Input Demand The Labor and Land Markets

Principles of Microeconomics, 8e (Case/Fair)
Chapter 10: Input Demand: The Labor and Land Markets

Input Markets: Basic Concepts

Multiple Choice
1)

The idea that the demand for autoworkers stems from the demand for automobiles is
A)

the value of the marginal product of autoworkers.
B)

derived demand.
C)

indirect demand.
D)

output demand.
Answer:

B
Diff: 3
Type: C


2)

A decrease in the wage rate will change
A)

only the amount of labor hired.
B)

the amount of labor employed, and it may also change the amount of other inputs employed.
C)

the price the firm charges for the product, but it will not affect the demand for any of the inputs.
D)

the firm's profit-maximizing level output, but not its usage of inputs.
Answer:

B
Diff: 1
Type: F


3)

When a large amount of output is produced per unit of the input, the input is said to exhibit
A)

high productivity.
B)

low productivity.
C)

marginal productivity.
D)

derived productivity.
Answer:

A
Diff: 1
Type: F


4)

The demand for _________ is a "derived demand."
A)

ice cream cones on a hot day
B)

tax-free municipal bonds
C)

a hair stylist by a salon owner
D)

a birthday cake for your brother
Answer:

C
Diff: 3
Type: C



5)

The demand for inputs is a derived demand because
A)

it does not come from competitive markets.
B)

it depends on the demand for outputs.
C)

it is derived from nature.
D)

it is derived from production.
Answer:

B
Diff: 3
Type: C


6)

A car manufacturing company adopts a new technology that, ceteris paribus, increases the productivity of capital. At the same time, workers unionize and demand higher wages. Assume that for this firm capital and labor are substitutable. Which of the following is most likely to occur?
A)

Capital will be substituted for labor.
B)

Labor will be substituted for capital.
C)

Output increases as do the prices of capital and labor.
D)

Output decreases as does the price of cars.
Answer:

A
Diff: 3
Type: C


7)

Factors of production that can be used together to enhance the other's productivity are
A)

substitutable inputs.
B)

complementary inputs.
C)

duplicate inputs.
D)

proportionate inputs.
Answer:

B
Diff: 2
Type: D


8)

The marginal revenue product of labor is
A)

the additional revenue a firm earns by employing one additional unit of labor.
B)

the additional profit a firm earns by employing one additional unit of labor.
C)

the marginal product of capital times the price of labor.
D)

the additional revenue the firm makes by selling one unit of labor.
Answer:

A
Diff: 2
Type: D


9)

If the marginal product of a calculator manufacturer is 10 calculators, and the price of a calculator is $10, the firm's marginal revenue product is
A)

$1.00.
B)

$10.00.
C)

$100.00.
D)

$1,000.00.
Answer:

C
Diff: 2
Type: A



10)

The Package Store hires workers to wrap packages. The store sells this service for $5. The marginal revenue product of this store's fifth worker is $50. The marginal product of the fifth worker is
A)

0.01 package.
B)

1 package.
C)

10 packages.
D)

indeterminate from this information.
Answer:

C
Diff: 2
Type: A


11)

The Ernie Egg Store hires workers to paint eggs. The store sells the eggs for $3. The marginal revenue product of this store's fifth worker is $21. The marginal product of the fifth worker is
A)

0.14 eggs.
B)

7 eggs.
C)

36 eggs.
D)

indeterminate from this information.
Answer:

B
Diff: 2
Type: A


Refer to the data provided in Table 10.1 below to answer the following questions.

