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Chapter 18



True/False
Indicate whether the statement is true or false.
 

 1. 

The factors of production are labour, land, and money.
 

 2. 

The demand for a factor is considered to be a derived demand because it is derived from the firm's decision to supply output in another market.
 

 3. 

For a competitive profit-maximizing firm, the demand curve for a factor is the value of the marginal product curve for that factor.
 

 4. 

A factor exhibits diminishing marginal productivity if employing additional units of the factor reduces output.
 

 5. 

If there is an increase in the equilibrium wage, there must have been an increase in the value of the marginal product of labour.
 

 6. 

An increase in the demand for textbooks will increase the value of the marginal product of textbook writers.
 

 7. 

A decrease in the supply of labour reduces the value of the marginal product of labour, decreases the wage, and decreases employment.
 

 8. 

The only way for the value of the marginal product of a factor to rise is for the price of the output produced by the factor to rise.
 

 9. 

An increase in the demand for pencils will likely improve the fortunes of both the pencil factory and the workers in the pencil factory.
 

 10. 

The demand for labour is downward sloping because the production function exhibits diminishing marginal productivity of labour.
 

 11. 

In equilibrium, when a competitive firm hires labour up to the point at which the value of the marginal product of labour equals the wage, it also produces up to the point at which the price equals marginal cost.
 

 12. 

An increase in the supply of capital will increase the marginal product of capital and the rental rate of capital.
 

 13. 

If capital is owned by firms as opposed to being owned directly by households, then capital income will be in the form of shares, bonds, and retained interest.
 

 14. 

The value of the marginal product of land is the marginal product of land multiplied by the price of the output produced on the land.
 

 15. 

An increase in the supply of capital decreases the value of the marginal product of capital, reduces the rental rate of capital, and decreases the value of the marginal product of labour, which reduces the wage of labour.
 

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 16. 

The most important factors of production are
a.
labour, land, and capital.
c.
money, stocks, and bonds.
b.
water, earth, and knowledge.
d.
management, finance, and marketing.
 

 17. 

If a factor exhibits diminishing marginal product, hiring additional units of the factor will
a.
cause a reduction in output.
b.
have no effect on output.
c.
increase the marginal product of the factor.
d.
generate ever smaller amounts of output.
 

 18. 

Figure 18-1

Labour (number of workers)
Output per hour
Marginal Product of Labour (MPL)
Value of MPL
0
0
  
1
5
  
2
9
  
3
12
  
4
14
  
5
15
  
   

Refer to Figure 18-1. What is the marginal product of labour as the firm moves from using three workers to using four workers?
a.
0
b.
2
c.
8
d.
12
e.
14
 

 19. 

Figure 18-1
 
Labour (number of workers)
Output per hour
Marginal Product of Labour (MPL)
Value of MPL
0
0
  
1
5
  
2
9
  
3
12
  
4
14
  
5
15
  
   

Refer to Figure 18-1. If the price of output is €4 per unit, what is the value of the marginal product of labour as the firm moves from using four workers to using five workers?
a.
€4
b.
€8
c.
€12
d.
€56
e.
€60
 

 20. 

Figure 18-1
 
Labour (number of workers)
Output per hour
Marginal Product of Labour (MPL)
Value of MPL
0
0
  
1
5
  
2
9
  
3
12
  
4
14
  
5
15
  
   
Refer to Figure 18-1. If this profit-maximizing firm sells its output in a competitive market for €3 per unit and hires labour in a competitive market for €8/hour, then this firm should hire
a.
one worker.
b.
two workers.
c.
three workers.
d.
four workers.
e.
five workers.
 

 21. 

The value of the marginal product of labour is the
a.
price of the output times the wage of labour.
b.
price of the output times the marginal product of labour.
c.
value of the output of all units of labour employed.
d.
wage of labour times the quantity of labour.
e.
wage of labour times the marginal product of labour.
 

 22. 

For a competitive, profit-maximizing firm, the value-of-the-marginal-product curve for capital is the firm's
a.
supply curve of capital.
c.
production function.
b.
demand curve for capital.
d.
marginal cost curve.
 

