Deck 3: Interdependence and the Gains From Trade

Question 1

A competitive, profit-maximizing firm hires labor until the:

A)marginal product of labor equals the wage.
B)price of output multiplied by the marginal product of labor equals the wage.
C)real wage equals the real rental price of capital.
D)wage equals the rental price of capital.

Answer 1

B

Question 2

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

A)all factors of production are fully utilized.
B)all capital is fully utilized but some labor is unemployed.
C)all labor is fully employed but some capital lies idle.
D)some capital lies idle and some labor is unemployed.

Answer 2

A

Question 3

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

A)the interest rate and the amount of national saving
B)Bthe quantity of capital and labor and production
C)technology consumption, investment, and government spending
D)the marginal products of capital and labor, constant returns to scale, and competition

Answer 3

B

Question 4

The two most important factors of production are:

A)goods and services.
B)labor and energy.
C)capital and labor.
D)saving and investment.

Question 5

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

A)number of workers is doubled, twice as much bread will be produced.
B)amount of equipment is doubled, twice as much bread will be produced.
C)amounts of equipment and workers are both doubled, twice as much bread will be produced.
D)amounts of equipment and workers are both doubled, four times as much bread will be produced.

Question 6

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

A).multiply capital by z
And labor by z , we multiply output by z .
1 2 3
B)increase capital and labor by 10 percent each, we increase output by 10 percent.
C)increase capital and labor by 5 percent each, we increase output by 10 percent.
D)increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5 percent.

Question 7

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

A)goods; financial
B)factor; financial
C)goods; factor
D)factor; goods

Question 8

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

A)labor force participation rate.
B)budget surplus or deficit.
C)population growth rate.
D)output of goods and services.

Question 9

The neoclassical theory of distribution:

A)was developed by Karl Marx.
B)is rejected by most economists today.
C)shows that the national income of an economy is not equal to total output.
D)is a theory of how national income is divided among the factors of production.

Question 10

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

A)demand for output and supply of factors.
B)demand for factors and supply of output.
C)demand and supply of output.
D)demand and supply of factors.

Question 11

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

A)is fixed because the supplies of capital and labor and the technology are fixed.
B) is fixed because the demand for goods and services is fixed.
C)varies because the supplies of capital and labor vary.
D)varies because the technology for turning capital and labor into goods and services varies.

Question 12

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

A)goods; financial
B)factor; financial
C)goods; factor
D)factor; goods

Question 13

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

A)factors of production and production function.
B)real and nominal interest rate.
C)government budget surplus or deficit.
D)rate of economic and accounting profit.

Question 14

A competitive firm chooses the:

A)price at which to sell the product produced.
B)wage to pay labor.
C)quantity of labor and capital to employ.
D)rental price to pay capital.

Question 15

The circular flow model shows that households use income for:

A)consumption, saving, and factor payments.
B)consumption, taxes, and factor payments.
C)taxes, saving, and factor payments.
D)consumption, taxes, and saving.

Question 16

The property of diminishing marginal product means that, after a point, when additional quantities of:

A)a factor are added, output diminishes.
B)both labor and capital are added, output diminishes.
C)both labor and capital are added, the marginal product of labor diminishes.
D)a factor are added when another factor remains fixed, the marginal product of that factor diminishes.

Question 17

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:

A)constant marginal product of labor.
B)increasing marginal product of labor.
C)constant returns to scale.
D)increasing returns to scale.

Question 18

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:

A)supply curve is horizontal.
B)supply curve is vertical.
C)supply curve slopes up to the right.
D)demand curve slopes up to the right.

Question 19

A firm's economic profit is:

A)the price of output minus the wage minus the rental price of capital.
B)revenue minus costs.
C)revenue plus capital costs.
D)the price of output minus labor costs.

Question 20

A competitive firm:

A)is small relative to the market in which it trades.
B)has to charge a lower price when it wants to sell more goods.
C)has several large competitors with whom it engages in fierce
D)competition. can set the wage at which it hires workers.

Question 21

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

A)dollars.
B)units of output.
C) units of labor.
D) units of capital.

Question 22

The marginal product of capital is:

A)output divided by capital input.
B)additional output produced when one additional unit of capital is added.
C)additional output produced when one additional unit of capital and one additional unit of labor are added.
D)value of additional output when one dollar's worth of additional capital is added.

Question 23

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

A)supply.
B)equilibrium growth rates.
C)relative political power.
D)marginal productivities.

Question 24

The real wage is the return to labor measured in:

A)dollars.
B)units of output.
C) units of labor.
D)units of capital.