Table 10.1


12)

Refer to Table 10.1. The marginal revenue product of the fourth worker is
A)

$5.
B)

$20.
C)

$100.
D)

$475.
Answer:

C
Diff: 3
Type: C



13)

Refer to Table 10.1. The marginal revenue product of the __________ worker is $150.
A)

second
B)

third
C)

fourth
D)

fifth
Answer:

A
Diff: 3
Type: C


14)

Refer to Table 10.1. If the payment to labor per day is $100, this T-shirt manufacturer is maximizing profits if he will hire __________ employees.
A)

one
B)

two
C)

four
D)

five
Answer:

C
Diff: 3
Type: C


15)

Refer to Table 10.1. The maximum payment to labor per day that this profit-maximizing T-shirt manufacturer would be willing to pay to hire three workers per day is
A)

$15.
B)

$75.
C)

$125.
D)

$200.
Answer:

C
Diff: 3
Type: C


16)

If the price of the product produced by labor decreases, the marginal revenue product of labor curve will
A)

be unaffected because productivity of labor has not changed.
B)

shift to the left.
C)

shift to the right.
D)

become more inelastic.
Answer:

B
Diff: 1
Type: F


17)

The formula for the marginal revenue product of labor (L is for labor, X is the output) is
A)

MPL/PX.
B)

PX/MPL.
C)

(MPL)(MRX).
D)

MPL + PX.
Answer:

C
Diff: 2
Type: D



Refer to the information provided in Figure 10.1 below to answer the questions that follow.

Figure 10.1

18)

Refer to Figure 10.1. This firm is currently hiring 16 workers and paying a wage of $10. This firm should
A)

do nothing because it is maximizing profits.
B)

reduce employment to 15 workers to increase profits.
C)

reduce employment to 14 workers to increase profits.
D)

increase employment to 17 workers to increase profits.
Answer:

B
Diff: 3
Type: C


19)

A firm will continue hiring labor as long as the MRP of labor __________ the market wage rate.
A)

is greater than or equal to
B)

is less than
C)

is equal to
D)

determines
Answer:

A
Diff: 1
Type: F


20)

The marginal cost of a unit of labor in a perfectly competitive labor market is
A)

its average MRP.
B)

equal to product price.
C)

the market wage rate.
D)

equal to MRP.
Answer:

C
Diff: 1
Type: F



21)

Tony's Lawn Service uses only one variable input, fertilizer. The firm's demand curve for fertilizer in the short run is the input's
A)

total product curve.
B)

marginal product curve.
C)

marginal revenue product curve.
D)

total cost curve.
Answer:

C
Diff: 1
Type: F


22)

You have been hired by a data processing firm to provide economic advice. The owner of the firm tells you that the firm's only variable input is the number of data-entry operators. The hourly wage for data-entry operators is $15.00. The marginal revenue product curve for data-entry operators reaches its maximum at three workers with a marginal revenue product of $12.00. What advice would you give this firm?
A)

Hire three data-entry operators so as to minimize the amount of money the firm will lose.
B)

Shut down immediately, as the firm is not able to cover all of its variable costs.
C)

Increase the wage rate paid to data-entry operators so that their marginal revenue product will increase.
D)

Produce as much as possible so as to maximize the difference between the wage paid to data-entry operators and their marginal revenue product.
Answer:

B
Diff: 3
Type: C


23)

Firms will employ an input up to the point where
A)

the wage rate equals the productivity of capital.
B)

its marginal cost equals its marginal product.
C)

the input's price equals its marginal revenue product.
D)

the input's price equals its marginal product.
Answer:

C
Diff: 1
Type: F


24)

Liu's Potato Chips is a perfectly competitive firm currently employing 30 workers. The marginal revenue product of the 30th worker is $7.00 per hour. The wage rate is $8.00 per hour. To increase profits, this firm should
A)

decrease employment until the MRP of labor equals $8.00.
B)

increase employment until the MRP of labor equals $8.00.
C)

continue hiring 30 workers because the firm earns a surplus of $1.00 on each worker hired.
D)

increase the price of potato chips so that the marginal revenue product increases to $8.00 per hour.
Answer:

A
Diff: 3
Type: C



25)

If the supply of labor decreases, which of the following events will occur?
A)

The wage rate will fall and firms will increase employment up until the point where MRP equals the new wage rate.
B)

The wage rate will fall and firms will decrease employment to the point where MRP equals the new wage rate.
C)

The wage rate will increase and firms will decrease employment to the point where MRP equals the new wage rate.
D)

