Practice Questions: Micro Test #4

 

1.      “Nobody has to tell me why ticket prices for professional sporting events are so high. The owners cannot afford to take the loss of the high salaries, so they just pass it along to people like you and me.”

 

      Is this statement likely to be correct or incorrect? Why?

      a.   Correct. High sports salaries force owners to charge high ticket prices, which they can pass on to the consumers because demand is elastic.

      b.   Correct. High sports salaries contain “economic rent” which equals the athletes’ opportunity cost of playing professional sports.                                    

c.       Incorrect. High sports salaries contain “economic rent” and would not be so high if the public was unwilling to spend so much money on professional

      sports.

      d.   Incorrect. Owners can afford to pay the high salaries without raising ticket prices. They raise prices simply to increase their marginal revenue above their marginal cost.

      e.   Correct.  High sports salaries allow owners to cover their players implicit costs, thus keeping them on the team.

 

2.   The demand for labor will increase in response to which of the following…

      a.   increased productivity of labor.

      b.   lower product prices.

      c.   a decrease in the supply of labor.

      d.   a decrease in the price of capital that can be used in place of the labor.

      e.   none of the above.

 

3.   Suppose the production of wheat requires two inputs, labor and fertilizer; the price of labor is $8.00 and the price of fertilizer is $3.00. A farmer is currently employing the inputs such that the marginal product of labor is 24 and the MP of fertilizer is 12. If the farmer is a cost-minimizer:

      a.   He should use more labor and less fertilizer.

      b.   He should use more fertilizer and less labor.

      c.   He should use more labor and more fertilizer.

      d.   He should continue to use the same amounts of each input.

      e.   He should use less labor and less fertilizer.

 

4.   If interest rates increase, what should happen to savings and investment?

 

            Savings                Investment

      a.   Increase              Decrease

      b.   Increase              Increase

      c.   Increase              No Change

      d.   Decrease             Decrease

      e.   Decrease             Increase

 

 

# of Workers

 

MP of Labor

0

 

 

 

1

 

14

 

2

 

12

 

3

 

10

 

4

 

8

 

5

 

6

 

 

5.   Given the information in the previous table, how many workers should be employed when product price is $2 and the company must pay $13 per worker (within the given time frame)?

      a.  1

      b.  2

      c.  3

      d.  4

      e.  5

 

  1. At one point in time, the Collins Co. had monopsony power in the town of Collinsville's labor market. But over time, new businesses moved to the area and the monopsony power was broken. When the Collins Co. lost its monopsony power, what probably happened?

      a.   wage rates in Collinsville increased.

      b.   wage rates in Collinsville decreased.

      c.   workers left the town in search of another monopsony market.

      d.   the price of goods sold by the Collins company decreased.

      e.   the number of workers employed in Collinsville decreased.

 

7.   Derived demand…

      a.   is the demand for any factor of production which is completely fixed in supply.

      b.   tells us that the demand for a factor of production is influenced by the demand for the good or service it produces.

      c.   is inversely related to MRP.

      d.   equals MP x MR.

      e.   increases when the supply of a factor of production increases.

 

8.   Which of the following statements is/are true of unions?

                      I.   Unions create monopsony power in the labor market.

                     II.   Unions try to improve wage rates for union members.

                   III.   Collective bargaining is the main tool of unions.

      a.   I only                                              e.   I and III only

      b.   II only                                            f.    II and III only

      c.   II only                                            g.   I, II and III

      d.   I and II                                           h.   none of the above

 

9.   If in 1995 the nominal wages of carpenters were to rise by 5 percent and the price level were to increase by 3 percent…

      a.   one could not determine the resulting change in real wages.

      b.   the real wages of carpenters would decrease by 2 percent.

      c.   the real wages of carpenters would increase by 2 percent.

      d.   the real wages of carpenters would increase by 3 percent.

      e.    the real wages of carpenters would increase by 8 percent.

__________________________________________________________________

 

 

 

10. Use the information provided by the previous graph to answer the following questions.

 

      a)   What kind of market situation does this graph illustrate?

      b)   What quantity of workers would this firm employ?

      c)   What wage rate would the firm pay its workers?

