Question 1

Workers will bear less of a payroll tax if
A) the supply of labor curve is steeper.
B) employers are made to pay more of the tax.
C) the supply of labor curve is flatter.
D) employers are made to pay less of the tax.

Accepted Answer

A flatter supply of labor curve indicates that workers are more responsive to changes in wages, meaning they can more easily leave the labor market or reduce hours worked if wages decrease due to a tax. This makes it harder for employers to pass the tax burden onto workers, so workers bear less of the tax.

Question 2

A profit-maximizing firm decides to produce 100 units of output.This implies that the firm will
A) produce on its lowest isoexpenditure line.
B) produce at a point where its isoexpenditure line is everywhere below the isoquant curve for 100 units of output.
C) produce at a point where its isoexpenditure line is tangent to the isoquant curve for 100 units of output.
D) produce where the marginal rate of technical substitution equals the wage rate.

Accepted Answer

Producing at a point where the isoexpenditure line is tangent to the isoquant curve for 100 units of output means that the firm is producing at the point where the marginal rate of technical substitution (MRTS) equals the ratio of factor prices. This is the point at which the firm can maximize profits, as it is producing the most output it can with the given factor prices. Choosing any other point will result in either lower output or higher costs, decreasing profits.

Question 3

A worker's hourly wage is $25 and output sells for $5 a unit.What is the minimum marginal product a worker must produce in order for a competitive employer to break even when hiring the worker?
A) 1/5
B) 5
C) 25
D) 125

Accepted Answer

To break even, the revenue earned by the employer hiring the worker must equal the cost of hiring the worker. The cost of hiring one worker for one hour is $25. The revenue earned from selling the output of the worker must be greater than or equal to $25. Since the output sells for $5 a unit, the worker must produce at least 5 units in order to generate $25 in revenue. Therefore, the minimum marginal product a worker must produce is 5 units. Thus, the correct option is B.

Question 4

If the hourly wage is $50 and the price of output is $25,then,in the short run,
A) the firm should add workers if they add 1/2 or more units to output.
B) the firm should add workers if they add 2 or more units to output.
C) the firm should hire two workers.
D) the firm should reduce employment until the wage falls to $25.

Accepted Answer

In the short run, the firm's decision to add workers depends on the marginal product of labor (MPL), i.e., the additional output produced by each additional worker. The MPL is given by the slope of the production function. If MPL is greater than the ratio of wage to price (i.e., MPL > w/p), then the firm should hire more workers to increase its profit. In this case, MPL = 2 units per hour, which is greater than the ratio of wage to price (= 50/25 = 2). Therefore, the firm should add workers if they add 2 or more units to output. Adding 1 worker increases output by 2 units, and this is enough to cover the cost of his wage ($50), which is less than the revenue generated by the additional output ($25 x 2 = $50). Therefore, the firm should add workers until MPL falls to the ratio of wage to price, at which point the firm would be indifferent between hiring or not. Since there is no information on the shape of the production function, we cannot determine the optimal number of workers or whether there are diminishing returns to labor.

Question 5

Consider a firm using three inputs: unskilled labor,skilled labor,and capital.Unskilled labor and capital are substitutes in production,while skilled labor and capital are complements in production.If the price of capital decreases,then
A) employment of skilled labor increases and employment of unskilled labor decreases.
B) employment of both skilled and unskilled labor decreases.
C) employment of skilled labor increases but the effect on employment of unskilled labor is ambiguous.
D) employment of skilled labor could increase or decrease and the employment of unskilled labor definitely decreases.

Accepted Answer

Since unskilled labor and capital are substitutes, a decrease in the price of capital will lead to a decrease in the employment of unskilled labor. On the other hand, since skilled labor and capital are complements, a decrease in the price of capital will lead to an increase in the employment of skilled labor. However, the effect on employment of unskilled labor is ambiguous, as the firm could use more skilled labor and less unskilled labor, or it could use more capital and less unskilled labor. Therefore, the correct answer is C.

Question 6

If an increase in the cost of labor causes the firm to use less capital,then
A) the scale effect has dominated over the substitution effect.
B) the substitution effect has dominated over the scale effect.
C) the firm has moved along an isoquant curve.
D) the firm has moved onto a higher isoquant.

Accepted Answer

An increase in labor costs leading to less capital use indicates that the firm is reducing its overall scale of production, suggesting the scale effect dominates over the substitution effect.

Question 7

A competitive firm uses two inputs: capital and labor.At its current level of hiring of both inputs,capital's marginal product is 12 while labor's marginal product is 18.Capital's cost (C)is $8 per unit while labor's cost (W)is $9.In the long run,to produce the same output at a lower cost,the firm should
A) hire more labor and less capital.
B) hire less labor and less capital.
C) hire more labor and more capital.
D) hire less labor and more capital.