The wage rate will increase and firms will increase employment up until the point where MRP equals the new wage rate.
Answer:

C
Diff: 3
Type: C


26)

If Tie-Dyed T-Shirts is currently employing labor so that the wage is less than the marginal revenue product of labor, it must also be true that
A)

total revenues would be greater than total costs.
B)

the wage is greater than marginal cost.
C)

the price of the product must be less than marginal cost.
D)

the price of the product must be greater than marginal cost.
Answer:

D
Diff: 3
Type: C


27)

Assume that labor is the only variable input and that the payment made to labor is denoted as W. The marginal product of labor can be stated as
A)

(W) × MC).
B)

W/MC.
C)

MC/W.
D)

TC/W.
Answer:

B
Diff: 3
Type: D


28)

If the wage rate is less than the marginal revenue product of labor, the firm should __________ to maximize profits.
A)

hire less labor and produce less output
B)

hire less labor and produce more output
C)

hire more labor and produce less output
D)

hire more labor and produce more output
Answer:

D
Diff: 3
Type: C



Refer to the information provided in Figure 10.2 below to answer the questions that follow.

Figure 10.2

29)

Refer to Figure 10.2. This firm's marginal cost curve has shifted from MC0 to MC1. A likely explanation for this is that
A)

the productivity of a variable input declined.
B)

the price of a variable input decreased.
C)

the demand for the firm's product decreased.
D)

the supply of a variable input decreased.
Answer:

B
Diff: 3
Type: C


30)

Refer to Figure 10.2. This firm's marginal cost curve has shifted from MC0 to MC1 A profit-maximizing firm should ________ the amount of output produced and _________ its demand for labor.
A)

increase; increase
B)

increase; decrease
C)

decrease; decrease
D)

keep constant; increase
Answer:

A
Diff: 3
Type: C


31)

If capital and labor are complementary inputs and the firm increases the amount of capital employed in production, the marginal revenue product of labor will
A)

decrease.
B)

increase.
C)

remain constant because the amount of labor was not changed.
D)

either increase, decrease or remain constant depending on how complementary labor and capital are in production.
Answer:

B
Diff: 1
Type: F



Refer to the information provided in Figure 10.3 below to answer the questions that follow.

Figure 10.3

32)

Refer to Figure 9.3. If labor supply is given by S0 and the firm is using K1 units of capital, this firm should hire __________ units of labor to maximize profit.
A)

I0
B)

I1
C)

I2
D)

I3
Answer:

A
Diff: 3
Type: C


33)

Refer to Figure 10.3. The market wage is initially W0 and the firm is initially at Point A. Labor supply decreases from S0 to S1, if the firm does not change the amount of capital it employs, the firm will move to Point __________ to maximize profits.
A)

B
B)

C
C)

E
D)

F
Answer:

A
Diff: 3
Type: C



34)

Refer to Figure 10.3. The market wage is initially W0 and the firm is initially at Point A. Labor supply decreases from S0 to S1. The firm's MRPL curve will shift from MRPL at K1 to MRPL at K2 because
A)

the factor substitution effect will cause the firm to substitute capital for the higher-priced labor.
B)

the supply of labor decreased and therefore the productivity of labor decreased.
C)

the output effect led to a decrease in the demand for capital, which in turn decreased the productivity of labor.
D)

the firm is no longer maximizing profits.
Answer:

C
Diff: 3
Type: C


35)

Refer to Figure 10.3. The market wage is initially W0 and the firm is initially at Point A. Labor supply decreases from S0 to S1; after the firm is fully able to adjust all inputs, the firm will hire __________ units of labor to maximize profits.
A)

I0
B)

I1
C)

I2
D)

I3
Answer:

D
Diff: 3
Type: C


36)

The demand for any factor of production in a competitive industry depends on
A)

its productivity and upon how its product is valued in the marketplace.
B)

its productivity and the productivity of all other inputs.
C)

the productivity of all the other inputs and how these inputs are valued in the marketplace.
D)

the amount of the factor that is used and the amounts of all the other factors that are used.
Answer:

