Deck 15: Factor Markets

Question 1

The profit maximizing condition for a firm selling its output in a competitive market and buying its resources in a competitive market is

A) P = MC only.
B) MRP = wage only.
C) both A and B.
D) neither A nor B.

Answer 1

C

Question 2

If a firm buys its labor in a competitive market,then in the short run,a decrease of the demand for the firm's product will cause the firm to

A) offer a higher wage.
B) hire fewer workers.
C) hire more workers.
D) offer a lower wage.

Answer 2

B

Question 3

The above figure shows a competitive firm's demand for labor assuming that the firm's output sells for $1 per unit.If the wage is $5 per hour,a 2 percent cut in all the workers' income tax will cause the firm to

A) demand less labor.
B) demand more labor.
C) raise the wage paid to the worker.
D) None of above.

Answer 3

B

Question 4

In the short run,the competitive firm will hire more labor if

A) the wage rate increases.
B) the price the firm receives for the output increases.
C) the price the firm receives for the output decreases.
D) a specific tax is imposed on the output.

Question 5

The above figure shows a competitive firm's demand for labor assuming that the firm's output sells for $1 per unit.If the wage is $5 per hour,a ten cent specific tax on the good sold by the firm will cause the firm to

A) demand less labor.
B) demand more labor.
C) offer its workers only $4.90 per hour.
D) hire 0 units of labor per hour.

Question 6

Suppose the marginal product of labor equals 1/L.If the firm can sell its output for $10 per unit,and the wage is $1 per unit,how many units of labor will the firm hire?

A) 0
B) 1
C) 10
D) 100

Question 7

A firm's demand for labor is downward sloping because of

A) diminishing marginal productivity of labor.
B) diminishing marginal utility.
C) price pressure.
D) workers' increased willingness to work at a higher wage.

Question 8

If a firm buys its labor in a competitive market,then a short-run increase in the price of the firm's output will cause the firm to

A) offer a higher wage.
B) hire fewer workers.
C) hire more workers.
D) offer a lower wage.

Question 9

If a competitive firm faces a competitive labor market,it will hire labor until

A) w = p.
B) w = MPL.
C) w = MPL ∗ p.
D) MPL = 0.

Question 10

In the short run,a competitive firm has a marginal product of labor,MPL = 5L⁻⁰.⁵.The output price is $10 per unit and the wage is $7 per hour.The short-run labor demand curve for the firm is

A) 5L⁻⁰.⁵.
B) 15L⁻⁰.⁵.
C) 35L⁻⁰.⁵.
D) 50L⁻⁰.⁵.

Question 11

The increase in total revenue due to increasing the amount of labor employed by one unit is called the

A) Marginal Product.
B) Marginal Revenue Product.
C) Average Revenue Product.
D) Total Revenue Product.

Question 12

Suppose the marginal product of labor equals 1/L.If the wage is $1 per unit of labor,what is the short-run effect on the firm's labor demand if the price of output were to double?

A) The firm will demand half as much labor.
B) The firm will demand twice as much labor.
C) The firm will demand the same quantity of labor.
D) There is not enough information to determine.

Question 13

In a perfectly competitive resource market,the labor supply curve facing the single firm is

A) vertical.
B) horizontal.
C) downward sloping.
D) upward sloping.

Question 14

In the long run,a competitive firm has a marginal product of labor,MPL = L⁻¹.The output price is $20 per unit and the wage is $7.25 per hour.The long-run labor demand curve for the firm is

A) 20 L⁻⁰.⁰⁵.
B) 7.25L⁻⁰.⁰⁵.
C) 20L⁻¹
D) 7.25L⁻¹.

Question 15

The above figure shows a competitive firm's demand for labor assuming that the firm's output sells for $1 per unit.If the wage is $5 per hour,a ten cent per unit subsidy on the good sold by the firm will cause the firm to

A) demand less labor.
B) demand more labor.
C) raise the wage for workers to $5.10.
D) None of the above.

Question 16

In a perfectly competitive resource market,the Marginal Revenue Product Curve is

A) vertical.
B) horizontal.
C) downward-sloping.
D) upward sloping.

Question 17

The above figure shows a competitive firm's demand for labor assuming that the firm's output sells for $1 per unit.If the wage is $5 per hour,the firm will hire

A) 10 units of labor per hour.
B) 5 units of labor per hour.
C) 2.5 units of labor per hour.
D) 0 units of labor per hour.

