Chapter 18/The Market For the Factors of Production ❖ 75
40. “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
41. 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.
42. Suppose that an industrial accident at a factory destroys a significant number of high-speed blenders that bar-
tenders 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.
43. 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.
76 ❖ Chapter 18/The Market For the Factors of Production
44. Suppose that a college physics experiment goes horribly wrong and releases an electronic pulse that renders all
electronic equipment in the city of San Francisco, California permanently useless. No people are hurt, and no
buildings are damaged. After the accident, the wages earned by California workers will
a.
increase because the marginal productivities of workers will increase.
b.
decrease because the marginal productivities of workers will decrease.
c.
decrease because the marginal productivities of workers will increase.
d.
increase because the marginal productivities of workers will decrease.
45. 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.
46. 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.
47. 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.
48. 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.
Chapter 18/The Market For the Factors of Production ❖ 77
49. 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.
50. 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.
51. Suppose that the labor market for high school chemistry teachers is initially in equilibrium. Chemistry teach-
ers 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 teach-
ers 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.
52. Suppose that the labor market for high school chemistry teachers is initially in equilibrium. Chemistry teach-
ers 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 teach-
ers 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.
53. 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.
78 ❖ Chapter 18/The Market For the Factors of Production
54. 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.
55. 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.
56. Suppose that due to flooding in Louisiana, 100,000 farmers relocate from Louisiana to Texas. 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 Texas?
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.
57. 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.
58. 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.
Chapter 18/The Market For the Factors of Production ❖ 79
59. 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.
60. 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.
61. 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.
62. 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.
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.
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.
80 ❖ Chapter 18/The Market For the Factors of Production
3. According to the neoclassical theory of distribution, the wages paid to John Deere tractor assembly line work-
ers 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.
TRUE/FALSE
1. A firm’s demand for labor is derived from its decision to supply a good in another market.
2. In 2010, the total income of all U.S. residents was approximately $120 billion.
3. In 2010, the total income of all U.S. residents was approximately $15 trillion.
4. Land, labor, and capital are examples of factors of production.
5. Stock dividends and interest payments are examples of factors of production.
6. The quantity available of one factor of production can affect the marginal product of other factors.
7. If the marginal productivity of the sixth worker hired is less than the marginal productivity of the fifth worker
hired, then the addition of the sixth worker causes total output to decline.
8. Let L represent the quantity of labor, and let Q represent the quantity of output. Suppose a certain production
function includes the points (L = 7, Q = 27), (L = 8, Q = 35), and
(L = 9, Q = 45). Based on these three points, this production function exhibits diminishing marginal product.
Chapter 18/The Market For the Factors of Production ❖ 81
9. If a firm is able to charge a higher price for its output, all else equal, the value of the marginal product of labor
will decrease to offset the higher price.
10. Daryn is raking leaves to earn money for his university’s economics club. In the first hour, he rakes 8 bags of
leaves. In the second hour, he rakes 6 bags of leaves. If he earns $8 per hour, the value of the marginal prod-
uct of the second hour of labor is $48.
11. Daryn is raking leaves to earn money for his university’s economics club. In the first hour, he rakes 8 bags of
leaves. In the second hour, he rakes 6 bags of leaves. If he earns $8 per hour, the value of the marginal prod-
uct of the second hour of labor is $16.
12. In a competitive market for labor, the equilibrium wage always equals the value of the marginal product.
13. In order to calculate the value of the marginal product of labor, a manager must know the marginal product of
labor and the wage rate of the worker.
14. The value of the marginal product of labor can be calculated as the price of the final good minus the marginal
product of labor.
15. The value of the marginal product of capital can be calculated as the market price of the good multiplied by
the marginal product of capital.
16. For competitive firms, the curve that represents the value of marginal product of labor is the same as the de-
mand for labor curve.
17. A profit-maximizing competitive firm will hire workers up to the point at which the wage equals the price of
the final good.
82 ❖ Chapter 18/The Market For the Factors of Production
18. A profit-maximizing competitive firm will hire workers up to the point at which the wage equals the marginal
product of labor.
19. When a competitive firm hires labor up to the point at which the value of the marginal product of labor equals
the wage, it also produces up to the point at which the price of output equals average variable cost.
20. The demand for computer programmers is inseparably tied to the supply of computer software.
21. If Firm X is a competitive firm in the market for labor, it has little influence over the wage it pays its employ–
ees.
22. The idea that rational employers think at the margin is central to understanding how many units of labor they
choose to employ.
23. Technological advances can cause the labor demand curve to shift.
24. In the United States, technological advances help explain persistently rising employment in the face of rising
wages.
25. The term Luddite refers to “tekkies” or people who are the first to adopt new technological advances.
26. Labor-saving technological advances increase the marginal productivity of labor.
27. Labor-augmenting technological advances increase the marginal productivity of labor.
Chapter 18/The Market For the Factors of Production ❖ 83
28. An increase in the output price will increase the firm’s demand for labor, all else equal.
29. Labor-saving technological advances decrease the marginal productivity of labor.
30. Labor-augmenting technological advances decrease the marginal productivity of labor.
31. An increase in a product’s price will shift the labor demand curve for workers who produce that product to the
left.
