Chapter 18/The Market For the Factors of Production ❖ 61
Figure 18-10
37. Refer to Figure 18-10. When the relevant labor demand curve is D1 and the labor market is in equilibrium,
a.
the value of the marginal product of labor to firms is less than W1.
b.
the opportunity cost of leisure to workers is greater than W1.
c.
the wage is W1.
d.
All of the above are correct.
38. Refer to Figure 18-10. Which of the following would shift of the labor demand curve from D1 to D2?
a.
technological progress
b.
an increase in the price of firms’ output
c.
an increase in the supply of a relevant factor of production other than labor
d.
All of the above are correct.
39. Refer to Figure 18-10. Which of the following would shift of the labor demand curve from D1 to D2?
a.
a change in workers’ attitudes toward the work-leisure tradeoff
b.
decreases in wages in other labor markets
c.
an increase in the price of firms’ output
d.
All of the above are correct.
40. Refer to Figure 18-10. Assume W1 = $20 and W2 = $22, and the market is always in equilibrium. A shift of
the labor demand curve from D1 to D2 would
a.
increase the value of the marginal product of labor by $2.
b.
increase the value of the marginal product of labor by less than $2.
c.
decrease the value of the marginal product of labor by more than $2.
d.
not change the value of the marginal product of labor.
62 ❖ Chapter 18/The Market For the Factors of Production
41. Refer to Figure 18-10. If the relevant labor demand curve is D2 and the current wage is W1,
a.
there is a surplus of labor.
b.
there is a shortage of labor.
c.
the quantity of labor supplied exceeds the quantity of labor demanded.
d.
workers are failing to take into account the work-leisure tradeoff in deciding what quantity of labor
to supply at alternative wages.
42. Suppose that the market for labor is initially in equilibrium. An increase in the price of output will cause the
equilibrium wage
a.
and the equilibrium quantity of labor to rise.
b.
and the equilibrium quantity of labor to fall.
c.
to rise and the equilibrium quantity of labor to fall.
d.
to fall and the equilibrium quantity of labor to rise.
43. Suppose that the market for labor is initially in equilibrium. A decrease in the price of output will cause the
equilibrium wage
a.
and the equilibrium quantity of labor to rise.
b.
and the equilibrium quantity of labor to fall.
c.
to rise and the equilibrium quantity of labor to fall.
d.
to fall and the equilibrium quantity of labor to rise.
44. Suppose that the market for labor is initially in equilibrium. If the firm employs labor-augmenting technology,
the equilibrium wage
a.
and the equilibrium quantity of labor will rise.
b.
and the equilibrium quantity of labor will fall.
c.
will rise, and the equilibrium quantity of labor will fall.
d.
will fall, and the equilibrium quantity of labor will rise.
45. Suppose that the market for labor is initially in equilibrium. If the firm employs labor-saving technology, the
equilibrium wage
a.
and the equilibrium quantity of labor will rise.
b.
and the equilibrium quantity of labor will fall.
c.
will rise, and the equilibrium quantity of labor will fall.
d.
will fall, and the equilibrium quantity of labor will rise.
Chapter 18/The Market For the Factors of Production ❖ 63
46. Suppose that technological progress increases the productivity of teachers. Which of the following accurately
describes the labor market for teachers after the technological change? Equilibrium wages will
a.
rise, and the equilibrium quantity of teachers employed will fall.
b.
rise, and the equilibrium quantity of teachers employed will rise.
c.
fall, and the equilibrium quantity of teachers employed will fall.
d.
fall, and the equilibrium quantity of teachers employed will rise.
47. Consider the labor market for computer programmers. During the late 1990s, the value of the marginal product
of all computer programmers increased dramatically. Holding all else equal, what effect did this process have
on the labor market for computer programmers? The equilibrium wage
a.
increased, and the equilibrium quantity of labor increased.
b.
increased, and the equilibrium quantity of labor decreased.
c.
decreased, and the equilibrium quantity of labor increased.
d.
decreased, and the equilibrium quantity of labor decreased.
48. Consider the labor market for computer programmers. During the late 1990s, the value of the marginal product
of all computer programmers increased dramatically. Holding all else equal, the equilibrium wage in the labor
market for computer programmers
a.
increased.
b.
decreased.
c.
did not change.
d.
It is not possible to determine the equilibrium wage.
49. Consider the labor market for computer programmers. During the late 1990s, the value of the marginal product
of all computer programmers increased dramatically. Holding all else equal, the equilibrium quantity in the
labor market for computer programmers
a.
increased.
b.
decreased.
c.
did not change.
d.
