Deck 17: The Labor Market and the Distribution of Income

Question 1

Economists say that labor demand is a derived demand because

A) it does not come from competitive markets.
B) it depends on the demand for products that workers produce.
C) it is derived from nature.
D) it is derived from production.

Answer 1

it depends on the demand for products that workers produce.

Question 2

What does a firm use to decide how much labor to hire at a particular wage?

A) marginal cost
B) price of output
C) marginal revenue product of labor
D) marginal product of labor

Answer 2

marginal revenue product of labor

Question 3

If the marginal product of the third worker employed by a computer manufacturer is 50 computers,and the price of a computer is $500,the third worker's marginal revenue product is

A) $50.
B) $500.
C) $25,000.
D) It cannot be determined; more information is needed.

Answer 3

$25,000.

Question 4

If a firm uses the marginal principle,then the firm picks the quantity of workers

A) at which the marginal benefit equals the marginal cost.
B) at a point where the firms earns an additional profit by employing one additional unit of labor.
C) at the point equal to the total product of labor times the price of labor.
D) which is the same as the marginal product of labor.

Question 5

Table 17.1
Refer to Table 17.1.Diminishing returns occur after the ________ worker.

A) first
B) second
C) third
D) fourth

Question 6

Refer to Figure 17.1.This firm is currently hiring 16 workers.This firm should

A) do nothing because it is maximizing profits.
B) reduce employment to 15 workers to increase profits.
C) reduce employment to 14 workers to increase profits.
D) increase employment to 17 workers to increase profits.

Question 7

The presence of a fixed input means that the marginal product of labor eventually declines.This concept is known as

A) decreasing marginal cost.
B) diminishing returns.
C) derived demand.
D) downward-sloping output curve.

Question 8

Table 17.2
Refer to Table 17.2.The maximum wage per day that this profit-maximizing T-shirt manufacturer would be willing to pay to hire three workers per day is

A) $15.
B) $75.
C) $125.
D) $200.

Question 9

The marginal benefit of labor equals the marginal-revenue product of labor,which is

A) the change in output from one additional unit of labor.
B) the extra revenue generated by one additional unit of labor.
C) equal to price of output only.
D) equal to marginal cost only.

Question 10

Table 17.1
Refer to Table 17.1.The marginal product of the fourth worker is

A) 30.
B) 20.
C) 10.
D) 5.

Question 11

The idea that the demand for autoworkers stems from the demand for automobiles is known as

A) the value of the marginal product of autoworkers.
B) derived demand.
C) indirect demand.
D) output demand.

Question 12

Table 17.1
Refer to Table 17.1.If the product sells at a market price of $3,the marginal revenue product of the fourth worker is

A) $60.
B) $40.
C) $15.
D) $10.

Question 13

The Aire Fresco Ceiling Fan Factory hires workers to make ceiling fans.The factory sells the fans for $50 each.The marginal revenue product of this factory's sixth worker is $300.The marginal product of the sixth worker is

A) 6 ceiling fans.
B) 12 ceiling fans.
C) 150 ceiling fans.
D) It cannot be determined; more information is needed.

Question 14

Table 17.2
Refer to Table 17.2.If the wage per day is $100,this T-shirt manufacturer will be maximizing profits if he hires ________ employees.

A) two
B) three
C) four
D) five

Question 15

Table 17.2
Refer to Table 17.2.The marginal revenue product of the ________ worker is $150.

A) second
B) third
C) fourth
D) fifth

Question 16

Table 17.2
Refer to Table 17.2.The marginal revenue product of the fourth worker is

A) $5.
B) $20.
C) $100.
D) $475.

Question 17

A firm's short-run demand curve for labor is

A) upward sloping.
B) the marginal revenue product curve.
C) the downward-sloping portion of the marginal cost curve.
D) the marginal cost divided by price.

Question 18

The additional output produced by hiring an additional unit of labor is known as

A) the productivity of labor.
B) the marginal product of labor.
C) diminishing returns.
D) the derived demand for labor.

Question 19

The demand for labor

A) is a derived demand.
B) depends on the demand for the output the labor can be used to produce.
C) is affected by the value placed by the market on the output produced by labor.
D) all of the above

Question 20

Which of the following will make the labor demand curve shift to the right?

A) a decrease in price
B) an increase in labor force
C) an increase in productivity
D) all of the above

Question 21

Table 17.4
Refer to Table 17.4.Suppose the firm is hiring only one worker when the wage rate is $12 and the output price is $2.Which of the following is true?