Question 18

If a firm is a price taker in both the labor market and the output market,it will

A) earn zero economic profit in the short run.
B) hire labor until the marginal product of labor equals zero.
C) hire labor until the marginal revenue product equals the output price.
D) hire labor until the marginal revenue product equals the wage rate.

Question 19

If wages for a certain type of labor were higher in one market than in another,then

A) the differential would exist into the long run.
B) labor would move from the high wage market to the low wage market until wages were equal.
C) labor would move from the low wage market to the high wage market until wages were equal.
D) firms would not be acting as profit maximizers.

Question 20

Suppose a perfectly competitive firm's production function is q = L⁰.²K⁰.⁶ and it takes the wage and price as given.Then the firm's long-run demand for labor as a function of K,w,and p is

A) p5((0.2/w)²(0.6/r)³).
B) p5((0.2/w)⁴(0.6/r)⁵).
C) p5((0.2/w)⁵(0.6/r)⁴).
D) p5((0.2/w)³(0.6/r)²).

Question 21

In the short run,which one of the following causes a competitive firm to hire more labor?

A) an increase in wage rate
B) an increase in the output price
C) a specific tax imposed on the firm's output
D) a decrease in the output price

Question 22

Because of market power,wages are higher under monopsony than under competitive conditions.

Question 23

For a monopoly,the value of the next worker equals

A) MR ∗ MPL.
B) (price + the effect of increased output on price) ∗ MPL.
C) P(1+1/e) * MPL
D) all of the above.

Question 24

The long-run labor demand curve is relatively flatter than the short-run labor demand curve because,in the short run,

A) the wage rate is fixed.
B) the firm cannot vary the amount of capital used.
C) the firm is a price taker.
D) All of the above.

Question 25

The marginal revenue product of labor is usually downward sloping.

Question 26

To derive the labor market demand curve,the labor demand curves for each firm in the output market of interest are summed.

Question 27

If the market demand elasticity is constant at -3 and a monopolist's MPL = 1.2L⁻⁰.⁵,then the labor demand for the monopoly is

A) 0.8PL⁻⁰.⁵.
B) 0.4PL⁻⁰.⁵.
C) 0.8PL⁻².
D) 0.4PL⁻².

Question 28

A monopoly's demand curve for labor

A) is below that of a competitive market.
B) is the same as that of a competitive market.
C) is above that of a competitive market.
D) equals p ∗ MPL.

Question 29

If the price of a competitive firm's output increases,the firm responds in the short run by demanding more labor.

Question 30

If the labor market is competitive,a monopoly output market will result in

A) a lower wage than that of a competitive output market.
B) a higher wage than that of a competitive output market.
C) less labor hired than in a competitive output market.
D) more labor hired than in a competitive output market.

Question 31

If a firm has market power in the output market but buys labor in a competitive market,it will hire the same quantity of labor that a competitive firm will.

Question 32

In the long-run,a fall in the input price causes less of an increase in factor demand

A) if the increase of product supply affected price.
B) if the market price will decrease too.
C) if the market price remain constant.
D) if the factor demand is more elastic.

Question 33

The amount of labor a firm employs depends on

A) the market wage.
B) the market price for the good produced.
C) Both A and B.
D) None of the above.

Question 34

If the competitive firm maximizes profit by selecting labor rather than output,it will earn greater economic profit.

Question 35

For a monopoly,the value of the next worker equals

A) MR ∗ MPL.
B) p ∗ MPL.
C) MPL.
D) w/MPL.

Question 36

For a monopoly,the value of the next worker equals

A) MR ∗ MPL.
B) p ∗ MPL.
C) MPL.
D) w/MPL.

Question 37

How does a competitive firm's demand for labor react to a specific tax on each unit of output it sells?

Question 38

A change in the wage causes a shift in the supply curve for labor and a

A) movement along the demand curve for labor.
B) shift in the demand curve for labor.
C) rotation in the demand curve for labor.
D) It cannot be determined by the information provided.

Question 39

The demand for a monopoly's output is p = 100 - Q.The firm's production function is Q = 2L.Which of the following is the firm's demand for labor?

A) w = 200 - 8L
B) w = 200 - 4L
C) w = 100 - L
D) w = 2L

Question 40

Suppose the market demand elasticity is constant at -2,and there are three identical firms in the oligopolistic market.A Cournot firm's MPL = 1.2L⁻⁰.⁵,then the labor demand for a Cournot firm is

A) PL⁻⁰.⁵.
B) 0.6PL⁻⁰.⁵.
C) 0.2PL⁻².
D) PL⁻².