Accepted Answer

The firm should hire more labor and less capital because the marginal product of labor is higher than the marginal product of capital, and the cost of labor is lower than the cost of capital.

Question 8

If a firm hires another unit of labor,output goes up by 12 units.The wage rate for the unit of labor is $6.What is the firm's cost of producing another unit of output using labor?
A) $18
B) $9
C) $1.50
D) $0.50

Accepted Answer

The answer of If a firm hires another unit of...

Question 9

The marginal income associated with a unit of input is found by
A) multiplying the additional output produced by the unit of input and the additional revenue generated per unit of physical output.
B) dividing total income generated by the number of units of output produced.
C) multiplying the price that the good sells for by the additional revenue generated per unit of physical output.
D) dividing the change in output produced by the change in units of the input employed.

Accepted Answer

The marginal income associated with a unit of input is the additional revenue generated per unit of physical output. This can be found by multiplying the additional output produced by the unit of input and the additional revenue generated per unit of physical output.

Question 10

Consider the short run production function for a hypothetical restaurant shown in the table.Cooks are equally talented and hardworking.The MPL column in the table illustrates
A) that firms tend to hire the best workers first.
B) the law of supply.
C) diminishing marginal returns in labor that derives from the fact that as employment expands cooks have less capital per person to work with.
D) increasing returns to scale followed by decreasing returns to scale, which is a fundamental empirical proposition in economics.

Accepted Answer

The MPL column in the table illustrates diminishing marginal returns in labor, which means that as employment expands, cooks have less capital per person to work with. This is due to the fixed amount of kitchen space and equipment. Therefore, each additional cook added leads to a smaller increase in output. This is a common phenomenon in production functions and is known as the law of diminishing marginal returns. Option A is not relevant to the information provided in the table. Option B is not related to the MPL column. Option D is not applicable as the table only shows short-run production function and does not allow for analysis of scale.

Question 11

Studies show that most of a payroll tax is paid by workers in the form of lowered wages.If true,these studies imply
A) the supply of labor curve is very steep.
B) the supply of labor curve is very flat.
C) it would be better if employers were made to pay all of the tax.
D) the demand for labor curve is very steep.

Accepted Answer

The implication that most of a payroll tax is paid by workers in the form of lowered wages suggests that the supply of labor is relatively inelastic (steep), indicating that workers are not able to easily reduce the amount of labor they supply in response to the tax.

Question 12

In the short run,
A) a firm cannot hire new workers.
B) wage rates and product prices cannot change.
C) a firm cannot add on to an assembly line or introduce new machines to the production process.
D) employment levels cannot change.

Accepted Answer

In the short run, firms are limited in their ability to adjust all factors of production. They can typically change the level of labor employed but cannot easily add to their capital stock, such as expanding an assembly line or introducing new machinery, due to time and cost constraints.

Question 13

If employers are paid a subsidy of $0.75 per hour for hiring teenaged workers,then
A) the teenagers' wage rate will usually increase by less than $0.75 per hour.
B) the teenagers' wage rate will usually increase by more than $0.75 per hour.
C) the teenagers' wage rate will usually increase by exactly $0.75 per hour.
D) the teenagers' wage rate will usually decrease.

Accepted Answer

The subsidy paid to employers reduces the cost of hiring teenaged workers, which may allow them to offer higher wages to attract more workers. However, the amount of the wage increase is unlikely to be an exact match to the subsidy amount. Other factors, such as the availability of other job options or the skills and experience of the teenagers, will also influence the wage rate. Therefore, it is likely that the teenagers' wage rate will increase by less than $0.75 per hour, making choice A the best option.

Question 14

All of the following firms are producing on the same output isoquant.Which firm will use the most labor?
A) Wage $120; Hourly Price of Capital $240
B) Wage $60; Hourly Price of Capital $40
C) Wage $6; Hourly Price of Capital $2
D) Wage $15; Hourly Price of Capital $15

Accepted Answer

The answer of All of the following firms are producing...

Question 15

When a competitive firm hired nine workers,its profits were $100.When it hired 10 workers,its output went from 9 to 11 units.Each unit of output sold for $10 while the wage of each worker was $12.What is the firm's new profit level?
A) $20
B) $8
C) $108
D) $12

Accepted Answer

First, we need to find the firm's marginal product of labor (MPL):
MPL = (change in output) ÷ (change in labor)
MPL = (11 - 9) ÷ (10 - 9) = 2

Since each unit of output sells for $10, the firm's total revenue from producing 11 units is:
Total revenue = Price x Quantity = $10 x 11 = $110

Next, we need to calculate the firm's total cost:
Total cost = Total wage cost + Total variable cost
Total wage cost = Wage per worker x Number of workers = $12 x 10 = $120
Total variable cost = Total cost - Total fixed cost = (9 workers' output x $10 per unit) - $100 = $-10

Notice that total variable cost comes out to be negative. This is because the firm's total cost decreases when it hires an additional worker (since the MPL is greater than the wage rate). This implies that the firm should continue to hire workers until the MPL = wage rate.