It is not possible to determine the equilibrium quantity.
50. Consider the labor market for computer programmers. Because of the dot.com boom in the late 1990s, a lot of
workers went to school to learn how to write computer code for one of thousands of new dot.com companies.
However, when these computer programming students graduated, the dot.com bust took place. The dot.com
bust decreased the value of the marginal product of computer programmers. Holding all else equal, what effect
did these two circumstances have on the equilibrium wage in the labor market for computer programmers?
a.
The equilibrium wage increased.
b.
The equilibrium wage decreased.
c.
The equilibrium wage did not change.
d.
It is not possible to determine what happens to the equilibrium wage.
64 ❖ Chapter 18/The Market For the Factors of Production
51. Consider the labor market for computer programmers. Because of the dot.com boom in the late 1990s, a lot of
workers went to school to learn how to write computer code for one of thousands of new dot.com companies.
However, when these computer programming students graduated the dot.com bust took place. The dot.com
bust decreased the value of the marginal product of computer programmers. Holding all else equal what effect
did these two circumstances have on the equilibrium quantity in the labor market for computer programmers?
a.
The equilibrium quantity of labor increased.
b.
The equilibrium quantity of labor decreased.
c.
The equilibrium quantity of labor did not change.
d.
It is not possible to determine what happens to the equilibrium quantity of labor.
52. Consider the labor market for heath care workers. Because of the aging population in the United States, the
output price for health care services has increased. Holding all else equal, in the labor market for health care
employees the equilibrium wage
a.
increases, and the equilibrium quantity of labor increases.
b.
increases, and the equilibrium quantity of labor decreases.
c.
decreases, and the equilibrium quantity of labor increases.
d.
decreases, and the equilibrium quantity of labor decreases.
53. Consider the labor market for heath care workers. Because of the aging population in the United States, the
output price for health care services has increased. Holding all else equal, the equilibrium wage of health care
employees would
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what happens to the equilibrium wage.
54. Consider the labor market for heath care workers. Because of the aging population in the United States, the
output price for health care services has increased. Holding all else equal, the equilibrium quantity of health
care employees would
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what happens to the equilibrium quantity.
Chapter 18/The Market For the Factors of Production ❖ 65
Scenario 18-7
Suppose the following events occur in the market for university economics professors.
Event 1: A recession in the U.S. economy lowers the opportunity cost of going to graduate school in
economics to become a university economics professor.
Event 2: An increasing number of students in U.S. primary and secondary schools increases the number of
students entering college, increasing the output price of university economics professors’ services.
55. Refer to Scenario 18-7. As a result of these two events, holding all else constant, the equilibrium wages of
university economics professors will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium wages.
56. Refer to Scenario 18-7. As a result of these two events, holding all else constant, the equilibrium quantity of
university economics professors will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium quantity.
Scenario 18-8
Suppose the following events occur in the market for university economics professors.
Event 1: A recession in the U.S. economy lowers the opportunity cost of going to graduate school in
economics to become a university economics professor.
Event 2: A decreasing number of students in U.S. primary and secondary schools decreases the number of
students entering college, decreasing the output price of university economics professors’ services.
57. Refer to Scenario 18–8. As a result of these two events, holding all else constant, the equilibrium wages of
university economics professors will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium wage.
58. Refer to Scenario 18–8. As a result of these two events, holding all else constant, the equilibrium quantity of
university economics professors will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium quantity.
66 ❖ Chapter 18/The Market For the Factors of Production
59. When firms are able to increase the amount of physical capital available to workers, the
a.
marginal product of labor will decrease.
b.
value of the marginal product of labor will decrease.
c.
value of the marginal product of labor will increase.
d.
final product price will increase.
60. An increase in the value of the marginal product of labor has the effect of increasing the
a.
demand for labor.
b.
wage.
c.
quantity of labor employed.
d.
All of the above are correct.
61. Suppose medical research provides evidence that eating bananas provides far greater health benefits than was
previously thought. The resulting increase in the demand for bananas
a.
increases the marginal product of banana pickers for any given number of banana pickers.
b.
increases the value of the marginal product of banana pickers for any given number of banana
pickers.
c.
increases the supply of banana pickers.
d.
All of the above are correct.
62. Consider the labor market for short-order cooks. A labor-augmenting technological change such as a faster
food processor will cause
a.
both equilibrium wages and equilibrium employment to increase.
b.
both equilibrium wages and equilibrium employment to decrease.
c.
equilibrium wages to increase and equilibrium employment to decrease.
d.
equilibrium wages to decrease and equilibrium employment to increase.
