Deck 17: Wages, Rent, Interest, and Profit

Question 1

Use the following figure to answer the question : Figure 17-1 : shows the weekly income (in dollars)and leisure (in hours)of a worker using an indifference curve and a budget line.

Refer to Figure 17-1.If the number of leisure hours is OL₂ after a change in the wage rate,it implies that:

A)the income effect of the wage change is greater than the substitution effect.
B)the income effect of the wage change is less than the substitution effect.
C)the income effect of the wage change exactly offsets the substitution effect.
D)the income and substitution effects of a wage change operate in the same direction.

Answer 1

the income effect of the wage change exactly offsets the substitution effect.

Question 2

As a result of the substitution effect of a lower wage,hours of work will:

A)increase due to a higher opportunity cost of leisure time.
B)fall due to a higher opportunity cost of leisure time.
C)fall due to a lower opportunity cost of leisure time.
D)increase due to a lower opportunity cost of leisure time.

Answer 2

fall due to a lower opportunity cost of leisure time.

Question 3

Use the following figure to answer the question : Figure 17-1 : shows the weekly income (in dollars)and leisure (in hours)of a worker using an indifference curve and a budget line.

In Figure 17-1,if the reference time period is one week,N equals _____ hours.

A)24
B)72
C)168
D)672

Answer 3

168

Question 4

The income-leisure model of work is based on the assumption that:

A)the worker is able to choose the desired level of income.
B)the worker works for a fixed number of hours a week.
C)the worker is able to choose how many hours to work.
D)the worker considers work an economic bad.

Question 5

As a result of the substitution effect of a wage increase,a worker will:

A)increase his work effort.
B)increase his leisure time.
C)reduce his work effort.
D)keep leisure time unchanged.

Question 6

The key assumption of the income-leisure model:

A)is not applicable to the real world and so negates the usefulness of the model.
B)is not valid as employers will not cater to workers' income-leisure choices.
C)holds good in general because workers can vary work hours with overtime,leaves without pay and early retirement.
D)is only applicable to entrepreneurs and not salaried workers who are associated with less promising financial rewards.

Question 7

As a result of the income effect of a higher wage,hours of work will:

A)increase due to a lower opportunity cost of leisure time.
B)fall due to a higher real income enabling greater leisure time.
C)increase due to a higher real income eliciting greater leisure time.
D)fall due to a lower opportunity cost of leisure time.

Question 8

Use the following figure to answer the question : Figure 17-1 : shows the weekly income (in dollars)and leisure (in hours)of a worker using an indifference curve and a budget line.

In Figure 17-1,assume the worker is initially in equilibrium at point A.Weekly earnings and work effort are _____ respectively.

A)OY₁ and OL₂
B)OY₂ and NL₂
C)OY₁ and NL₂
D)OY₂ and ON

Question 9

In the income-leisure model of work,leisure is the portion of time when:

A)the worker is employed but not at work.
B)the worker is not receiving compensation from an employer.
C)the worker is not receiving at least the minimum wage.
D)the worker is temporarily employed or working part-time.

Question 10

Use the following figure to answer the question : Figure 17-1 : shows the weekly income (in dollars)and leisure (in hours)of a worker using an indifference curve and a budget line.

Refer to Figure 17-1.If the number of leisure hours is OL₃ after a change in the wage rate,it implies that:

A)the income effect of the wage change is greater than the substitution effect.
B)the income effect of the wage change is less than the substitution effect.
C)the income effect of the wage change exactly offsets the substitution effect.
D)the income and substitution effects of a wage change operate in the same direction.

Question 11

Which of the following best explains the backward bending portion of the labor supply curve?

A)An increase in the wage rate results in a larger income effect and a lower substitution effect.
B)An increase in the wage rate increases the quantity of labor supplied to the market.
C)An increase in the wage rate increases the elasticity of the labor supply curve.
D)An increase in the wage rate leads to a steeper labor supply curve.

Question 12

Suppose Jack earns $10 an hour which is subject to a tax of 10 percent.If the government raises the tax rate to 50 percent,he will:

A)increase hours of work if the income effect of the change in wage is less than the substitution effect.
B)increase hours of work if the income effect of the change in wage is greater than the substitution effect.
C)reduce hours of work if the income effect of the change in wage rate exactly offsets the substitution effect.
D)reduce hours of work if the income and substitution effects operate in opposite directions.

