The Markets for the Factors of Production 4659
28. Assume all capital is owned by firms, rather than by households. Under this assumption, capital is
paid according to the value of its marginal product
a. only if this income is transmitted to households in the form of interest.
b. only if this income is transmitted to households in the form of dividends.
c. only if this income is transmitted to households in the form of interest or dividends.
d. regardless of whether this income is transmitted to households in the form of interest or
dividends or whether it is kept within firms as retained earnings.
29. Suppose that a violent earthquake causes the uninhabited Hawaiian island of Mokuauia (also
called Goat Island) to fall into the Pacific Ocean. No people are killed or injured, and since the
island is undeveloped, no buildings are destroyed. The island was a source of tourist income for
Hawaiian landowners. Which of the following statements correctly describes the rents earned by
the people who own land on the surrounding islands?
a. As the supply of vacation land decreases, the marginal productivity of the remaining land will
decrease; thus rents will decrease.
b. As the supply of vacation land decreases, the marginal productivity of the remaining land will
increase; thus, rents will decrease.
c. As the supply of vacation land decreases, the marginal productivity of the remaining land will
increase; thus, rents will increase.
d. There would be no change in the rents earned by the other landowners because the effects of
supply and demand would exactly cancel each other out.
4660 The Markets for the Factors of Production
30. The rental price of land is
a. the price paid for ownership of the land.
b. the price paid for the flow of services from land over a specified time period.
c. always more than the purchase price.
d. All of the above are correct.
31. Owners of land are compensated according to the
a. absolute level of production from the land.
b. number of laborers the land can support.
c. purchase price of the land stock.
d. value of the marginal product of land.
The Markets for the Factors of Production 4661
32. Suppose the government designates certain areas within a community to be “wetlands,” making it
illegal to build on the land. What happens to land not classified as “wetlands” within the
community?
(i) The price of non-wetland land will rise.
(ii) The marginal product of non–wetland land will fall.
(iii) The marginal product of non-wetland land will rise.
a. (i) and (ii) only
b. (ii) only
c. (i) and (iii) only
d. (iii) only
33. As a result of a labeling mistake at the chemical factory, a farmer accidentally sprays weedkiller
rather than fertilizer on half her land. As a result, she loses half of her productive farmland. If the
property of diminishing returns applies to all factors of production, she should expect to see the
marginal productivity of her remaining land
a. increase.
b. remain unchanged.
c. decrease but remain positive.
d. decrease and become negative.
4662 The Markets for the Factors of Production
34. As a result of a labeling mistake at the chemical factory, a farmer accidentally sprays weedkiller
rather than fertilizer on half her land. As a result, she loses half of her productive farmland. If the
property of diminishing returns applies to all factors of production, she should expect to see
a. an increase in the marginal productivity of her remaining land and an increase in the marginal
productivity of her labor.
b. an increase in the marginal productivity of her remaining land and a decrease in the marginal
productivity of her labor.
c. a decrease in the marginal productivity of her remaining land and an increase in the marginal
productivity of her labor.
d. a decrease in the marginal productivity of her remaining land and a decrease in the marginal
productivity of her labor.
35. The equilibrium rental income paid to landowners at any point in time equals the
a. purchase price of land.
b. value of the marginal product of land.
c. marginal product of land.
d. wage paid to laborers.
The Markets for the Factors of Production 4663
36. The current value of the marginal product of land influences the
a. demand for land.
b. equilibrium rental price of land.
c. equilibrium purchase price of land.
d. all of the above.
37. Consider the market for land. Suppose the value of the marginal product of land decreases.
Holding all else constant, the equilibrium rental price for land will
a. increase.
b. decrease.
c. not change.
d. It is not possible to determine what will happen to the equilibrium rental rate.
4664 The Markets for the Factors of Production
38. The marginal product of any factor of production depends on
a. the quantity of the factor used.
b. the price of the final good.
c. the demand for the final good.
d. All of the above are correct.
39. Rent, interest, and profit are all forms of income paid to the owners of
a. aggregate stock.
b. aggregate demand.
c. firms and not–for-profit organizations.
d. land and capital.
