Question 1

Other things being equal, the elasticity of demand for labor will be greater the

Accepted Answer

The elasticity of demand for labor will be greater when there are a larger number of close substitute resources available. This is because employers can more easily switch to alternative inputs if the price of labor increases, making the demand for labor more sensitive (elastic) to changes in wage rates.

Question 2

Other things being equal, a labor union will find it harder to obtain a wage increase for its members the

Accepted Answer

If it is easier to substitute other resources for labor, the demand for labor becomes more elastic, making it harder for a union to negotiate higher wages without risking job losses.

Question 3

A firm is both hiring labor and selling output in purely competitive markets and is maximizing profits. It is currently operating in the elastic range of its MRP curve. If the wage rate increases, its total spending on wages at the new equilibrium will

Accepted Answer

In the elastic range of the MRP (Marginal Revenue Product) curve, an increase in the wage rate leads to a decrease in the quantity of labor hired that is proportionally larger than the increase in the wage rate. This results in a decrease in total spending on wages.

Question 4

A change in a factor's price will have a greater effect on the quantity of the factor demanded the

Accepted Answer

The demand for a factor of production is more elastic when the demand for the product it helps to make is more elastic. This is because if the final product's demand is sensitive to price changes, then any change in the cost of production (including changes in the price of factors of production) can significantly affect the quantity of the product demanded, thereby affecting the demand for the factors used to produce it.

Question 5

A firm is observed using 15 units of input X when the price of X is $2. If the price of X increases to $4, the firm uses only 6 units of it. What is the price elasticity of demand for input X? (Use the simple formula for percentage change: [(new# −old#)/old#] × 100%.)

Accepted Answer

The answer of A firm is observed using 15 units...

Question 6

A union representative observed that if the union members' wages were increased by some proportion, the workers would eventually suffer a greater than proportional decline in employment. This statement could best be explained if

Accepted Answer

When union labor can easily be replaced with capital, employers might respond to higher wages by substituting labor with machinery or technology, leading to a greater than proportional decline in employment.

Question 7

In firm X labor costs are 85 percent of production costs, while in firm Y labor costs are 40 percent of production costs. A 20 percent increase in wages would increase production costs by

Accepted Answer

For firm X, a 20% increase in wages (which are 85% of production costs) results in a 0.20 * 0.85 = 0.17 or 17% increase in production costs. For firm Y, a 20% increase in wages (which are 40% of production costs) results in a 0.20 * 0.40 = 0.08 or 8% increase in production costs.

Question 8

If labor costs are 60 percent of production costs, then a 15 percent increase in wage rates would increase production costs by

Accepted Answer

Since labor costs are 60% of production costs, a 15% increase in wage rates would increase the labor costs by 15% of 60%, which is 0.15 * 60% = 9%.

Question 9

In which of the cases given below will the elasticity of demand for workers who produce yo-yos be most inelastic? The price elasticity of demand for yo-yos is

Accepted Answer

The elasticity of demand for workers is most inelastic when the price elasticity of demand for the product is low (indicating that the quantity demanded of the product is not very responsive to price changes) and when labor's share of total costs is low (indicating that changes in wages have a smaller impact on total costs and thus on the quantity of labor demanded). Option C, with a price elasticity of demand for yo-yos of 0.1 and labor's share of total costs at 20 percent, meets these conditions.

Question 10

Suppose that the labor cost to total cost ratio in industry A is 82 percent, while in industry B it is 21 percent. Other things equal, labor demand will be

Accepted Answer

Labor demand elasticity is higher in industries where labor costs constitute a larger portion of total costs. Since industry A has a higher labor cost to total cost ratio (82%) compared to industry B (21%), labor demand in industry A will be more elastic. This is because changes in wages will have a more significant impact on total costs and, consequently, on the quantity of labor demanded in industry A.

Question 11

What will the elasticity of resource demand be if unit wages rise by 8 percent and the number of employed workers falls by 5 percent?

Accepted Answer

The elasticity of resource demand can be calculated using the formula: percentage change in quantity demanded / percentage change in price. Here, it's -5% / 8% = -0.625, which rounds to 0.63, indicating an inelastic demand.

Question 12

Which will not be a determinant of the price elasticity of demand for an input?

Accepted Answer

The price of the input itself does not determine its price elasticity of demand. Price elasticity of demand for an input is influenced by factors such as the substitutability of other resources (B), the elasticity of demand for the product it produces (C), and the proportion of total cost represented by the input (D), rather than the input's own price.

Question 13

Which would result in a decrease in the elasticity of demand for a particular resource?

Accepted Answer

A decrease in the percentage of the firm's total costs accounted for by the resource would result in a decrease in the elasticity of demand for that resource. This is because if the resource represents a smaller portion of the total costs, changes in its price would have a less significant impact on the firm's overall costs, making the firm less sensitive (or elastic) to price changes of that resource.

Question 14

If a factor of production has many close substitutes, we would expect that its price elasticity of demand would be

Accepted Answer

When a factor of production has many close substitutes, its price elasticity of demand is expected to be greater than one. This is because consumers can easily switch to substitutes if the price of the factor increases, making the demand for that factor highly responsive to price changes.

Question 15

The demand for labor would most likely become less inelastic as a result of

Accepted Answer

An increase in the proportion of labor cost to total costs makes labor demand more elastic because changes in labor costs have a larger impact on total costs, prompting employers to be more responsive to changes in wages.

Question 16

Other things being equal, if a once-competitive firm attains a high degree of monopoly power in its product market, then its resource demand will

Accepted Answer

When a firm gains a high degree of monopoly power, its demand for resources becomes more inelastic because it faces less competition in its product market, reducing the necessity to adjust resource usage significantly in response to changes in resource prices.

Question 17

The more inelastic the demand for a resource, the

Accepted Answer

The more inelastic the demand for a resource, the less elastic its marginal revenue product curve. This is because the marginal revenue product (MRP) curve reflects the additional revenue generated by employing one more unit of the resource. If demand for the resource is inelastic, changes in its price do not significantly affect the quantity demanded, leading to a less elastic MRP curve.

Question 18

Other things being the same, if the demand for labor is inelastic,

Accepted Answer

When demand for labor is inelastic, an increase in wage rates will lead to a proportionally smaller decrease in the quantity of labor demanded, resulting in higher overall payrolls.

Question 19

Which of the following statements is true? Other things equal, the demand for labor will be less elastic the

Accepted Answer

The demand for labor will be less elastic when the ratio of labor costs to total costs is smaller because labor costs constitute a smaller portion of total costs, making it less sensitive to changes in the wage rate.

Question 20

Other things being equal, a firm's demand for labor is likely to be more elastic than its demand for capital if

Accepted Answer

Labor-intensive production techniques imply that labor is a significant input in the production process, making the demand for labor more responsive (elastic) to changes in wage rates compared to capital, which might not be as easily substitutable or adjustable in the short term.

Quiz 16: The Demand for Resources