Question 13

The income effect of a wage change typically assumes that:

A)workers get negative utility from work.
B)not all workers consider income to be a normal good.
C)leisure is a normal good.
D)income and leisure are complementary goods.

Question 14

Use the following figure to answer the question : Figure 17-1 : shows the weekly income (in dollars)and leisure (in hours)of a worker using an indifference curve and a budget line.

Refer to Figure 17-1.If the number of leisure hours is OL₃ after a change in the wage rate,the individual's supply curve of labor will be _____.

A)backward bending
B)vertical
C)upward-sloping
D)relatively elastic

Question 15

Suppose leisure is shown on the horizontal axis and weekly income is shown on the vertical axis,an increase in the wage rate will cause the budget line to:

A)become steeper.
B)shift inward toward the origin.
C)shift outward away from the origin.
D)become flatter.

Question 16

Use the following figure to answer the question : Figure 17-1 : shows the weekly income (in dollars)and leisure (in hours)of a worker using an indifference curve and a budget line.

Refer to Figure 17-1.If the number of leisure hours is OL₁ after a change in the wage rate,it implies that:

A)the income effect of the wage change is greater than the substitution effect.
B)the income effect of the wage change is less than the substitution effect.
C)the income effect of the wage change exactly offsets the substitution effect.
D)the income and substitution effects of a wage change operate in the same direction.

Question 17

Use the following figure to answer the question : Figure 17-1 : shows the weekly income (in dollars)and leisure (in hours)of a worker using an indifference curve and a budget line.

_____ will cause the budget line in Figure 17-1 to rotate from NY₂ to NY₃.

A)An increase in work effort
B)A fall in work effort
C)A rise in the wage rate
D)A fall in the wage rate

Question 18

Consider an individual whose income increases substantially.This allows him to increase consumption of all normal goods and services.If he increases the consumption of leisure,it implies that:

A)the substitution effect of a wage increase is larger than the income effect.
B)the labor supply curve is upward sloping at all wage rates.
C)he is on the backward bending portion of the labor supply curve.
D)the labor supply curve is downward sloping at all wage rates.

Question 19

Suppose a worker is working 40 hours a week at a certain wage.After the wage rate increases:

A)the worker will work more if the income effect of the wage increase is greater than the substitution effect.
B)the worker will work less if the income effect of the wage increase is greater than the substitution effect.
C)the supply curve of labor will be backward bending if the substitution effect of the wage increase is greater than the income effect.
D)the supply curve of labor will be upward sloping throughout if the income effect of the wage increase is greater than the substitution effect.

Question 20

Jane,who works at a publishing firm,chooses to work fewer hours following an increase in her wage.Which of the following is correct?

A)Jane has a backward-bending labor supply curve.
B)Jane considers leisure to be an inferior good.
C)Jane's has an upward-sloping labor supply curve.
D)Jane considers work to be a normal good.

Question 21

Karen works as an emergency-room nurse at a hospital.Although her regular shifts last 8 hours,she has to work twelve-hour shifts on Saturday and Sunday.For these extra hours that she puts in during the weekends,Karen's hourly wage is doubled.Karen's income during the weekends is an example of:

A)a labor-leisure tradeoff.
B)a compensating wage differential.
C)increasing marginal revenue product.
D)the diminishing marginal product of labor.

Question 22

Which of the following is an implicit cost of a college education?

A)The cost of tuition
B)The cost of foregone earnings
C)The cost of housing and dining at a dorm
D)The cost of commuting to college and back

Question 23

Which of the following is not a source of equilibrium differences in wage rates?

A)The level of risk associated with an occupation
B)The level of skills that workers possess
C)The economic rent associated with the labor input
D)The aptitude that workers have for an occupation

Question 24

Economic rent accrues to:

A)owners of monopsony firms.
B)owners of monopoly firms
C)consumers in competitive markets.
D)suppliers in input markets.

Question 25

Which of the following did contributed to the slowdown in the growth of real wages during the 1970s in the U.S.?