Question 25

Since 1960, the U.S. ratio of labor income to total income has:

A)been about 2.5 to 1.
B)been about 0.7.
C)increased steadily.
D)decreased steadily.

Question 26

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.

Question 27

If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:

A)50.
B)100.
C)200.
D)1,000.

Question 28

What determines the distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale?

A)the relative quantity of labor to capital A
B)the interest rate
C)the ratio of public saving to private saving
D)the marginal productivity of labor relative to the marginal productivity of capital

Question 29

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

A)the average price level
B)the interest rate
C)the real rental price of capital
D)the real wage

Question 30

If output is described by the production function Y = AK0.2L0.8, 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.

Question 31

In fourteenth-century Europe, the bubonic plague:

A)reduced the population of Europe by about one-half.
B)substantially increased economic output in Europe.
C)substantially increased real rentals on land in Europe.
D)substantially increased real wages in Europe.

Question 32

The real wage will increase if:

A)the supply of labor increases.
B)the productivity of labor increases.
C)the price of output decreases.
D)the supply of capital decreases.

Question 33

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)all firms maximize profits and none are competitive.
D)all firms maximize profits and all factors are paid their marginal products.

Question 34

If the production function describing an economy is Y = 100 K0.25L0.75, then the share of output going to labor:

A)is 25 percent.
B) is 75 percent.
C)depends on the quantities of labor and capital.
D)depends on the state of technology.

Question 35

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

A)decreases as the amount of labor increases.
B)increases as the amount of labor increases.
C)increases as the amount of capital increases.
D)is independent of the amount of labor.

Question 36

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

A)the quantity of labor increases.
B)the quantity of capital increases.
C)capital's share of output increases.
D)average labor productivity decreases.

Question 37

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)decrease the real interest rate.

Question 38

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

Question 39

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.

Question 40

Accounting profit is:

A)economic profit minus the return to
B)capital. equal to economic profit.
C)economic profit plus the return to capital.
D)equal to the economic return to capital.

Question 41

The demand for output in a closed economy is the sum of:

A)public saving and private saving.
B)the quantity of capital and labor and production technology.
C)consumption, investment, and government spending.
D)government purchases and transfer payments minus tax receipts.

Question 42

A consumption function shows the relationship between consumption and:

A)income.
B)personal income.
C)disposable income.
D)taxes.

Question 43

Consumption depends on disposable income, and investment depends on the real interest rate.

A)positively; positively
B)positively; negatively
C)negatively; negatively
D)negatively; positively

Question 44

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when:

A)real interest rates are high.
B)real interest rates are low.
C)average labor productivity is growing rapidly.
D)capital's share of income is growing rapidly.

Question 45

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

A)the quantity of labor increases.
B)the quantity of capital increases.
C)labor's share of output increases.
D)average capital productivity decreases.

Question 46

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y =
50K0.5L0.5, where K = 100 and L = 100, then C equals:

A)1,000.
B)2,500.
C)3,000.
D)5,000.

Question 47

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings:

A)decreases by 0.85 unit
B)decreases by 0.15 unit.
C)increases by 0.15 unit.
D)increases by 0.85 unit.

Question 48

Disposable personal income is personal income minus:

A)personal tax and nontax payments.
B)taxes plus dividends.
C)taxes plus dividends plus net interest.
D)social insurance contributions.

Question 49

If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T =
200 + 0.2Y, then C equals:

A)2,500.
B)2,800.
C)3,500.
D)4,200.

Question 50

The marginal propensity to consume is:

A)normally expected to be between zero and one.
B)equal to consumption divided by disposable income.
C)normally assumed to decrease as disposable income increases.
D)normally assumed to increase as disposable income increases.

Question 51

In a closed economy, the components of GDP are:

A)consumption, investment, government purchases, and exports.
B)consumption, investment, government purchases, and net exports.
C)consumption, investment, and government purchases.
D)consumption and investment.

Question 52

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be:

A)6 percent.
B)12 percent.
C)18 percent.
D)30 percent.

Question 53

If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then savings:

A)decreases by 0.85 unit.
B)decreases by 0.15 unit.
C)increases by 0.15 unit.
D)increases by 0.85 unit.

Question 54

Total investment in the United States averages about percent of GDP.

A)10
B)15
C)20
D)25

Question 55

Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides
That it should:

A)not build because the rate of return on the factory is only 6 percent.
B)not build because the rate of return on the factory is only 12 percent.
C)build because the rate of return on the factory is 30 percent.
D)build because the rate of return on the factory is 35 percent.

Question 56

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly:

A)labor's share of total income will be increasing.
B)labor's share of income will be decreasing.
C)workers will experience high rates of real wage growth.
D)economic profits will be positive.