A
Diff: 1
Type: F


37)

A wheat farmer sells wheat in a perfectly competitive market and hires labor in a perfectly competitive market. The market price of wheat is $2 a bushel, the wage rate is $10, the farmer employs five workers and the marginal product of the fifth worker is 10 bushels. What would you advise this farmer to do?
A)

Do nothing because the wage rate and the marginal product of the last worker hired are equal.
B)

Reduce employment because the wage paid is less than the marginal revenue product.
C)

Increase employment because the wage paid is less than the marginal revenue product.
D)

Reduce the product price so that the wage and marginal revenue product will be equal.
Answer:

C
Diff: 2
Type: A


39)

The law of ___________ explains why a marginal revenue product schedule eventually declines.
A)

diminishing marginal opportunity costs
B)

increasing marginal returns
C)

increasing marginal opportunity costs
D)

diminishing marginal returns
Answer:

D
Diff: 1
Type: F


40)

An increase in technology will cause a marginal revenue product of labor curve to
A)

be unaffected because the productivity of labor has not changed.
B)

shift to the left.
C)

shift to the right
D)

become more inelastic.
Answer:

C
Diff: 3
Type: C


41)

A firm competing in a perfectly competitive labor market desires to maximize _________.
A)

marginal profit, not total profit
B)

total profit, not marginal profit
C)

marginal profit, not average profit
D)

average profit, not marginal profit
Answer:

B
Diff: 3
Type: C


42)

To get a profit maximizing firm in a perfectly competitive labor market to hire another worker, the firm will need to pay a
A)

lower wage rate but only to that last worker hired.
B)

higher wage rate but only to that last worker hired.
C)

lower wage rate not only to that last worker hired but also to all previous workers hired.
D)

higher wage rate not only to that last worker hired but also to all previous workers hired.
Answer:

C
Diff: 3
Type: C


43)

Suppose the supply of labor schedule increases in a perfectly competitive labor market while the market demand schedule remains unchanged. A profit maximizing representative firm will
A)

hire more workers.
B)

hire less workers.
C)

hire the same number of workers.
D)

substitute capital for labor.
Answer:

A
Diff: 3
Type: C


44)

A firm’s marginal cost curve in a perfectly competitive product market is the same as its ______ curve. Similarly, a firm’s marginal revenue product curve in a perfectly competitive labor market is the same as its ________ curve.
A)

demand; supply
B)

supply; demand
C)

demand; demand
D)

supply; supply
Answer:

B
Diff: 1
Type: F


45)

In the product market changes in technology affect the marginal ________ of a unit of output. In the labor market, changes in technology affect the marginal _______ of a unit of labor input.
A)

cost; cost
B)

revenue; revenue
C)

revenue product; cost
D)

cost; revenue product
Answer:

D
Diff: 3
Type: C


46)

MPL X PX is the _________ while the wage rate in the _____________.
A)

cost of a marginal unit of labor; value of labor’s marginal product
B)

value of labor’s marginal product; cost of a marginal unit of labor
C)

marginal revenue of a unit of output; marginal cost of a unit of output
D)

marginal cost of a unit of output; marginal revenue of a unit of output
Answer:

B
Diff: 3
Type: C


47)

Assuming that labor is the only variable input if society values a good _______ it costs firms to hire the workers to produce that good, the good _______ be produced.
A)

more than; will
B)

less than; will
C)

more than; will not
D)

equal to what; will not
Answer:

A
Diff: 3
Type: C



48)

A soybean farmer sells soybeans in a perfectly competitive market and hires labor in a perfectly competitive market. The market price of soybeans is $1 a bushel, the wage rate is $12, the farmer employs six workers and the marginal product of the sixth worker is 10. What would you advise this farmer to do?
A)

Do nothing because the wage rate and the marginal product of the last worker hired are equal.
B)

Reduce employment because the wage paid is greater than the marginal revenue product.
C)

Increase employment because the wage paid is less than the marginal revenue product.
D)