40. Because of diminishing returns, a factor in abundant supply has a
a. high marginal product and a high rental price.
b. high marginal product and a low rental price.
c. low marginal product and a high rental price.
d. low marginal product and a low rental price.
The Markets for the Factors of Production 4665
41. Because of diminishing returns, a factor in relatively low supply has a
a. low marginal product and a low rental price.
b. low marginal product and a high rental price.
c. high marginal product and a low rental price.
d. high marginal product and a high rental price.
42. A change in the supply of one factor of production
a. will not change either the marginal productivities or the prices of other factors.
b. will not change the prices of other factors, but it may change their marginal productivities.
c. will not change the marginal productivities of other factors, but it may change their prices.
d. changes the marginal productivities and the prices of other factors.
43. The distinction between purchase price and rental price applies to which factor(s) of production?
a. land only
b. capital only
c. land and capital only
d. land, capital, and labor
4666 The Markets for the Factors of Production
44. “The firm hires the factor up to the point where the value of the factor’s marginal product is equal
to the factor’s price.” This statement applies to which factor of production?
a. labor only
b. land only
c. capital only
d. land, labor, and capital
45. As a result of a fire, a small business owner loses some of her computers and other equipment. If
the property of diminishing returns applies to all factors of production, she should expect to see
a. an increase in the marginal productivity of her remaining capital and an increase in the marginal
productivity of her labor.
b. an increase in the marginal productivity of her remaining capital and a decrease in the marginal
productivity of her labor.
c. a decrease in the marginal productivity of her remaining capital and an increase in the marginal
productivity of her labor.
d. a decrease in the marginal productivity of her remaining capital and a decrease in the marginal
productivity of her labor.
The Markets for the Factors of Production 4667
46. Suppose that an industrial accident at a factory destroys a significant number of high-speed
blenders that bartenders use to mix frozen drinks. What will happen in the labor market for
bartenders?
a. Both wages and employment will increase.
b. Both wages and employment will decrease.
c. Wages will increase, and employment will decrease.
d. Wages will decrease, and employment will increase.
47. Which of the following statements is correct?
a. The market for capital is unlike the market for labor because the rental price of capital is
unaffected by the marginal product of capital, whereas the price of labor is affected by the
marginal product of labor.
b. The market for capital is unlike the market for labor because the purchase price of capital is
unaffected by the marginal product of capital, whereas the price of labor is affected by the
marginal product of labor.
c. The market for capital is like the market for labor because the rental price of capital is affected
by the marginal product of capital, and the price of labor is affected by the marginal product of
labor.
d. Both a and b are correct.
4668 The Markets for the Factors of Production
48. Suppose that a college physics experiment goes horribly wrong and releases an electronic pulse
that renders all electronic equipment in the cities of Columbus, Cleveland and Cincinnati, Ohio
permanently useless. No people are hurt, and no buildings are damaged. After the accident, the
wages earned by Ohio workers will
a. increase because the marginal productivities of Ohio workers will increase.
b. decrease because the marginal productivities of Ohio workers will decrease.
c. decrease because the marginal productivities of Ohio workers will increase.
d. increase because the marginal productivities of Ohio workers will decrease.
49. Suppose that a large tornado destroys the fleet of fire trucks for the city of Omaha, Nebraska.
What happens to the earnings of firefighters in Omaha?
a. The reduction in the supply of fire trucks reduces the marginal productivities of Omaha
firefighters, which causes the equilibrium wage to fall.
b. The reduction in the supply of fire trucks increases the marginal productivities of Omaha
firefighters, which causes the equilibrium wage to fall.
c. The reduction in the supply of fire trucks reduces the marginal productivities of Omaha
firefighters, which causes the equilibrium wage to rise.
d. The reduction in the supply of fire trucks increases the marginal productivities of Omaha
firefighters, which causes the equilibrium wage to rise.