 23. 

An increase in the supply of labour
a.
increases the value of the marginal product of labour and decreases the wage.
b.
decreases the value of the marginal product of labour and decreases the wage.
c.
decreases the value of the marginal product of labour and increases the wage.
d.
increases the value of the marginal product of labour and increases the wage.
 

 24. 

A decrease in the demand for fish
a.
decreases the value of the marginal product of fishermen, reduces their wage, and reduces employment in the fishing industry.
b.
increases the value of the marginal product of fishermen, increases their wage, and increases employment in the fishing industry.
c.
decreases the value of the marginal product of fishermen, reduces their wage, and increases employment in the fishing industry.
d.
increases the value of the marginal product of fishermen, increases their wage, and decreases employment in the fishing industry.
 

 25. 

What will a decrease in the supply of fishermen do to the market for capital employed in the fishing industry?
a.
increase the demand for fishing boats and decrease rental rates on fishing boats
b.
decrease the demand for fishing boats and increase rental rates on fishing boats
c.
decrease the demand for fishing boats and decrease rental rates on fishing boats
d.
increase the demand for fishing boats and increase rental rates on fishing boats
 

 26. 

An increase in the demand for apples will cause all but which of the following?
a.
a decrease in the number of apple pickers employed
b.
an increase in the value of the marginal product of apple pickers
c.
an increase in the price of apples
d.
an increase in the wage of apple pickers
 

 27. 

A decrease in the supply of farm tractors will cause all but which of the following?
a.
an increase in the rental rate for tractors
b.
a decrease in the rental rate of farmland
c.
an increase in the value of the marginal product of tractors
d.
an increase in the wage of farm workers
 

 28. 

If both input and output markets are competitive and firms are profit maximizing, then in equilibrium each factor of production earns
a.
an amount equal to the price of output times total output.
b.
the amount allocated by the political process.
c.
an equal share of output.
d.
the value of its marginal product.
 

 29. 

An individual firm's demand for a factor of production
a.
slopes downward because an increase in the production of output reduces the price at which the output can be sold in a competitive market, thereby reducing the value of the marginal product as more of the factor is used.
b.
slopes downward due to the factor's diminishing marginal product.
c.
slopes upward due to the factor's increasing marginal product.
d.
is perfectly elastic (horizontal) if the factor market is perfectly competitive.
 

 30. 

An increase in the demand for a firm's output
a.
decreases the prosperity of the firm but increases the prosperity of the factors hired by the firm.
b.
decreases the prosperity of both the firm and the factors hired by the firm.
c.
increases the prosperity of both the firm and the factors hired by the firm.
d.
increases the prosperity of the firm but decreases the prosperity of the factors hired by the firm.
 

 31. 

A competitive, profit-maximizing firm should hire workers up to the point where the
a.
wage, the rental price of capital, and the rental price of land are all equal.
b.
marginal product of labour equals zero and the production function is maximized.
c.
value of the marginal product of labour equals the wage.
d.
marginal product of labour equals the wage.
 

 32. 

Which of the following is not true with regard to workers who have a high value of marginal product? These workers
a.
have skills that are in relatively scarce supply.
b.
produce output for which there is great demand.
c.
usually have little capital with which to work.
d.
are usually highly paid.
 

 33. 

An increase in the price of automobiles shifts the demand for autoworkers to the
a.
right and increases the wage.
c.
left and decreases the wage.
b.
right and decreases the wage.
d.
left and increases the wage.
 

 34. 

When capital is owned by the firm as opposed to being directly owned by households, capital income may take any of the following forms except
a.
interest.
c.
retained earnings.
b.
dividends.
d.
increases in stocks of goods.
 

 35. 

Suppose that a war is fought with biological weapons. The weapons destroy people but not capital. What is likely to happen to equilibrium wages and rental rates after the war when compared to their values before the war?
a.
Wages rise and rental rates fall.
c.
Wages fall and rental rates rise.
b.
Wages rise and rental rates rise.
d.
Wages fall and rental rates fall.
 



 
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