Reduce the product price so that the wage and marginal revenue product will be equal.
Answer:

B
Diff: 2
Type: A


49)

The price of a good will be demand determined if
A)

the demand for the good is perfectly elastic.
B)

the demand for the good is perfectly inelastic.
C)

the supply of the good is perfectly elastic.
D)

the supply of the good is perfectly inelastic.
Answer:

D
Diff: 3
Type: C


50)

The return to any factor of production that is in fixed supply is
A)

pure profit.
B)

pure rent.
C)

producer surplus.
D)

factor surplus.
Answer:

B
Diff: 2
Type: D


51)

If a firm could increase profits by hiring less labor and more capital, then
A)

the last dollar spent on labor must yield a smaller increase in output than the last dollar spent on capital.
B)

the last dollar spent on labor must yield a larger increase in output than the last dollar spent on capital.
C)

the price of labor exceeds the price of capital.
D)

the optimal production technique must be capital intensive.
Answer:

A
Diff: 3
Type: C



52)

If a product's demand decreases as its supply simultaneously increases, the marginal revenue product curve will
A)

shift to the right.
B)

shift to the left.
C)

remain unchanged.
D)

either shift to the left, shift to the right, or remain unchanged depending upon what happens to product price.
Answer:

B
Diff: 3
Type: C


53)

The marginal revenue product curve of labor will always shift to the right if
A)

the wage rate rises.
B)

product demand decreases and product price decreases.
C)

product demand increases and product price increases.
D)

the price of capital rises.
Answer:

C
Diff: 3
Type: C


54)

If product demand increases and product price increases,
A)

the marginal revenue product curve will shift to the right.
B)

the marginal revenue product curve will shift to the left.
C)

the firm will move up the marginal revenue product curve and hire fewer units of the input.
D)

the firm will move down the marginal revenue product curve and hire more units of the input.
Answer:

A
Diff: 3
Type: C


55)

Assume that automobiles are a normal good. An increase in income will
A)

shift the marginal revenue product curve of autoworkers to the left.
B)

move a firm down the marginal revenue product curve of autoworkers.
C)

shift the marginal revenue product curve of autoworkers to the right.
D)

have no effect on the marginal revenue product curve of autoworkers.
Answer:

C
Diff: 3
Type: C


True/False
1)

Productivity of an input is the amount of output produced per unit of input.
Answer:

TRUE
Diff: 2
Type: D



2)

Households will supply labor as long as the wage they receive is less than the value of their leisure time.
Answer:

FALSE
Diff: 1
Type: F


3)

The price of any factor of production in a competitive market depends on the value of the final product it is used to produce.
Answer:

TRUE
Diff: 1
Type: F


Labor Markets

Multiple Choice
1)

To produce one unit of output, a firm can use either one unit of capital or one unit of labor. In this case, capital and labor are
A)

complementary inputs.
B)

substitutable inputs.
C)

both complementary and substitutable inputs.
D)

unrelated inputs.
Answer:

B
Diff: 1
Type: F


2)

Assuming labor is the only variable factor of production, production of a good will occur
A)

as long as the marginal revenue product of labor is positive.
B)

if society values a good more than it costs firms to hire the workers to produce the good.
C)

as long as the product's price is greater than the marginal revenue product of labor.
D)

if the marginal cost of a unit of output equals the marginal revenue product of labor.
Answer:

B
Diff: 3
Type: C


3)

When a firm substitutes away from a factor whose price has risen and toward a factor whose price has fallen, it is an example of the
A)

output effect of a factor price decrease.
B)

factor substitution effect.
C)

factor complementary effect.
D)

output substitution effect.
Answer:

B
Diff: 2
Type: D



4)

According to the output effect of a factor price increase, the demand for
A)

the factor whose price has increased will decrease, but the demand for the other factors will increase.
B)

all factors decreases.
C)

all factors increases.
D)

the factor whose price has increased will increase, but the demand for the other factors will decrease.
Answer:

B
Diff: 1
Type: F


5)