A) The firm is maximizing profit.
B) The firm is incurring a loss and should hire less labor.
C) The firm could increase its profit by hiring more labor.
D) The wage rate will fall.

Question 22

A profit-maximizing firm should hire more labor as long as

A) the marginal product of the worker is positive.
B) the marginal revenue product of the worker is positive.
C) the marginal revenue product of the worker is greater than or equal to the wage rate.
D) the marginal revenue product of the worker is greater than or equal to the price of the output.

Question 23

Table 17.4
Refer to Table 17.4.Suppose the wage rate equals $8 per worker.How many workers will the firm hire?

A) 2
B) 3
C) 4
D) There is not enough information to tell.

Question 24

A wheat farmer sells wheat in a perfectly competitive market and hires labor in a perfectly competitive market.The market price of wheat is $2 a bushel,the wage rate is $10,the farmer employs five workers,and the marginal product of the fifth worker is 10.What would you advise this farmer to do?

A) Do nothing because the wage rate and the marginal product of the last worker hired are equal.
B) Reduce employment because the wage paid is less than the marginal revenue product.
C) Increase employment because the wage paid is less than the marginal revenue product.
D) Reduce the product price so that the wage and marginal revenue product will be equal.

Question 25

Table 17.4
Refer to Table 17.4.If the wage rate is $12 and the output sells for $3 per unit,how many workers will the firm hire?

A) 1
B) 2
C) 3
D) 4

Question 26

Table 17.3
Refer to Table 17.3.If the market price of the product is $5 and the wage rate is $40,the firm should hire ________ workers.

A) 2
B) 3
C) 4
D) 5

Question 27

A soybean farmer sells soybeans in a perfectly competitive market and hires labor in a perfectly competitive market.The market price of soybeans is $1 a bushel,the wage rate is $12,the farmer employs six workers,and the marginal product of the sixth worker is 10.What would you advise this farmer to do?

A) Do nothing because the wage rate and the marginal product of the last worker hired are equal.
B) Reduce employment because the wage paid is greater than the marginal revenue product.
C) Increase employment because the wage paid is less than the marginal revenue product.
D) Increase the product price so that the wage and marginal revenue product will be equal.

Question 28

The marginal revenue product curve is

A) upward sloping when capital and labor are substitutes.
B) the firm's short-run demand curve for labor.
C) likely to shift if the wage increases.
D) all of the above

Question 29

Table 17.3
Refer to Table 17.3.Suppose that the market price of the product is $2.If the wage is $40,the firm should hire ________ workers.

A) 2
B) 3
C) 4
D) 5

Question 30

In a competitive labor market

A) the firm can hire all the labor it wants at the going market wage rate.
B) the market wage rate is the marginal revenue product of labor.
C) firms will hire as long as the marginal revenue product of labor is less than or equal to the market wage.
D) all of the above

Question 31

A firm's short-run demand curve for labor would shift to the left if

A) there is a decrease in the price of the output.
B) there is an increase in the marginal product of labor.
C) there is a decrease in the wage rate.
D) all of the above

Question 32

If Sparkling Cleaning Service uses only one variable input,labor.The firm's short-run demand curve for labor is the

A) total product curve.
B) marginal product curve.
C) marginal revenue product curve.
D) wage rate.

Question 33

Table 17.3
Refer to Table 17.3.If the market price of the product is $4 and the firm can hire as many workers as it wants at a wage of $40,the firm should hire ________ workers.

A) 2
B) 3
C) 4
D) 5

Question 34

If a firm is maximizing profit,which of the following is true?

A) The marginal revenue product is equal to the wage rate.
B) The marginal product of labor is equal to the average product of labor.
C) The marginal product of labor is maximized.
D) all of the above

Question 35

The perfectly competitive firm's short-run demand for labor is downward sloping because

A) the output price falls as the firm produces more output.
B) of diminishing marginal productivity.
C) the labor supply curve is upward sloping.
D) as more labor is hired, the firm has less money available per worker.

Question 36

Table 17.4
Refer to Table 17.4.If the wage rate is $8 per worker and the output sells for $1,the firm will hire

A) 0 workers.
B) 1 workers.
C) 2 workers.
D) 3 workers.

Question 37

If the wage rate is less than the marginal revenue product of labor,the firm should ________ to maximize profits.

A) hire less labor and produce less output
B) hire less labor and produce more output
C) hire more labor and produce less output
D) hire more labor and produce more output

Question 38

Which of the following situations is most likely to generate the largest output effect from a decrease in the price of one of a firm's inputs?

A) The demand for a firm's product is inelastic.
B) The demand for a firm's product is elastic.
C) The inputs used in production are highly substitutable.
D) The inputs used in production are highly complementary.