The Markets for the Factors of Production 4669
50. Suppose that a large rogue wave destroys the (thankfully unoccupied) fleet of swordfish fishing
boats docked in the Gloucester, Massachusetts harbor. What happens to the earnings of fishermen
and women in Gloucester?
a. The reduction in the supply of fishing boats increases the marginal productivities of Gloucester
fishermen and women, which causes the equilibrium wage to fall.
b. The reduction in the supply of fishing boats reduces the marginal productivities of Gloucester
fishermen and women, which causes the equilibrium wage to fall.
c. The reduction in the supply of fishing boats increases the marginal productivities of Gloucester
fishermen and women, which causes the equilibrium wage to rise.
d. The reduction in the supply of fishing boats reduces the marginal productivities of Gloucester
fishermen and women, which causes the equilibrium wage to rise.
51. Suppose that the labor market for life guards is initially in equilibrium. Then the marginal
productivity of life guards increases. What happens to the equilibrium wage and quantity of life
guards?
a. Both the equilibrium wage and quantity increase.
b. Both the equilibrium wage and quantity decrease.
c. The equilibrium wage increases, and the equilibrium quantity decreases.
d. The equilibrium wage decreases, and the equilibrium quantity increases.
4670 The Markets for the Factors of Production
52. Suppose that the labor market for life guards is initially in equilibrium. Then swimming pool
owners adopt a new labor-saving technology that uses computers to monitor the locations of
swimmers in the pool. What happens to the equilibrium wage and quantity of life guards?
a. Both the equilibrium wage and quantity increase.
b. Both the equilibrium wage and quantity decrease.
c. The equilibrium wage increases, and the equilibrium quantity decreases.
d. The equilibrium wage decreases, and the equilibrium quantity increases.
53. Suppose that the labor market for life guards is initially in equilibrium. Then a new television series
debuts which glamorizes the social opportunities for life guards. What happens to the equilibrium
wage and quantity of life guards?
a. Both the equilibrium wage and quantity increase.
b. Both the equilibrium wage and quantity decrease.
c. The equilibrium wage increases, and the equilibrium quantity decreases.
d. The equilibrium wage decreases, and the equilibrium quantity increases.
The Markets for the Factors of Production 4671
54. Suppose that the labor market for life guards is initially in equilibrium. Whistles are an important
safety tool that life guards use as a part of their jobs. A fire destroys the largest factory that
produces whistles. What happens to the equilibrium wage and quantity of life guards?
a. Both the equilibrium wage and quantity increase.
b. Both the equilibrium wage and quantity decrease.
c. The equilibrium wage increases, and the equilibrium quantity decreases.
d. The equilibrium wage decreases, and the equilibrium quantity increases.
55. Suppose that the labor market for life guards is initially in equilibrium. Whistles are an important
safety tool that life guards use as a part of their jobs. A fire destroys the largest factory that
produces whistles. In the market for life guards the equilibrium wage
a. increases because the marginal productivity of life guards increases.
b. decreases because the marginal productivity of life guards decreases.
c. increases because the supply of life guards increases.
d. decreases because the supply of life guards decreases.
4672 The Markets for the Factors of Production
56. Suppose that the labor market for high school chemistry teachers is initially in equilibrium.
Chemistry teachers use laboratory chemicals as an important part of their jobs. New
environmental regulations ban the use of many chemicals, which means that fewer laboratory
chemicals are available for high school chemistry teachers to use in their jobs. What happens to
the equilibrium wage and quantity of high school chemistry teachers?
a. Both the equilibrium wage and quantity increase.
b. Both the equilibrium wage and quantity decrease.
c. The equilibrium wage increases, and the equilibrium quantity decreases.
d. The equilibrium wage decreases, and the equilibrium quantity increases.
57. Suppose that the labor market for high school chemistry teachers is initially in equilibrium.
Chemistry teachers use laboratory chemicals as an important part of their jobs. New
environmental regulations ban the use of many chemicals, which means that fewer laboratory
chemicals are available for high school chemistry teachers to use in their jobs. In the market for
high school chemistry teachers, the equilibrium wage
a. increases because the marginal productivity of high school chemistry teachers increases.
b. decreases because the marginal productivity of high school chemistry teachers decreases.
c. increases because the supply of high school chemistry teachers increases.
d. decreases because the supply of high school chemistry teachers decreases.