The owner of Instant Printing, a firm that prints business cards, tells you that as a result of an increase in the wage rate of printer operators he has reduced the amount of output he produces and the amount of capital he uses. How would you respond to this?
A)

You should tell him that this doesn't make any economic sense because according to the factor substitution effect he should have substituted toward capital and away from labor.
B)

This seems logical, because the output effect of a factor price increase would cause a firm to demand less of all inputs, not just the input whose price increased.
C)

You should tell him that instead of reducing output and the demand for all factors of production, he should increase output and the demand for all factors of production so that he can meet the higher labor costs by generating more revenue.
D)

You tell him that capital must be an inferior input, because he reduced his use of capital when the price of labor increased.
Answer:

B
Diff: 3
Type: C


6)

The demand curve for an input will slope downward because of
A)

the factor substitution effect.
B)

the output effect.
C)

decreasing returns to scale.
D)

Both A and B
Answer:

D
Diff: 1
Type: F


7)

If the price of labor falls,
A)

we can conclude that the demand for capital will always decrease because only the factor substitution effect is relevant.
B)

we can conclude that the demand for capital will always increase because only the output effect is relevant.
C)

the change in the demand for capital cannot be predicted because the factor substitution effect and output effect work in opposite directions.
D)

the demand for capital will be unaffected, because only a change in the price of capital would change the demand for capital.
Answer:

C
Diff: 1
Type: F


8)

Which of the following situations is most likely to generate the largest output effect from a decrease in the price of one of a firm's inputs?
A)

The demand for a firm's product is inelastic.
B)

The demand for a firm's product is elastic.
C)

The inputs used in production are highly substitutable.
D)

The inputs used in production are highly complementary.
Answer:

B
Diff: 3
Type: C


9)

Assume that Creative Ceramics can vary both capital and labor. An increase in the amount of capital will
A)

have no impact on the productivity of labor.
B)

cause the firm to move down along the marginal revenue product of labor curve and hire more labor.
C)

cause the marginal revenue product of labor curve to be more inelastic.
D)

shift the marginal revenue product curve of labor out to the right.
Answer:

D
Diff: 3
Type: C


10)

An increase in the productivity of a factor of production will
A)

shift its marginal revenue product curve to the right.
B)

shift its marginal revenue product curve to the left.
C)

cause a firm to move down the marginal revenue product curve.
D)

cause a firm to move up the marginal revenue product curve.
Answer:

A
Diff: 1
Type: F


11)

The production and use of capital
A)

reduces the productivity of labor and decreases wages.
B)

reduces the productivity of labor and drives up wages.
C)

enhances the productivity of labor and drives up wages.
D)

enhances the productivity of labor and decreases wages.
Answer:

C
Diff: 1
Type: F


True/False
1)

Compliments and substitutes exist for outputs, but not for inputs.
Answer:

FALSE
Diff: 1
Type: F



2)

Pure rent is the return to any factor of production that is in fixed supply.
Answer:

TRUE
Diff: 2
Type: D


3)

A firm will use land up to the point at which the MRP of land is equal to the price of land.
Answer:

TRUE
Diff: 1
Type: F


4)

If capital and labor are substitute inputs, the productivity of labor falls as the use of capital increases.
Answer:

FALSE
Diff: 1
Type: F


5)

The infusion of capital into an industry raises the productivity of the other inputs in that industry.
Answer:

TRUE
Diff: 1
Type: F


Land Markets

Multiple Choice
1)

Because a famous painting is fixed in supply, its price is
A)

demand determined.
B)

supply determined.
C)

inelastic.
D)

independently determined.
Answer:

A
Diff: 3
Type: C


2)

The number of seats available in a stadium is fixed at 80,000. The equilibrium price for a ticket to a football game at the stadium is $30. The equilibrium price for a ticket to a baseball game at the stadium is $20. Which of the following is TRUE?
A)

Football games must be more expensive to produce than baseball games.
B)

The demand for baseball games must be more elastic than the demand for football games.
C)

The supply of baseball games must be less elastic than the supply of football games.
D)

