ANSWERS:

 

1.  C

Ø      Economic rent is often referred to as a surplus payment.  Economic rent is the price paid for the use of natural resources that are completely fixed in total supply.  Thus, if society didn’t have such a high demand for professional athletes, their salaries would decrease. 

2.  A

Ø      If workers are more productive, the cost of producing products will decrease and, therefore firms will demand more laborers as they increase output.

3.  B

Ø      The least cost rule states that the MPlabor / Plabor = MPcapital / Pcapital.  24 / $8 < 12 / $3.  3 < 4.  Thus, the farmer should employ more fertilizer and less labor so that the ratios are brought into equilibrium.

4.  A

Ø      If interest rates increase, there will be a natural incentive to save more and invest less.  The cost of borrowing money for investment is the rate of interest.  Thus, higher interest rates mean that the cost of investing has increased, thereby making more projects less profitable which leads to a decrease in the level of investment.

5.  D

Ø      The hiring rule states that a firm should hire workers as long as the marginal revenue product (MRP) greater than or equal to the marginal resource cost (MRC).  MRP is simply the marginal product (MP) times the product price (P).  Since the MRC in this problem is equal to the wage rate of $13 per worker, the firm will hire 4 workers since the MRP of the 4th worker is 16, which is still greater than the MRC of $13.  The MRP of the 5th worker is 12, which is less than the MRC of $13.

6.  A

Ø      A firm with monopsony power will hire fewer workers and pay them a lower wage rate.  Therefore, when the monopsony power is broken up, wage rates will naturally increase.

7.  B

Ø      The demand for a resource is derived or determined by the demand for the product it produces.  There will be no demand for a resource if it is not used to produce anything that society wants.  This concept is known as derived demand.

8.  F

Ø      Unions use collective bargaining as their main tool to try to increase the wages of union members.

9.  C

Ø      Real Wages = Nominal Wages – Inflation Rate = 5% - 3% = 2%

10. Monopsony, F, D

Ø      Since MRC > S, the market depicted is a monpsony.

Ø      The firm will employ F workers since that is where MRP = MRC.

Ø      The corresponding wage rate is determined by the supply curve when F workers are hired.  This equates to a wage rate of D.

11. D

Ø      The least cost rule states that the MPlabor / Plabor = MPcapital / Pcapital.  20 / $10 > 40 / $80.  2 > ½.  Thus, the company should employ another worker since an additional worker will provide a greater amount of additional output for the cost of that worker compared to an additional truck. 

12. B

Ø      The person who will earn the greatest amount of money as a result of using the land will most likely end up renting that land since they will be willing to pay the most for the land in the first place.

13. D

Ø      Since the MRP > MRC, the firm will hire more workers.  In order to maximize profits, the MRP of labor / Price of labor = 1.

14. A

Ø      If the demand for products produced by certain workers increases, the demand for those workers will increase since more workers will be needed to produce the additional products demanded.

15. C

Ø      If the supply of a factor is fixed, the supply curve must be vertical.  Thus, the price of that resource will be determined by the demand for it.  The greater the demand, the higher the price.  Likewise, the lower the demand, the lower the price.

16. A

Ø      Marginal Product (MP) = D Total Product (TP) / D Labor (L) = (44-25) / (2-1) = 19

17. B

Ø      You’ll hire additional workers as long as MRP is > or = MRC.  MRP = MP x P and MRC = $40.  Therefore, the company should hire 4 workers since the MRP of the 4th worker is 50, which is still > 40.  The MRP of the 5th worker is 25, which is < 40.

18. D

Ø      Interest is the cost of using money.  It is the price paid for loanable funds.

19. C

Ø      If profits increase in a particular industry, there will be an incentive for firms to enter that industry.

20.

Ø      Profit Maximization Combination of labor and capital:  MRPlabor / Plabor = MRPcapital / Pcapital = 1.

21.

Ø      Cost Equalizing Combination for labor and capital:  MPlabor / Plabor = MPcapital / Pcapital.

22.

Ø      MRP = D Total Revenue (TR) / D Units of Resource

Ø      MRP = MP x P

23.

Ø      Marginal revenue product (MRP) is the increase in total revenue that results from the use of each additional unit of a variable input.

24.

Ø      Marginal resource cost (MRC) is the cost of hiring an additional resource unit.

Ø      MRC = D Total Resource Cost / D Units of Resource

25.

Ø      Theoretically, anyone with money should be able to purchase a factor of production.

26.

Ø      A union’s most basic tool is collective bargaining.  They use this to increase their wage rates.

27.

Ø      Nominal wages are simply the money received per hour, per day, per week, etc.

Ø      Real wages adjust nominal wages for changes in the price level.  Real wages represent the purchasing power of the nominal wage.

28.

Ø      Nominal interest rates:  rate of interest expressed in dollars of current value.

Ø      Real interest rates:  rate of interest expressed in the purchasing power of the dollar.

Ø      Real interest rate = Nominal interest rate – Inflation rate.

29.

Ø      As interest rates increase, savings will increase, while investment and total spending will decrease.

Ø      As interest rates decrease, savings will decrease, while investment and total spending will increase.

30.

Ø      Economic rent is the price paid for the use of land and other natural resources that are completely fixed in total supply.