Finally, we can calculate the firm's profit:
Profit = Total revenue - Total cost = $110 - ($120 + $(-10)) = $110 + $10 = $120

Since the original profit level was $100, the firm's new profit level is $120 - $100 = $20 more. Therefore, the correct answer is C.

Question 16

When the price of capital increases,a firm will
A) employ more labor because labor has become relatively cheaper.
B) employ less labor due to the increase in costs.
C) employ the same amount of labor.
D) employ more, less, or the same amount of labor.

Accepted Answer

The answer of When the price of capital increases,a firm...

Question 17

If skilled workers are gross complements with low-skilled immigrant labor,then,when there is an increase in low-skilled immigrant labor,
A) skilled workers wages will go down but their employment will go up.
B) skilled workers wages will go down and their employment will go down.
C) skilled workers wages will go up and their employment will go up.
D) skilled workers wages will go up and their employment will go down.

Accepted Answer

When skilled workers are gross complements with low-skilled immigrant labor, an increase in low-skilled immigrant labor makes skilled workers more productive or in higher demand, leading to increases in both their wages and employment.

Question 18

If labor costs twice as much as capital (per unit),then,in the long run,
A) labor will be half as productive as capital.
B) labor's marginal product will be twice that of capital.
C) the firm will hire twice as much labor as capital.
D) the firm will hire less labor and more capital.

Accepted Answer

The law of diminishing marginal returns states that as additional units of a variable resource are added to a fixed resource, the marginal product of the variable resource eventually decreases. Therefore, if labor costs twice as much as capital, the firm will substitute capital for labor until the marginal product of labor is twice that of capital. Thus, choice B is the best answer.

Question 19

If the firm operates in a competitive labor market,
A) it faces a positively sloped labor supply curve, and the marginal expense of labor is less than the market wage.
B) it faces a horizontal labor supply curve, and the marginal expense of labor equals the market wage.
C) it must compete against other employers by offering a generous compensation package.
D) it faces a vertical labor supply curve, and it competes against other employers by moving to the lowest attainable point on the labor supply curve.

Accepted Answer

In a competitive labor market, firms face a horizontal labor supply curve because they are wage takers, meaning they can hire as many workers as they want at the market wage. Therefore, the marginal expense of labor equals the market wage.

Question 20

The marginal product of an individual
A) depends on the number of similar workers that the firm employs as well as on the size of the firm's capital stock.
B) is solely a function of the worker's personal characteristics.
C) is a poorly defined concept because individual effort is difficult to identify and measure.
D) initially decreases but ultimately increases beyond the minimum effort level.

Accepted Answer

The marginal product of an individual worker depends on the number of similar workers and the size of the capital stock because these factors affect the availability of resources and the level of division of labor. The individual worker's personal characteristics may also influence their productivity, but they are only one part of the overall picture. The concept of marginal product is well defined and widely used in economics, and while it may vary over time or with changes in input levels, it is a useful tool for understanding how changes in labor affect output. The marginal product typically initially increases, but eventually reaches a point of diminishing returns where additional effort or resources result in proportionally less output.

Quiz 3: The Demand for Labor

Workers will bear less of a payroll tax if

A profit-maximizing firm decides to produce 100 units of output.This implies that the firm will

A worker's hourly wage is $25 and output sells for $5 a unit.What is the minimum marginal product a worker must produce in order for a competitive employer to break even when hiring the worker?

If the hourly wage is $50 and the price of output is $25,then,in the short run,

Consider a firm using three inputs: unskilled labor,skilled labor,and capital.Unskilled labor and capital are substitutes in production,while skilled labor and capital are complements in production.If the price of capital decreases,then

If an increase in the cost of labor causes the firm to use less capital,then

If a firm hires another unit of labor,output goes up by 12 units.The wage rate for the unit of labor is $6.What is the firm's cost of producing another unit of output using labor?

The marginal income associated with a unit of input is found by

Consider the short run production function for a hypothetical restaurant shown in the table.Cooks are equally talented and hardworking.The MPL column in the table illustrates

Studies show that most of a payroll tax is paid by workers in the form of lowered wages.If true,these studies imply

In the short run,

If employers are paid a subsidy of $0.75 per hour for hiring teenaged workers,then

All of the following firms are producing on the same output isoquant.Which firm will use the most labor?

When a competitive firm hired nine workers,its profits were $100.When it hired 10 workers,its output went from 9 to 11 units.Each unit of output sold for $10 while the wage of each worker was $12.What is the firm's new profit level?

When the price of capital increases,a firm will

If skilled workers are gross complements with low-skilled immigrant labor,then,when there is an increase in low-skilled immigrant labor,

If labor costs twice as much as capital (per unit) ,then,in the long run,

If the firm operates in a competitive labor market,

The marginal product of an individual