63. Consider the labor market for short-order cooks. A shortage in the availability of frying pans will cause
a.
both equilibrium wages and equilibrium employment to increase.
b.
both equilibrium wages and equilibrium employment to decrease.
c.
equilibrium wages to increase and equilibrium employment to decrease.
d.
equilibrium wages to decrease and equilibrium employment to increase.
64. The distribution of immigrant workers in the United States is
a.
concentrated in low-skilled jobs.
b.
concentrated in high-skilled jobs.
c.
evenly distributed among low-, medium-, and high-skilled jobs.
d.
more concentrated in low- and high-skilled jobs than in medium-skilled jobs.
Chapter 18/The Market For the Factors of Production ❖ 67
65. Which of the following is not correct?
a.
High-skilled immigration increases GDP growth.
b.
In the United States, about 40 percent of PhD. scientists and engineers are foreign born.
c.
Low-skilled immigration lowers the earnings of native-born workers by 10-20 percent.
d.
Illegal immigrants may pay less in taxes, but they also are eligible for fewer government benefits.
66. A significant slowdown in the growth of productivity persisted in the U.S. economy between
a.
1959 and 1973.
b.
1973 and 1995.
c.
1973 and 2009.
d.
1995 and 2009.
67. Both theory and history point to a close relationship between increases in
a.
labor demand and increases in labor supply.
b.
labor demand and decreases in real wages.
c.
the productivity of labor and increases in real wages.
d.
interest rates and decreases in real wages.
68. Which of the following statements is correct?
a.
Neither economic theory nor evidence from the U.S. economy suggests that there is a close link
between productivity and real wages.
b.
Economic theory suggests that there is a close link between productivity and real wages, but
evidence from the U.S. economy fails to confirm that link.
c.
Evidence from the U.S. economy suggests a close link between productivity and real wages, but
economic theory provides no basis for such a link.
d.
Both economic theory and evidence from the U.S. economy suggest that there is a close link
between productivity and real wages.
THE OTHER FACTORS OF PRODUCTION: LAND AND CAPITAL
1. In economics, the term capital refers to
a.
money.
b.
stocks and bonds.
c.
equipment and structures used in production.
d.
All of the above are correct.
68 ❖ Chapter 18/The Market For the Factors of Production
2. Capital is paid according to the value of its marginal product
a.
only if earnings from capital are paid to households in the form of dividends.
b.
only if earnings from capital are kept within firms as retained earnings.
c.
regardless of whether earnings from capital are paid to households in the form of dividends or
whether those earnings are kept within firms as retained earnings.
d.
None of the above is correct; unlike labor, capital is a factor of production for which earnings are
unrelated to the value of marginal product.
3. Which of the following best describes the economy’s stock of equipment and structures?
a.
capital
b.
aggregate demand
c.
long-term inventory
d.
aggregate stock
4. Which of the following would be an example of capital for a computer software firm?
(i)
the firm’s computer programmers
(ii)
the wages the firm pays to its computer programmers
(iii)
computer equipment
a.
(i) only
b.
(ii) only
c.
(iii) only
d.
(i) and (iii) only
5. Which of the following would be an example of capital for a retail gasoline station?
(i)
the gas tanks and pumps
(ii)
the service attendants’ time
(iii)
the plot of land on which the station sits
a.
(i) only
b.
(iii) only
c.
(i) and (iii) only
d.
(ii) and (iii) only
6. Which term below refers to “the accumulation of goods produced in the past that are being used in the present
to produce new goods and services”?
a.
inventories
b.
products
c.
factors of production
d.
capital
Chapter 18/The Market For the Factors of Production ❖ 69
7. Economists define capital as the
a.
accumulation of goods produced in the past that are being used in the present to produce new goods
and services.
b.
goods and services that are most affected by changes in technology.
c.
factors of production that can be rented by firms.
d.
factors of production that can be purchased by firms.
8. When economists refer to a firm’s capital, they are describing the
a.
markets for final goods and services.
b.
stock of equipment and buildings used in production.
c.
amount of bank financing used by the firm.
d.
amount of financing provided by the equity markets.
9. The accumulation of machinery and buildings used in the production of new goods and services is referred to
as
a.
production factors.
b.
output factors.
c.
capital.
d.
equity.