The Markets for the Factors of Production 4673
58. A decrease in population can be expected to
a. increase the marginal product of land.
b. decrease the supply of land.
c. decrease the rents on land.
d. increase the demand for land.
59. An increase in population can be expected to
a. increase the marginal product of land.
b. decrease the supply of land.
c. decrease the rents on land.
d. decrease the demand for land.
4674 The Markets for the Factors of Production
60. Suppose that a rare virus infects and kills a significant percentage of the population. Assuming
that land and labor are complements in a farming production function, what would happen to the
wages earned by workers and the rents earned by landowners?
a. Both wages and rents would increase.
b. Both wages and rents would decrease.
c. Wages would increase, and rents would decrease.
d. Wages would decrease, and rents would increase.
61. Suppose that due to a severe drought in Texas, 100,000 farmers relocate from Texas to Louisiana.
Assuming that land and labor are complements in a farming production function, what would
happen to the wages earned by workers and the rents earned by landowners in Louisiana?
a. Both wages and rents would increase.
b. Both wages and rents would decrease.
c. Wages would increase, and rents would decrease.
d. Wages would decrease, and rents would increase.
The Markets for the Factors of Production 4675
62. Suppose that a toxic waste spill renders half of the land in New Jersey uninhabitable. Assuming
that land and labor are complements in the production function, what would happen to the wages
earned by workers and rents earned by landowners?
a. Both wages and rents would increase.
b. Both wages and rents would decrease.
c. Wages would increase, and rents would decrease.
d. Wages would decrease, and rents would increase.
63. Suppose that a large lake in the middle of Minnesota evaporates, leaving more fertile farm land
for growing corn available. Assuming that land and labor are complements in a farming production
function, what would happen to the wages earned by workers and rents earned by landowners?
a. Both wages and rents would increase.
b. Both wages and rents would decrease.
c. Wages would increase, and rents would decrease.
d. Wages would decrease, and rents would increase.
4676 The Markets for the Factors of Production
64. The effect of the Black Death in 14th-century Europe was to
a. decrease wages.
b. increase land rents.
c. reduce income inequality between peasants and the landed classes.
d. Both a) and b) are correct.
65. The Black Death in fourteenth-century Europe resulted in
a. a lower marginal product of land.
b. a lower marginal product of labor of surviving workers.
c. economic hardship for surviving peasants.
d. economic prosperity for surviving landowners.
66. The Black Death in fourteenth-century Europe resulted in
a. a lower marginal product of labor of surviving workers.
b. a higher marginal product of labor of surviving workers.
c. economic hardship for surviving peasants.
d. economic prosperity for surviving landowners.
The Markets for the Factors of Production 4677
67. The Black Death in fourteenth-century Europe resulted in
a. a lower marginal product of labor of surviving workers.
b. a higher marginal product of land.
c. economic hardship for surviving peasants.
d. economic hardship for surviving landowners.
Multiple Choice – Section 05: Conclusion
1. According to the neoclassical theory of distribution, the wages paid to workers
a. reflect the market prices of the goods those workers produce.
b. reflect the degree of market power held by the firms that pay those wages.
c. fail to reflect those workers’ opportunity costs of leisure.
d. are unrelated to the forces of supply and demand.
4678 The Markets for the Factors of Production
2. According to the neoclassical theory of distribution, the wages paid to workers depend on the
a. supply of labor.
b. demand for labor.
c. marginal productivity of labor.
d. All of the above are correct.
3. According to the neoclassical theory of distribution, the wages paid to John Deere tractor assembly
line workers are higher than those paid to fast food workers because assembly line workers
a. have college degrees, on average, whereas fast food workers usually do not.
b. produce a product of greater market value than do fast food workers.
c. work in a less stressful environment than do fast food workers.
d. are less likely to belong to a labor union than are fast food workers.