The demand for each baseball game must be lower than the demand for each football game.
Answer:

D
Diff: 3
Type: C



3)

The number of seats available in a stadium is fixed at 80,000. The equilibrium price for a ticket to a football game at the stadium is $30. The equilibrium price for a ticket to a soccer match at the stadium is $10. Which of the following is TRUE?
A)

Football games must be more expensive to produce than a soccer match.
B)

The demand for each football game must be more than the demand for each soccer match.
C)

The supply of soccer matches must be less elastic than the supply of football games.
D)

The demand for each soccer game must be greater than the demand for each football game.
Answer:

B
Diff: 3
Type: C


4)

If the marginal revenue product of land is greater than its price, a firm should
A)

use more land.
B)

use less land.
C)

try to decrease the productivity of land.
D)

decrease the price it is willing to pay for land.
Answer:

A
Diff: 3
Type: C


5)

A profit-maximizing firm will continue to employ land until
A)

MPLAND = PLAND.
B)

MRPLAND = 0.
C)

MRPLAND = MPLAND.
D)

MRPLAND = PLAND.
Answer:

D
Diff: 1
Type: F


6)

If the MRP of land is less than its price, a firm should
A)

use more land.
B)

use less land.
C)

try to decrease the productivity of land.
D)

increase the price it is willing to pay for land.
Answer:

B
Diff: 1
Type: F


True/False
1)

"Demand determined" means that price is set by buyers’ demand and a fixed supply.
Answer:

TRUE
Diff: 2
Type: D


The Firm's Profit-Maximizing Condition in Input Markets

Multiple Choice
1)

If land becomes more valuable in residential use than in commercial use,
A)

the supply of land available for commercial use should decrease and the supply of land for residential use should increase.
B)

there can be no change in the allocation of land because land is fixed in supply.
C)

there will be no change in the allocation of land, as there is no responsiveness to price changes by suppliers of land.
D)

the supply of land for commercial use will become perfectly elastic and the supply of land for residential use will become perfectly inelastic.
Answer:

A
Diff: 1
Type: F


2)

Assume the Backwoods Shoe Company hires three inputs: labor (L), capital (K), and land (A) to produce shoes (X). Which of the following conditions must be met so that the firm is using the optimal, or least costly, combination of inputs?
A)

MPL = MPK = MPA
B)

PL = PK = PA
C)

MPL/PL = MPK/PK = MPA/PA
D)

MPL = MPK = MPA = 1/PX
Answer:

C
Diff: 1
Type: F


3)

A firm is currently hiring capital and labor so that MPL/PL < MPK/PK, if the firm wishes to maximize profits it should hire
A)

less labor and less capital.
B)

more capital and more labor.
C)

more labor and less capital.
D)

less labor and more capital.
Answer:

D
Diff: 3
Type: C


Input Demand: The Labor and Land Markets

True/False
1)

A technological change would cause movement along the demand curve for inputs.
Answer:

FALSE
Diff: 2
Type: D



Resource Allocation and the Mix of Output in Competitive Markets

Multiple Choice
1)

Custom Made Clothing, a small clothing manufacturer, can use either a capital-intensive or labor-intensive technology to produce a product. If the price of capital increases and the price of labor remains constant, this firm most likely would
A)

switch to the labor-intensive technology.
B)

continue to use the capital-intensive technology and reduce the amount of output produced.
C)

leave the industry.
D)

try to increase the productivity of capital.
Answer:

A
Diff: 3
Type: C


2)

Joe and Carl are both reporters and they both have the same productivity - they each can write five articles a week. Joe writes articles about celebrities. Carl writes articles about economics. Joe earns twice as much as Carl. Which of the following could explain this?
A)

There are more reporters writing about celebrities than there are reporters writing about economics.
B)

The output effect is greater for celebrity writers than economics writers.
C)

There must be more substitutes available for celebrity writers than there are for economics writers.
D)

People are willing to pay more for stories about celebrities than for stories about economics.
Answer:

D
Diff: 3
Type: C