32. From 1959 to 2009, inflation-adjusted wages increased by 131 percent in the U.S. As a result, firms reduced
the amount of labor they employed by nearly 20 percent.
33. An increase in the wages paid to high-school student who detassle corn will increase the labor supply of high–
school students who weed soybean fields, all else equal.
34. The labor-supply curve is affected by the trade-off between labor and leisure.
35. The opportunity cost of leisure is impossible to measure because we cannot measure leisure time in dollars.
36. The labor supply curve reflects how workers’ decisions about the labor-leisure tradeoff respond to changes in
the opportunity cost of leisure.
37. Ellen receives a raise at her current part-time job from $8 to $10 per hour. If her labor supply curve is upward
sloping, she will work fewer hours after receiving the pay raise.
84 ❖ Chapter 18/The Market For the Factors of Production
38. Jessica receives a raise at her current part-time job from $9 to $11 per hour. If her labor supply curve is back-
ward sloping, she will work fewer hours after receiving the pay raise.
39. Labor supply curves are always upward sloping.
40. When an individual’s income goes up, that individual may choose to supply less labor, resulting in a back-
ward-sloping labor supply curve.
41. The supply of labor in any one market depends on the opportunities available in other markets.
42. Movements of workers from country to country can cause shifts in the labor supply curves for both countries.
43. If the demand for labor in a particular industry increases, the equilibrium wage in that industry will also in-
crease.
44. An increase in immigration will lower the equilibrium wage, all else held constant.
45. As the number of concrete workers in the United States falls, the wage paid to the remaining concrete workers
will necessarily fall as well.
46. If men’s preferences for work change such that more men want to be stay–at-home fathers, the wages paid to
men who remain in the workplace would rise, all else equal.
47. Oil field workers’ wages are directly tied to the world price of oil.
Chapter 18/The Market For the Factors of Production ❖ 85
48. Changes in supply and demand in the labor market will cause changes in wages.
49. In general, less productive workers are paid less than more productive workers.
50. If the demand for labor decreases and the supply of labor is unchanged, then the opportunity cost of leisure
will decrease.
51. Profit maximization by firms ensures that the equilibrium wage always equals the value of the marginal prod-
uct of capital.
52. Increases in productivity are not responsible for increased standards of living in the United States.
53. Average productivity can be measured as total output divided by total units of labor.
54. For a snow-removal business, the capital stock would include inputs such as snow blowers and shovels.
55. When a firm decides to retain its earnings instead of paying dividends, the stockholders necessarily suffer.
56. Capital owners are compensated according to the value of the marginal product of that capital.
57. If the output price of a product rises, the demand for capital will increase, raising the rental price of capital.
58. Suppose the supply of capital decreases. As a result, the quantity of capital used in production and the rental
price of capital will both fall.
86 ❖ Chapter 18/The Market For the Factors of Production
59. The rental price of capital is the price a person pays to own the capital indefinitely.
60. Capital income does not include income paid to households for the use of their capital.
61. Firms pay out a portion of their earnings in the form of interest and dividends, and those payments are a por-
tion of the economy’s capital income.
62. The marginal product of land depends on the quantity of land that is available.
63. Suppose an influenza pandemic were to significantly decrease the population of a country. We would predict
a decrease in the marginal product of land in that country.
64. For profit-maximizing, competitive firms, the demand curve for each factor of production equals the value of
the marginal product of that factor.
65. A change in the supply of any one factor alters the earnings of all the other factors.
66. An event that changes the supply of any factor of production can alter the earnings of all the factors.
SHORT ANSWER
1. Describe the difference between a diminishing marginal product of labor and a negative marginal product of
labor. Why would a profit-maximizing firm always choose to operate where the marginal product of labor is
decreasing (but not negative)?
Chapter 18/The Market For the Factors of Production ❖ 87
2. Explain how a firm values the contribution of workers to its profitability. Would a profit-maximizing competi-
tive firm ever stop increasing employment as long as marginal product is rising? Explain your answer.
3. In the 1980s, the dangerous Ebola virus entered the United States through contaminated monkeys that were
imported for use in medical experiments. Suppose this virus had not been contained but had spread to the gen-
eral population. Assume that the virus is lethal in half of the people who are exposed to it. Describe the result-
ing effect on labor productivity.
4. Using the theory of wage determination, explain why wages in developing countries, where levels of capital
are small, are typically quite low.
5. A recent flood in the Midwest has destroyed much of the farmland that lies in fertile regions near the rivers.
Describe the effect of the flood on the marginal productivity of land, labor, and capital. How would the flood
affect the price of inputs? Provide some examples.
88 ❖ Chapter 18/The Market For the Factors of Production
6. Describe the process by which the market for capital and the market for land reach equilibrium. As part of
your description, elaborate on the role of the stock of the resource versus the flow of services from the re-
source.
7. Describe the difference between the purchase price of capital and the rental price of capital. If you know the
value of marginal product from the flow of capital services, how would you determine the market price for the
capital stock?