A)A change in technology
B)A decrease in the supply of labor
C)A high rate of inflation due to high oil prices
D)An increase in the rate of investment

Question 26

Tom started working five hours more each week,after receiving a $5 per hour increase in his hourly wage.This indicates that:

A)the income effect of the wage increase exceeded the substitution effect.
B)the substitution effect of the wage increase exceeded the income effect.
C)Tom's wage elasticity is equal to one.
D)Tom's wage elasticity is low.

Question 27

Which of the following factors will contribute to an increase in the marginal productivity of labor?

A)An increase in the cost of living
B)Technological progress
C)An increase in the demand for labor
D)A high nominal wage

Question 28

Which of the following is true of wage differentials between different occupations in equilibrium?

A)Wages cannot differ across occupations if there is free mobility of labor.
B)Wages can differ across occupations due to differences in training,abilities,and preferences.
C)Wages can differ across occupations depending on the size of the labor force in the economy.
D)Wages cannot differ across occupations if there are equal opportunity employment laws.

Question 29

The equilibrium wage paid to college professors is generally thrice that of kindergarten teachers.The correct explanation for this difference in wages is:

A)the excess demand for kindergarten teachers as compared to college professors.
B)the higher funds available to universities as compared to schools.
C)the high investment required to become a college professor.
D)the lower value placed by society on kindergarten teachers.

Question 30

A study showed that Americans aged 15-64 currently work 50 percent more than working-age Europeans.Which of the following best explains this difference in work hours?

A)The European work ethic is relatively laid-back compared to the American work ethic.
B)Unemployment benefits in European countries are higher than that in the U.S.which reduces the incentive to work in Europe.
C)The marginal tax rates on labor supply in Europe are higher relative to the United States.
D)Since the labor market in Europe is tightly regulated,European firms employ fewer workers than American firms.

Question 31

A comparison of wages in the U.S.and in less developed countries shows that:

A)high-wage U.S.labor cannot compete with low-wage labor in many developing countries.
B)workers in the U.S.are more productive than workers in less developed countries.
C)the substitution of labor for capital depresses wages and increases unemployment.
D)the supply of labor in developed countries had increased faster than demand.

Question 32

Which of the following correctly explains why wages are higher in the United States than in less developed countries?

A)The number of hours worked per worker in the U.S.is higher than it is in less developed countries.
B)The aggregate labor supply curve in the U.S.is highly inelastic.
C)The output produced by each worker is higher in the U.S.than in less developed countries.
D)The substitution effect of a wage increase is greater for the U.S.residents than it is for residents of less developed countries.

Question 33

A compensating wage differential is the extra wage that is paid _____.

A)in occupations where there is excess supply of labor
B)for working overtime
C)in intrinsically less attractive jobs
D)to compensate the worker for the effects of inflation

Question 34

Which of the following does not explain wage differentials in long-run equilibrium?

A)The relative attractiveness of jobs
B)The level of investment in human capital
C)The size of the work force in the economy
D)The variation in the abilities of workers

Question 35

An individual's supply curve of labor is backward bending when:

A)the income effect dominates at lower wage rates and the substitution effect dominates at higher wage rates.
B)the substitution effect dominates at lower wage rates and the income effect dominates at higher wage rates.
C)the substitution and income effect work in the same direction at lower wage rates but in opposite directions at higher wage rates.
D)the substitution and income effect offset each other at lower wage rates but work in opposite directions at higher wage rates.

Question 36

What is meant by human capital?

A)It refers to the quantity of labor input employed in the production process.
B)It refers to the earning capacity of workers which is enhanced by education and experience.
C)It refers to the number of workers that will be required to replace one unit of capital.
D)It refers to the total number of employees working in an organization.

Question 37

Which of the following is not likely to have contributed to the stagnating real wage levels experienced in the 1970s in the U.S.?

A)Higher prices for oil,an input in production,led to a decrease in the demand for labor.
B)The working age population increased and increased the supply of labor in the economy.
C)The labor force participation rate of females increased sharply in the 1970s.
D)The imports of consumer goods from Japan led to a decline in domestic production.

Question 38

Management consultants work in pleasant surroundings at low risk of injury,but they generally receive higher pay than sanitation workers who face a health risk by working in unpleasant conditions.Based on this information,which of the following must be true?