10. If one were to consider a university as a business, the computers in the computer labs would be regarded by
economists as
a.
technology flows.
b.
mechanization flows.
c.
part of the university’s stock of capital.
d.
a flow of services from the university’s stock of capital.
11. The purchase price of capital is
a.
the value of the capital to the firm.
b.
always less than the rental price.
c.
the price received from the flow of some capital services.
d.
the price a person pays to own that factor of production indefinitely.
12. The owners of capital resources are compensated according to the
a.
purchase price of the capital stock.
b.
marginal product of capital.
c.
value of the marginal product of capital.
d.
absolute level of production of final goods and services.
70 ❖ Chapter 18/The Market For the Factors of Production
13. Consider the market for capital equipment. Suppose the price of firms’ output increases. Holding all else con-
stant, the equilibrium rental price of capital equipment will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium rental price of capital equipment.
14. Consider the market for capital equipment. Suppose the value of the marginal product of capital equipment
increases. Holding all else constant, the equilibrium quantity of capital equipment will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium quantity of capital equipment.
15. Consider the market for capital equipment. Suppose the market price of firms’ output decreases. Holding all
else constant, the equilibrium quantity of capital equipment will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium quantity of capital equipment.
16. Which of the following is not correct?
a.
Earnings from capital may be paid to households in the form of dividends.
b.
Earnings from capital may be retained by firms to purchase additional capital.
c.
Firms may not pay out all of their earnings to households.
d.
Firms earn the highest profits when the owners of capital receive a value above the marginal
product.
17. The demand curve for capital
a.
is vertical.
b.
is horizontal.
c.
is derived from households’ decisions concerning saving and spending.
d.
reflects the marginal productivity of capital.
18. The equilibrium rental income paid to the owners of capital at any point in time equals the
a.
marginal product of capital.
b.
value of the marginal product of capital.
c.
percentage of profits paid out to stockholders in the form of dividends.
d.
equilibrium purchase price of capital.
Chapter 18/The Market For the Factors of Production ❖ 71
19. Consider the market for capital equipment. Suppose the value of the marginal product of capital equipment
increases. Holding all else constant, the equilibrium rental price of capital equipment will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium rental price of capital equipment.
20. Which of the following accurately describes how earnings from capital eventually get paid to households?
a.
Households can own a stock of capital and rent it to firms.
b.
Households lend money to firms, who then pay interest to the households.
c.
Households that own stock in firms receive dividends.
d.
All of the above are correct.
21. The rental price of capital is
a.
determined outside the realm of factor markets.
b.
the price paid to use capital for a limited time period.
c.
the price paid for ownership of the capital.
d.
always more than the purchase price.
22. The rental price of capital is determined by the
a.
forces of supply and demand in capital markets.
b.
amount of equity that is generated in equity markets.
c.
amount of bond financing used by profit-maximizing firms.
d.
amount of dividends paid out to stockholders by profit-maximizing firms.
23. Who receives income from capital in the United States?
a.
bank depositors
b.
bondholders
c.
stockholders
d.
All of the above are correct.
24. Which of the following qualify as part of our economy’s capital income?
a.
wages paid to workers
b.
interest paid to the owners of corporate bonds
c.
rent paid on farmland
d.
All of the above are correct.
72 ❖ Chapter 18/The Market For the Factors of Production
25. Suppose that a violent earthquake causes the uninhabited Hawaiian island of Mokuauia (also called Goat Is-
land) 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 is-
lands?
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.
26. 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.
27. 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.
28. 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
Chapter 18/The Market For the Factors of Production ❖ 73
29. As a result of severe flooding, a farmer loses half of his productive farmland. He should expect to see the mar-
ginal productivity of his remaining land
a.
increase.
b.
remain unchanged.
c.
decrease but remain positive.
d.
decrease and become negative.
30. As a result of severe flooding, a farmer loses half of his productive farmland. If the property of diminishing
returns applies to all factors of production, he should expect to see
a.
an increase in the marginal productivity of his remaining land and an increase in the marginal
productivity of his labor.
b.
an increase in the marginal productivity of his remaining land and a decrease in the marginal
productivity of his labor.
c.
a decrease in the marginal productivity of his remaining land and an increase in the marginal
productivity of his labor.
d.
a decrease in the marginal productivity of his remaining land and a decrease in the marginal
productivity of his labor.
31. 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.
32. 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.
33. 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.
74 ❖ Chapter 18/The Market For the Factors of Production
34. 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.
35. 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.
36. 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.
37. 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.
38. 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.
39. 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