Question 57

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by:

A)0.15 unit.
B)0.5 unit.
C)0.85 unit.
D)1 unit.

Question 58

Investment goods as measured in the GDP are purchased by:

A)business firms alone.
B)households alone.
C)business firms and households.
D)business firms, households, and governments.

Question 59

Other things equal, an increase in the interest rate leads to:

A)a decrease in the quantity of investment goods demanded.
B)no change in the quantity of investment goods demanded.
C)an increase in the quantity of investment goods demanded.
D)sometimes an increase and sometimes a decrease in the quantity of investment goods demanded.

Question 60

When economists speak of "the" interest rate, they mean:

A)the rate on 90-day Treasury bills.
B)the rate on 30-year government bonds.
C)the "prime" rate on loans.
D)no particular interest rate, since it is assumed that various interest rates tend to move up and down together.

Question 61

The home that would have the highest mortgage payment on a 30-year fixed-rate mortgage would be a home with a mortgage of:

A)$200,000 at 8 percent.
B)$100,000 at 12 percent.
C)$100,000 at 8 percent.
D)$200,000 at 12 percent.

Question 62

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:

A)increase.
B)decrease.
C)remain unchanged.
D)either increase or decrease, depending on whether consumption is greater or less than investment.

Question 63

In the classical model with fixed income, if the interest rate is too low, then investment is too
And the demand for output the supply.

A)high; exceeds
B)high; falls short of
C)low; exceeds
D)low; falls short of

Question 64

In the classical model with fixed income, if the interest rate is too high, then investment is too
And the demand for output the supply.

A)high; exceeds
B)high; falls short of
C)low; exceeds
D)low; falls short of

Question 65

The factor that makes national saving equal investment, in equilibrium, is:

A)the interest rate.
B)private saving.
C)public saving.
D)fiscal policy.

Question 66

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will:

A)increase.
B)decrease.
C)remain unchanged.
D)either increase or decrease, depending on whether consumption is greater or less than investment.

Question 67

The demand for the economy's output:

A)is always equal to the supply, regardless of the interest rate.
B)may be computed provided that we know disposable income.
C)is equal to consumption, investment, and government purchases.
D)is determined by government purchases and taxes.

Question 68

Consumption depends positively on and investment depends negatively on .

A)disposable income; the real interest rate
B)the real interst rate; disposable income
C)private saving; public saving
D)public saving; private saving

Question 69

National saving refers to:

A)disposable income minus consumption.
B)taxes minus government spending.
C)income minus consumption minus government spending.
D)income minus investment.

Question 70

In a closed economy, Y - C - G equals:

A)national saving.
B)private saving.
C)public saving.
D)financial saving.

Question 71

The nominal interest rate is the:

A)rate of interest that investors pay to borrow money.
B)same as the real interest rate.
C)rate of inflation minus the real rate of interest.
D)real rate of interest minus the rate of inflation.

Question 72

The real interest rate is the:

A)rate of interest actually paid by consumers.
B)rate of interest actually paid by banks.
C)rate of inflation minus the nominal interest rate.
D)nominal interest rate minus the rate of inflation.

Question 73

All of the following actions increase government purchases of goods and services except the:

A)federal government's sending a Social Security check to Betty Jones.
B)federal government's sending a paycheck to the president of the United States.
C)federal government's buying a Patriot missile.
D)city of Boston's buying a library book.

Question 74

In the classical model with fixed output, the supply and demand for goods and services are balanced by:

A)government spending.
B)taxes.
C)fiscal policy.
D)the interest rate.

Question 75

Public saving is:

A)Aalways positive.
B)always negative.
C)always zero.
D)either positive, negative, or zero.

Question 76

The government spending component of GDP includes all of the following except:

A)federal spending on goods.
B)state and local spending on goods.
C)federal spending on transfer payments.
D)federal spending on services.

Question 77

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be:

A)240.
B)700.
C)760.
D)970.

Question 78

The investment function slopes because there are investment projects that are profitable as the interest rate decreases.

A)upward; fewer
B)upward; more
C)downward; fewer
D)downward; more

Question 79

If government purchases exceed taxes minus transfer payments, then the government budget is:

A)balanced.
B)in deficit.
C)in surplus.
D)endogenous.

Question 80

In examining the impact of fiscal policy, it is assumed that:

A)consumption, investment, and the interest rate are endogenous variables.
B)consumption, investment, and the interest rate are exogenous variables.
C)government purchases, taxes, and interest rates are endogenous variables.
D)government purchases, taxes, and interest rates are exogenous variables.