Question 41

Suppose there are profit maximizing,competitive buyers and sellers of labor in an industry,and the amount of capital is fixed for each firm.Explain under what condition the output price will equal the wage rate.

Question 42

Show with a graph that an increase in the minimum wage can increase the level of employment in a monopsony market.

Question 43

Explain why a decrease in an input price causes less of an increase in the quantity demanded of the factor if we assumed that product price remained constant.

Question 44

Suppose a monopoly producer is also a monopsonist in the labor market.Demand for the output is p = 100 - Q.The production function is Q = L,and the labor supply curve is w = 10 + L.How much labor does the firm hire? What wage is paid?

Question 45

Suppose two people with the same level of income and wealth have different discount rates.Joe has a very high discount rate and Jim has a very low discount rate.Which one of the following is TRUE?

A) Joe is more likely to borrow than Jim.
B) Joe is less likely to borrow than Jim.
C) Joe and Jim will borrow the same amount.
D) Neither Joe nor Jim would be borrowers.

Question 46

If the interest rate is 10%,then $1 today is worth how much one year from now?

A) $1.10
B) $1
C) 91¢
D) 90¢

Question 47

If you invest $500 today,and the value one year from today is $1000,then the annual interest rate must be

A) 10%.
B) 50%.
C) 100%.
D) 200%.

Question 48

Jon runs a bar in New York City.A city law prevents smoking in New York bars,but Jon is able to convince a friend in city hall to grant his bar a smoking permit by exploiting some fancy loopholes in the law.While smoking enables Jon to charge a premium to the customers (higher drink prices),his workers are subject to second-hand smoke.Therefore Jon has to pay his workers a wage higher than he otherwise would.Assuming Jon's production function is f(L,K)= LᵃK¹⁻ᵃ,where L is the quantity of workers and K is the quantity of capital,how does Jon's optimal capital-to-labor ratio compare to similar bars without smoking?

Question 49

Suppose that a mining company employs 80% of the available laborers in a town.Explain what will happen to the number of laborers hired and the wage rate paid by the mine if a minimum wage is set at the competitive level.

Question 50

Interest rates are positive mainly because

A) of inflation.
B) people tend to prefer the present to the future.
C) people tend to prefer the future to the present.
D) bankers are greedy.

Question 51

Why is the short-run demand curve for labor downward sloping?

Question 52

XYZ Co.operates in a competitive market.Its marginal product of labor is 1/L,and it takes the wage and price as given.Derive the firm's short-run demand for labor as a function of w and p.How much labor will the firm hire if w = 2 and p = 10?

Question 53

Suppose n identical Cournot firms purchase labor in a competitive labor market.How is the market demand for labor affected by the number of firms in the market?

Question 54

If you place $100 in a bank account that pays 6% at the end of each year,and you leave your $100 and all your interest in the bank,how much will you have in the bank at the end of seven years with annual compounding?

A) (106)⁷.
B) 7 ∗ (106).
C) 100 ∗ (1.60)⁷.
D) 100 ∗ (1.06)⁷.

Question 55

XYZ Co.operates in a competitive market.Its production function is q = .The exponents,α and β,are both less than one.The firm's capital is fixed,and it takes the wage and price as given.Derive the firm's short-run demand for labor as a function of K,w,and p.How does the firm react to an increase in the wage rate?

Question 56

Why does a monopsonist's marginal expenditure curve lie above the labor supply curve?

Question 57

Suppose the labor market is competitive,the supply curve of labor is upward sloping,and the amount of capital is fixed.If the output market changes from a competitive market to a monopoly,what is the effect on its demand for labor? Explain.

Question 58

Suppose a person has a discount rate of zero.This implies she

A) places no value on the future.
B) places no value on the present.
C) values the present and the future equally.
D) would not lend money at any positive interest rate.

Question 59

For a given rate of interest,the total interest you receive from lending money

A) increases with the frequency of compounding.
B) decreases with the frequency of compounding.
C) is independent of the frequency of compounding.
D) is greatest when there is no compounding.

Question 60

If the interest rate is 10%,then $1 received one year from now is worth how much today?

A) $1.10
B) $1
C) 91¢
D) 90¢

Question 61

You place $100 in a bank account that pays 8%.If you remove the interest you receive each year you can turn your stock into a flow of

A) $108 per year.
B) $100 per year.
C) $80 per year.
D) $8 per year.