A)Management workers receive a higher pay because their wages include a compensating wage differential.
B)Since there is free mobility of labor,sanitation workers must have chosen not to move to a higher-paying job.
C)Wages of management consultants and sanitation workers are not comparable due to differences in the level of human capital investment.
D)Management consultants are paid a higher wage to compensate for the intrinsic attractiveness of their jobs.

Question 39

If identical workers are paid an extra $1 per hour to work the night shift,then one can conclude that:

A)workers who work the day shift should also be paid an extra $1.
B)the night shift is intrinsically more attractive to all workers.
C)the value of working the day shift is at least $1 per hour to some workers.
D)the marginal product of night shift workers is higher than the day shift workers.

Question 40

Real wages are higher in the United States than in less developed countries for all of the
Following reasons,except:

A)the large size of the labor force.
B)the skills of the labor force.
C)the amount of capital available per worker.
D)the output produced per worker.

Question 41

Use the following figure to answer the question : Figure 17-2 : shows the demand [D],marginal revenue [MR],and supply [S] curves in the market for labor.

Refer to Figure 17-2.Under competitive conditions _____ workers are hired at a wage of _____.

A)L₁ and W₁
B)L₁ and W₂
C)L₂ and W₁
D)L₂ and W₂

Question 42

Which of the following correctly explains the reason for the decline in union membership in the U.S.post 1970s?

A)The implementation of minimum wage laws that force employers to compensate low-skilled workers more.
B)The fall in elasticity of demand for the products of certain industries,leading to an increase in the elasticity of the labor input.
C)The irrelevance of union membership in technology sectors where demand for workers outstrips supply.
D)The increase in labor supply due to a large number of baby boomers entering the workforce.

Question 43

Use the following figure to answer the question : Figure 17-2 : shows the demand [D],marginal revenue [MR],and supply [S] curves in the market for labor.

Refer to Figure 17-2.If union members cartelize the supply side of the market,the deadweight loss associated with the union is shown by the area _____.

A)ABL₁L₂
B)BCL₂L₁
C)W₂AL₂O
D)ABC

Question 44

Use the following figure to answer the question : Figure 17-2 : shows the demand [D],marginal revenue [MR],and supply [S] curves in the market for labor.

Refer to Figure 17-2.If union members cartelize the supply side of the market,the economic rent that accrues to the union is represented by the area _____.

A)W₁BF
B)W₂ACF
C)W₂ABF
D)W₂AL₂O

Question 45

For an input with a vertical supply curve,an increase in the demand for the input will lead to:

A)an increase in economic rent which is less than the payment to the input.
B)an increase in economic rent equal to the payment to the input.
C)a decrease in economic rent equal to the payment to an input.
D)a decrease in economic rent which is higher than the payment to the input.

Question 46

What does the height of the demand curve in a labor market represent?

A)The value of output produced by an incremental worker
B)The increase in revenue from the sale of an additional unit of output
C)The marginal cost of hiring an additional worker
D)The payment made to an individual worker

Question 47

Suppose the government imposes a policy which does not allow interest rates in the home mortgage market to rise above a certain level.Given that this level is set below the equilibrium interest rate,which of the following is a consequence of this policy?

A)There will be a surplus of mortgages in the market.
B)The demand for mortgages will outstrip supply.
C)The credit standards for people applying for loans will be tightened.
D)All the individuals who apply for a mortgage will be able to get one.

Question 48

Which of the following is the best example of economic rent?

A)Bob leases a two-bedroom apartment in town for $1,000 that he could have got for $700.
B)Ann was paid a $20,000 bonus this year for selling $500,000 more than her required sales quota.
C)Diane received a $20,000 raise to counter a job offer she received from a competing firm.
D)Carl,a union member,earns $20,000 more than a worker who is not a member of the union.

Question 49

Which of the following correctly describes economic rent?

A)The area that is enclosed between a firm's upward-sloping input supply curve and the input demand curve represents economic rent.
B)The payment to an input that is in excess of the minimum amount necessary to retain the input in its present use is economic rent.
C)The difference between the payment to an input and the maximum amount necessary to retain the input in its present use is economic rent.
D)The payment made by a firm to lease the services of land,buildings,equipment,or some other durable asset is economic rent.

Question 50

The more inelastic the labor supply curve:

A)the smaller the economic rent as a percentage of total wage payment.
B)the larger the economic rent as a percentage of total wage payments.
C)the more responsive the supply of labor to a change in wage.
D)the more responsive the supply of labor to the price of the final good.

