an economy without monetary exchange.
B)cannot be a market economy.
C)is a competitive economy.
D)is not a competitive economy.
E)is an economy with no business firms.

Question 70

A static decision is one that

A)is made very slowly.
B)involves only the present.
C)involves planning over one time period.
D)involves planning over more than one time period.
E)involves planning over exactly two time periods.

Question 71

A dynamic decision is one that

A)involved planning over exactly two time periods.
B)involves only the future.
C)is made very quickly.
D)involves only the present.
E)involves planning over more than one time period.

Question 72

As the quantity of capital increases, the marginal product of capital

A)is constant.
B)increases.
C)decreases.
D)may either increase or decrease.
E)gets more expensive.

Question 73

Of the following, which is the least likely example of an increase in total factor productivity?

A)good weather
B)the introduction of the assembly line
C)a reduction in the relative price of energy
D)an educated work force
E)the invention of the personal computer

Question 74

Moving down the indifference curve, the marginal rate of substitution

A)diminishes.
B)depends on household income.
C)is highly volatile.
D)is rising.
E)is constant.