 

11. Suppose that a local snow plowing company has just employed its fifteenth worker and that worker added 20 units to total production while the company had to pay the worker $10.00. The last truck they purchased added 40 units to total production, while it cost the company $80.00. Now the company plans to purchase more factors of production, how would you advise them?

      a.  Do not purchase any more inputs, you are already maximizing your profits.

      b.  Purchase another truck.

      c.  Fire a worker.

      d. Employ another worker.

      e. Shut down your operation.

 

12. According to an economist, the person who will end up renting a particular piece of land will

      be…

      a.  the one who needs it the most.

      b.  the one who will earn the greatest amount money as a result of using the land.

      c.  the one who wants to build a house on it.

      d. the one who wants to hold onto it to resell in the future.

      e.  the one who has the lowest costs of production.

 

      13. A profit maximizing firm finds that the most recent worker hired contributes more to total

            revenue than the extra cost of hiring that worker. Which of the following will the firm most

            likely do?

      a. maximize the marginal productivity of its workers

      b. minimize the marginal resource cost of hiring workers

      c. maximize the difference between the marginal revenue product of labor and the marginal resource cost of labor

      d. hire more workers

      e. hire fewer workers

 

14. Which of the following inevitably causes a shift in the market demand for workers with a

      certain skill?

      a. an increase in the demand for the goods produced by these workers

      b. a decrease in the tax rate on the income of these workers

      c. an increase in the equilibrium price received by these workers

      d. an increase in the supply of these workers

      e. the creation of a federally subsidized program to train new workers

 

15. If the supply of a factor of production is fixed, which of the following will be true of its price?

      a. supply is irrelevant to the determination of prices for all factors of production

      b. one can not justify charging a price for this factor of production

      c. factor price will be determined by the demand for the fixed factor of production

      d. factor price will not be determined by supply and demand analysis

      e. factor prices will be zero, since no payment is necessary to secure the services of the factor

 

Question 16-17 are based on the following table, which shows the relationship between the number of workers and coal output (in tons per day)

                                                                                                     

                                       _______________________

                                       Number of        Total Output

                                         Workers              of Coal

                                               0                         0

                                               1                        25

                                               2                        44

                                               3                        60

                                               4                        70

                                               5                        75

                                       _______________________

 

16. The marginal product of the second worker is…

      a. 19

      b. 22

      c. 25

      d. 44

      e. 75

 

17. How many workers should the coal company hire if the price of coal were competitively

      priced at $5 per ton and the wage rate were $40 per day?

      a. 5

      b. 4

      c. 3

      d. 2

a.    0

      18. Of the following, which is the best definition of interest?

      a. profits made by a bank.

      b. money earned by entrepreneurs without working for it

      c.  dividends paid to stockholders

      d. the price paid for loanable funds

      e. the factor payment for land

 

      19. What would we expect with an increase in profits in a particular industry?

      a. Firms to leave the industry

      b. Firms to produce less

      c. Firms to enter the industry

      d. People to buy less

      e. A decrease in derived demand

 

20. What is the formula used to determine the profit maximization combination of labor and

      capital?

 

 

 

 

 

 

 

21.  What is the formula used to determine the cost equalizing combination for capital and labor?

 

 

 

 

 

 

 

22. What are the two methods of determining Marginal Revenue Product?

 

 

 

 

     

                                                                          

23. Explain what Marginal Revenue Product (MRP) means.

 

 

 

 

 

 

24. Explain what Marginal Resource Cost (MRC) means.

 

 

 

 

 

 

 

25. Theoretically, who should be able to purchase a factor of production?

 

 

 

 

 

 

 

26. What is a union's most basic tool?

 

 

 

 

 

 

 

27. Explain the difference between real wages and nominal wages.

 

 

 

 

 

 

 

28. Explain the difference between real interest rates and nominal interest rates.

 

 

 

 

     

     

     

      29. How do interest rates influence savings, investment and total spending?

 

 

 

 

 

      30. What is economic rent?