Question 51

As compared to a labor market without a union,_____ in a labor market with an effective union.

A)the level of employment is lower
B)the wage rate paid to workers is lower
C)there is higher producer surplus
D)the supply curve of labor is horizontal

Question 52

What does the height of the supply curve in a labor market represent?

A)The marginal revenue product of a worker
B)The value of the output produced by a worker
C)The marginal value product of a worker
D)The minimum payment required to induce the worker to work

Question 53

In the market for loanable funds,an increase in the interest rate leads to _____ if the income effect dominates the substitution effect.

A)a decrease in demand
B)an increase in supply
C)an increase in demand
D)a decrease in supply

Question 54

Which of the following correctly describes an interest rate?

A)It is the portion of the payment to an input supplier in excess of the minimum amount necessary to retain the input in its present use.
B)It is paid by suppliers of loanable funds.
C)It equates the value of future and present consumption.
D)It is the price paid to purchase an asset.

Question 55

The value of economic rent _____.

A)is directly related to the elasticity of supply of the input
B)decreases with an increase in the total payment made for the use of the input
C)increases with an increase in the total payment made for the use of the input
D)is inversely related to the elasticity of supply of the input

Question 56

Payment to an input which is in excess of the minimum amount required to retain the input in its present use is called _____.

A)total revenue
B)factor payment
C)economic rent
D)surplus value

Question 57

Use the following figure to answer the question : Figure 17-2 : shows the demand [D],marginal revenue [MR],and supply [S] curves in the market for labor.

Refer to Figure 17-2.If union members cartelize the supply side of the market,_____ workers are employed at a wage of .

A)L₁ and w₁
B)L₁ and w₂
C)L₂ and w₁
D)L₂ and w₂

Question 58

The purpose of unions formed by workers is to:

A)increase mobility of labor across industries.
B)increase the productivity of the workers.
C)maximize the economic rent accruing to their members.
D)secure different wages for different members.

Question 59

Which of the following correctly supports the argument for the presence of unions in an industry?

A)Unions counteract the monopsony power of big firms in the labor market.
B)As a result of negotiations by unions,employment in the industry is higher than it would have been without a union.
C)Any inefficiency arising from the presence of a union is outweighed by the benefits of unions.
D)The presence of unions does not lead to a deadweight loss in the labor market.

Question 60

In a labor market with an effective union,the marginal revenue curve lies below the demand curve because:

A)workers who are part of the union are not as productive as non-union workers.
B)union workers are paid less than their marginal revenue product.
C)the union must lower wages paid to all workers to hire an extra worker.
D)marginal revenue increases as additional workers are hired.

Question 61

What is meant by the net marginal productivity of an investment?

A)It is the marginal revenue minus marginal cost from the last unit of capital.
B)It is the total addition to productivity from an extra unit of capital minus the cost of capital.
C)It is the additional revenue generated by selling an extra unit of output.
D)It is the extra output produced by an extra unit of capital minus the marginal cost.

Question 62

When investment is financed through borrowing,an increase in the interest rate will lead to:

A)a fall in investment as the supply of funds declines at higher interest rates.
B)a fall in investment as the rate of return on certain projects will be below the interest rate.
C)an increase in investment as the value of present spending will be higher.
D)an increase in investment as the net marginal productivity will increase.

Question 63

Consider a machine that lasts two years before it wears out and adds $100 to output in each of these two years.If the rate of return per year is 5%,calculate the initial cost of the machine.

A)$150
B)$186
C)$100
D)$136

Question 64

The aggregate investment demand curve slopes downward because:

A)the cost of the investment falls at lower interest rates.
B)of the law of diminishing marginal returns.
C)the total addition to productivity increases at higher interest rates.
D)an expansion in investment pushes up interest rates.

Question 65

When a firm earns a rate of return on an investment that _____,it makes a pure economic profit.

A)is above its accounting costs
B)is equal to its average variable cost
C)is above the cost of borrowed funds
D)just covers the firm's fixed costs

Question 66

Suppose that a firm has an opportunity to invest $100,000 in a project that over its one year life is likely to yield $115,000 in revenue.To maximize its return on investment the firm should:

A)finance the investment through borrowed funds if the interest rate is 25 percent or less.
B)finance the investment out of retained earnings if the interest rate is less than 15 percent.
C)borrow funds to finance the investment if the interest rate is 15 percent or less.
D)borrow funds to finance the investment as the present value of money is higher than the future value.