Question 39

Floor Lamp Inc.is a perfectly competitive firm that currently employs 100 workers.The marginal revenue product of the 90th worker is $7.00 per hour.The wage rate is $8.00 per hour.To increase profits,this firm should

A) increase employment until the MRP of labor equals $8.00.
B) continue hiring 100 workers because the firm earns a surplus of $1.00 on each worker hired.
C) decrease employment until the MRP of labor equals $8.00.
D) increase the price of lamps so that the marginal revenue product increases to $8.00 per hour.

Question 40

Firms in a competitive labor market will employ labor up to the point where

A) the wage rate equals the productivity of capital.
B) its marginal cost equals its marginal product.
C) the wage equals its marginal revenue product.
D) the wage equals its marginal product.

Question 41

Frank's Burgers employs workers in a competitive market.It currently has 15 employees.The marginal revenue product of the 15th worker hired is $8.50 per hour.The market equilibrium wage is $10 per hour.Is this firm maximizing profit? Explain.

Question 42

The demand curve for labor will slope downward because of

A) the input-substitution effect.
B) the output effect.
C) diminishing returns to scale.
D) Both A and B are correct.

Question 43

Explain why the demand for labor is a derived demand.

Question 44

Graphically illustrate and explain the effect of an increase in the marginal product of labor on the demand curve for labor.

Question 45

Table 17.5
A firm producing ink pens reports the production information in Table 17.5.The pens sell in a competitive market at a price of $0.50 each.The firm hires workers in a competitive labor market at a wage of $9 per hour.How many workers should the firm hire? Explain your answer.

Question 46

Graphically illustrate and explain the effect of an increase in product price on the demand curve for labor.

Question 47

The input-substitution effect decreases the labor input per unit of output while the output effect

A) decreases the price of the output.
B) decreases the total output.
C) increases the price of the output.
D) increases the total output.

Question 48

A profit-maximizing firm will hire labor as long as the marginal revenue product of labor is less than the wage.

Question 49

Recall the Application about the salaries paid in Major League Baseball to answer the following question(s). Some Major League Baseball players are free agents, meaning they are free to negotiate a contract with any team. Other players are journeymen and apprentices, who are restricted to a single team.
Recall the Application.How are average salaries of MLB players determined?

A) Salaries are based on the MRP of a player that equals his contribution to the firm's total revenue from ticket sales and television contracts.
B) Firms use a specific formula that is determined by multiplying the total revenue from the player and the total cost.
C) Salaries are based on the diminishing return from each player.
D) Salaries are based on the years that players have been with one team.

Question 50

An appliance manufacturer adopts a new technology that,ceteris paribus,increases the productivity of capital.At the same time,its employees unionize and demand higher wages.Assume that for this manufacturer capital and labor are substitutable.Which of the following is most likely to occur?

A) Capital will be substituted for labor.
B) Labor will be substituted for capital.
C) Output increases as do the prices of capital and labor.
D) Output decreases as does the price of cars.

Question 51

The demand for labor is dependent on the demand for the outputs the labor is used to produce.

Question 52

The output effect is defined as

A) the demand for the input whose price has increased will decrease, but the demand for the other factors will increase.
B) the change in the quantity of labor demanded resulting from a change in the quantity of output produced.
C) the change in the quantity of labor demanded resulting from an increase in the price of other inputs.
D) the demand for the factor whose price has increased will increase, but the demand for the other factors will decrease.

Question 53

If the price of labor falls,

A) we can conclude that the demand for capital will always decrease because only the input-substitution effect is relevant.
B) we can conclude that the demand for capital will always increase because only the output effect is relevant.
C) the change in the demand for capital cannot be predicted because the input-substitution effect and output effect work in opposite directions.
D) the demand for capital will be unaffected, because only a change in the price of capital would change the demand for capital.

Question 54

Compared to its long-run demand for labor,a firm's short-run labor demand curve

A) is flatter.
B) will be relatively more inelastic.
C) will be relatively more elastic.
D) none of the above

Question 55

The owner of Instant Printing,a firm that prints business cards,tells you that as a result of an increase in the wage rate of printer operators he has reduced the amount of output he produces and the amount of capital he uses.How would you respond to this?

A) You should tell him that this doesn't make any economic sense because according to the input-substitution effect, he should have substituted toward capital and away from labor.
B) This seems logical, because the output effect of an input price increase would cause a firm to demand less of all inputs, not just the input whose price increased.
C) You should tell him that instead of reducing output and the demand for all inputs, he should increase output and the demand for inputs so that he can meet the higher labor costs by generating more revenue.
D) You tell him that the input-substitution effect and the scale effect both suggest that he decrease the amount of capital he uses when his workers' wage rate increases.