Question 62

As the interest rate increases,the present value of a future payment

A) increases.
B) decreases.
C) does not change.
D) approaches infinity.

Question 63

If a firm needs one machine to produce a product,and must replace the machine when it wears out,then the firm should pick a durability level of the machine that

A) minimizes the expense today.
B) minimizes the present discounted cost of having the machine forever.
C) maximizes the future value of the machine.
D) minimizes the future value of the machine.

Question 64

Suppose a new cost-saving device will generate $1,000 net savings per year to a firm.The device costs $10,000.Should the firm purchase the device?

A) definitely
B) absolutely not
C) The firm is indifferent between buying the device and not.
D) More information is required to answer.

Question 65

To calculate the internal rate of return on a factory that would yield a perpetual future stream of income,one would divide

A) the annual future payment by the cost of the factory.
B) the sum of the future payments by the cost of the factory.
C) the cost of the factory by the rate of interest.
D) the cost of the factory by the annual future payment.

Question 66

You can put your $100 in Bank A that pays 8% at the end of the year.You can also put your $100 in Bank B that pays 4% at the end of six months and then 4% again at the end of the year.You will keep your $100 and all interest in the bank.At the end of the year

A) the total will be the same at both banks.
B) the total at Bank A will be greater.
C) the total at Bank B will be greater.
D) the total could be larger at either bank.

Question 67

Using the Internal Rate of Return approach to investment,one would undertake an investment if the internal rate of return

A) equals zero.
B) equals the interest rate.
C) exceeds the interest rate.
D) is less than the interest rate.

Question 68

You invest an amount today for four years that pays 6% annually.The bank compounds annually.At the end of the four years you will have $150.What amount must you invest today?

A) $148.81
B) $138.81
C) $128.81
D) $118.81

Question 69

Four banks are offering the same interest rate of 4%.Where do you invest?

A) Bank A compounds interest on a yearly basis.
B) Bank B compounds interest on a monthly basis.
C) Bank C compounds interest on a daily basis.
D) I am indifferent between banks.

Question 70

As the interest rate rises,the present value of a given perpetual stream of income

A) increases.
B) decreases.
C) does not change.
D) approaches infinity.

Question 71

If a bond's coupon adjusts to pay a constant real rate of return,then an increase in inflation would cause

A) the nominal coupon payment to rise.
B) the nominal coupon payment to fall.
C) the nominal coupon payment to remain unchanged.
D) the bond's price to fluctuate wildly.

Question 72

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.From an investment standpoint,Joe will go back full-time if

A) 10,000 × = 40,000 ×
B) 10,000/r > 10,000 ×
C) 10,000 × > 40,000 ×
D) 10,000 × > 40,000 ×

Question 73

In using the Internal Rate of Return approach,one must first calculate the discount rate on the investment that makes

A) the net present value equal zero.
B) the interest rate equal zero.
C) the interest rate equal the discount rate.
D) the first year's return positive.

Question 74

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.If these are real amounts (adjusted for inflation),then the discount rate to be used should be

A) the nominal rate of interest.
B) the real rate of interest.
C) the rate of inflation.
D) zero.

Question 75

A bond issuer agrees to pay a stated nominal amount each year.An increase in the nominal interest rate will cause

A) the price of the bond to fall.
B) the price of the bond to rise.
C) the nominal value of the bond's coupon to rise.
D) the nominal value of the bond's coupon to fall.

Question 76

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.His benefit of a degree would be

A) 10,000 ×
B) 10,000 ×
C) 10,000/r.
D) 10,000 ×

Question 77

A firm should make an investment if the expected return is greater than

A) the marginal cost of the investment.
B) the fixed cost of the investment.
C) the opportunity cost of the investment.
D) the expected rate of inflation.

Question 78

Suppose a new cost-saving device will forever generate $1,000 net savings per year to a firm.The device costs $10,000.Using the Internal Rate of Return approach,will the firm make the investment?

A) definitely
B) definitely not
C) if the interest rate exceeds 10%
D) if the interest rate is less than 10%

Question 79

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.His cost of going back to college is

A) 10,000 ×
B) 20,000 ×
C) 30,000 ×
D) 40,000 ×

Question 80

The Net Present Value approach to investment results in an investment being undertaken only if

A) its net present value is positive.
B) its net present value is zero.
C) it has positive cash flow.
D) its internal rate of return equals the rate of interest.