Question 67

An increase in investment in the present would mean that _____ in the future.

A)both income and consumption will remain unchanged
B)both income and consumption will increase
C)consumption will fall but income will increase
D)income will fall but consumption will increase

Question 68

Given that g is the rate of return on an investment,C is the initial cost,and R is the addition to output,which of the following equations can be used to calculate g?

A)C = R/(1+g)
B)C = R/g
C)C= (R+1)/g
D)C = R + 1/g

Question 69

Consider a machine that costs $50,has an economic life of one year,and produces output worth $63.The rate of return on capital is _____%.

A)26
B)13
C)63
D)50

Question 70

Anna and James decide to apply for individual personal loans at a bank.Anna will have to pay a higher interest rate than James if:

A)the inflation rate in the economy increases.
B)the duration of James' loan is longer.
C)James opts for a loan that is paid in installments.
D)James has a lower credit score than Anna.

Question 71

Consider a production possibility frontier [PPF] for the current year that measures the output of capital goods on the horizontal axis and the output of consumer goods on the vertical axis.Which of the following statements is true?

A)Technological progress will lead to a fall in current consumption resulting in a movement along the PPF.
B)For the productive capacity of the economy to increase,current consumption should increase.
C)An increase in investment in the current period will lead to a shift of the PPF in the future period.
D)An increase in investment in the current period increases current consumption.

Question 72

In equilibrium,interest rates on different assets will differ for all of the following reasons,except for differences in _____.

A)the risks associated with the asset
B)the asset prices
C)the duration of the loan
D)the tax treatment of the investment

Question 73

In the long-run,capital will be allocated across industries such that:

A)the rate of return to capital is highest in the most profitable industries.
B)the rate of return to capital is equal across industries.
C)the ratio of capital to labor is equal across industries.
D)economic rents are equalized across industries.

Question 74

A firm has $2 million in retained earnings.It can lend out the money at the rate of 11 percent per year,keep the money as idle cash,or earn invest in government bonds and earn 10 percent per year.Suppose the firm also needs $2 million for a new project which will give an 8 percent return per year.What should the firm do to maximize its return?

A)It should lend out the money at an interest of 11 percent per annum.
B)It should purchase government bonds promising a 10 percent return per annum.
C)It should invest the money in its new project.
D)It should keep the money as idle cash.

Question 75

State governments in the U.S.can borrow at lower interest rates than corporations because:

A)corporations borrow money by issuing short-term debt securities.
B)the government's investment need calls for smaller loans.
C)the cost of administering loans to the government is low.
D)the interest on bonds issued by the government is not subject to tax.

Question 76

What is meant by the gross marginal productivity of an investment?

A)It is the total addition to productivity contributed by capital investment.
B)It is the addition to total revenue from the sale of an extra unit of output.
C)It is the increase in production by proportionately increasing all inputs.
D)It is the increase in the average product from an extra unit of capital investment.

Question 77

In equilibrium,labor will be allocated across industries in such a way that the:

A)real wage is highest in the most profitable industries.
B)capital-to-labor ratio is equalized across industries.
C)wages are equalized across industries.
D)the economic rents are equalized across industries.

Question 78

Interest rates charged on loans tend to be higher for corporations than for the U.S.government because:

A)corporations borrow in illiquid money markets unlike the government.
B)the cost of administering the loan is greater for the government than for a corporation.
C)the tax rate on corporate bonds is higher than on government bonds.
D)loans to the government are always for shorter time periods than loans to corporations.

Question 79

Differences exist in specific interest rates in equilibrium.Which of the following is not a reason for this difference in interest rates?

A)The level of risk associated with an investment
B)The duration of loans
C)The variations in tax rates
D)The present value of consumption

Question 80

Which of the following is true of the net marginal productivity of a capital investment?

A)The net marginal productivity falls with an increase in the additional output generated.
B)The net marginal productivity increases when the rate of interest increases.
C)The net marginal productivity falls with a higher rate of investment.
D)The net marginal productivity increases if the initial cost of capital increases.