Question 56

Fred's Pizza Palace sells pizzas in a competitive market.The price of pizza is $1.25 each.Hourly output varies with the amount of labor hired as follows:

Fill in the column for marginal product of labor and marginal revenue product.

Question 57

The tendency of firms to substitute away from a factor whose relative price has risen and toward a factor whose relative price has fallen is called the

A) input-substitution effect.
B) derived demand effect.
C) diminishing returns effect.
D) output effect.

Question 58

What happens when a firm encounters diminishing returns? What causes diminishing returns?

Question 59

Since there are diminishing returns in the long run,the market demand curve is negatively sloped.

Question 60

The demand for labor is more inelastic in the short run.This makes the short-run demand curve steeper compared to the long-run demand curve.

Question 61

Dogger's Snowboard Shop hires workers for the holidays.Dogger's sells snowboards for $150.The marginal revenue product of the last worker hired is $450.What is the marginal product of the last worker?

Question 62

Explain why long-run labor demand curves slope downward using the concepts of the input-substitution effect and the output effect.

Question 63

Use a diagram of a competitive labor market and a representative firm to explain how much labor a profit-maximizing firm will hire.

Question 64

Explain the output effect of an increase in the wage rate.

Question 65

Graphically illustrate and explain the effect of an increase in the wage rate on the demand curve for labor.

Question 66

If the substitution effect of a wage change outweighs the income effect of a wage change,the labor-supply curve is

A) upward sloping.
B) horizontal.
C) vertical.
D) backward bending.

Question 67

Dogger's Snowboard Shop hires workers for the holidays.Marginal product of the last worker hired is three.Marginal revenue product of the last worker hired is $450.Assuming one price,what is the price of Dogger's snowboards?

Question 68

Assume Edward considers eating out to be a normal good.The income effect of a wage increase for Edward implies that Edward's demand for eating out will be ________ and Edward's labor supply will be ________.

A) lower; higher
B) higher; lower
C) higher; higher
D) lower; lower

Question 69

Table 17.6
A soft pretzel shop can sell as many pretzels as it wishes at a price of $2.The production information is shown in Table 17.6.Complete the marginal product and marginal revenue product columns of Table 17.6.

Question 70

Comment on the following statement: "The output effect and the input-substitution effect work in opposite directions,so it is possible that a decrease in the wage rate can lead to a decrease in the amount of labor hired."

Question 71

Define the marginal revenue product of labor.Explain two factors that could cause the marginal revenue product curve for labor to shift to the right.

Question 72

Table 17.6
A soft pretzel shop can sell as many pretzels as it wishes at a price of $2.The production information is shown in Table 17.6.If the shop must pay $60 per worker per day,how many workers should be hired to maximize profit?

Question 73

Dogger's Snowboard Shop hires workers for the holidays.Dogger's sells snowboards for $150.The marginal product of the last worker hired is three.What is the marginal revenue product of the last worker?

Question 74

If Sara receives a pay increase from $15 to $16 an hour and she chooses to

A) work more, then the income effect is equal to the substitution effect.
B) take more vacation, then the income effect is weaker than the substitution effect.
C) take more vacation, then the income and substitution effects are working in the same direction with regard to leisure because it is a normal good.
D) work more, then the substitution effect for leisure demand is stronger than the income effect.

Question 75

The market supply curve for labor is usually

A) negatively sloped.
B) horizontal.
C) positively sloped.
D) vertical.

Question 76

Which of the following could lead to an increase in labor supply?

A) an increase in immigration
B) a decrease in the marginal product of workers
C) an increase in the wage rate
D) none of the above

Question 77

Assuming that leisure is a normal good,if an individual's labor supply curve is backward bending,then the

A) income effect outweighs the substitution effect.
B) substitution effect outweighs the income effect.
C) income effect and the substitution effects are equal.
D) income effect is zero.

Question 78

The labor market supply curve illustrates that as

A) more workers are hired, a lower wage rate needs to be paid.
B) the wage rate increases, more workers seek to be employed.
C) the wage rate falls, more workers will seek to be employed.
D) the price of the product produced by the worker rises, more workers will be employed.

Question 79

Which of the following could lead to an increase in labor supply?

A) more people retire at a younger age
B) an increase in labor force participation
C) tighter restrictions on immigration policy
D) an increase in the wage rate

Question 80

Explain the input-substitution effect and provide an example.