Chapter 5

Question 1

What is one of the most important question asked when attempting to maximize profits?

Answer 1

Whether, and how, to increase or decrease output

Question 2

What are some of the small (marginal) changes that must be made in order to search for profit improving possibilities?

Answer 2

Incrementally deciding the optimal level of output

Question 3

What is the equation for the marginal product of labor?

Answer 3

MP(labor) = ΔQ/ΔL|(K constant)

Question 4

What is the equation for marginal product of capital?

Answer 4

MP(capital) = ΔQ/ΔK|(L constant)

Question 5

What is the equation for marginal revenue?

Answer 5

MR = P

Question 6

What is the equation for marginal revenue product of labor?

Answer 6

MRP(labor) = MP(labor) . MR

Question 7

What is the equation for marginal revenue product of capital?

Answer 7

MRP(capital) = MP(capital) . MR
or
MRP(capital) = MP(capital) . P

Question 8

What does change in labor and change in capital do to the firm’s total cost?

Answer 8

It will add or subtract from the firm’s total costs

Question 9

What is marginal expense of labor?

Answer 9

It is the change in total labor cost for each additional unit of labor hired

Question 10

What happens to wage when the labor market is competitive?

Answer 10

Each worker hired is paid the same wage as all workers so ME(labor) = W

Question 11

What kind of supply curve is the marginal expense of labor?

Answer 11

It is a horizontal supply curve

Question 12

What happens to rental cost when the capital market is competitive?

Answer 12

Each additional unit of capital will have the same rental cost (C) so ME(capital) = C

Question 13

What can’t the firm do when in the short-run?

Answer 13

In the short-run, the firm cannot vary its stock of capital

Question 14

What is the equation for the production function?

Answer 14

Q = f(L,K)

Question 15

What is assumed when both product and labor markets are competitive?

Answer 15

All producers or sellers are price takers in the product market
All employers of labor are wage takers in the labor market

Question 16

Where does the analysis of a firm’s production and employment take place?

Answer 16

In the short run where the firm cannot vary its capital stock

Question 17

What happens to output in the short run, where K (capital) is constant, and extra units of L (labor) are added?

Answer 17

It increases output in each case and MPL is positive to some point

Question 18

What will eventually occur in the short run when adding more L (labor)? What is this called?

Answer 18

It will produce progressively smaller increments of output
This is called the law of diminishing marginal returns

Question 19

What does the law of diminishing marginal returns describe?

Answer 19

It describes that, as employment expands, each additional worker has a progressively smaller share of the capital stock to work with

Question 20

When is profit maximized?

Answer 20

It is maximized only when employment is such that any further one-unit change in labor would have a marginal revenue product equal to marginal expense

Question 21

What are the two ways in which labor demand can be analyzed?

Answer 21

It can be analyzed in terms of either real or money wages

Question 22

What does the negative slope of the labor demand curve indicate?

Answer 22

It indicates that each additional unit of labor employed produces a progressively smaller increment in output

Question 23

What should the firm employe at any real wage determined by the market>

Answer 23

They should employ labor up to the point at which MP(labor) equals the real wage (W/P)

Question 24

Why doesn’t MRP(labor) decline?

Answer 24

It does not decline because added workers are incompetent, it declines because capital stock is fixed hence added workers have less capital or equipment to work with

Question 25

What does the labor demand curve do in the short run?

Answer 25

It slopes downward because it is the MRP(labor) curve, which slopes downward because of labor's diminishing marginal product

Question 26

Since MRP(labor) = W for a profit maximizer who takes wages as given, the MRP(labor) curve and labor demand curve (MP(labor)) must be __

Answer 26

the same

Question 27

The marginal product of an individual is not a function solely of his or her personal characteristics

Answer 27

It depends on the number of similar employees hired by the firm and the firm’s capital stock

Question 28

What is a market demand curve?

Answer 28

It is the summation of the labor demanded by all firms in a particular labor market at each level of the real wage

Question 29

When real wage falls or increases the number of workers that existing firms want to employ ___

Answer 29

falls or increases

Question 30

What is labor demand in the long run?

Answer 30

It is the firm's ability to adjust other inputs such as capital will affect the demand for labor

Question 31

How can a firm maximize its profits in the long run?

Answer 31

The firm must adjust L and K such that each input's MRP is equal to ME

Question 32

What must firms do to maximize profits?

Answer 32

The firm must adjust its labor and capital inputs so that the marginal cost of producing an added unit of output using labor is equal to the marginal cost of producing an added unit of output using capital

Question 33

What are the categories that labor can be subdivided into?

Answer 33

Age, education level, and occupation

Question 34

If two inputs are substitutes in production, and if an increase in the price of one input shifts the demand for another input to the left what effect dominates?

Answer 34

The scale effect dominates the substitution effect

Question 35

If the increase in the price of one input shifts the demand for the other input to the right which effect dominates?

Answer 35

The substitution effect dominates

Question 36

When two inputs must be used together in some proportion what are they considered to be?

Answer 36

They are considered to be perfect complements or complements in production – that is, no substitution effect, only scale effect.

Question 37

What are monopoly producers?

Answer 37

They are price-makers in the product market but wage-takers in the labor market

Question 38

Where will payroll taxes shift the labor demand curve?

Answer 38

It will shift it to the left

Question 39

When will employers decrease their employment of workers?

Answer 39

When their wage costs increase by the tax amount due tot the payroll tax

Question 40

When will employers retain the same amount of workers as before the payroll tax was imposed?

Answer 40

If the entire tax burden is passed onto the workers, that is, workers' wages fall by the tax amount

Question 41

Who bears the burden of the payroll tax?

Answer 41

Employees in the form of lower wage rates and lower employment levels when the government chooses to generate revenues through a payroll tax on employers

Question 42

What does it mean when the labor supply curve is vertical? What would occur?

Answer 42

Lower or higher wages have no effect on labor supply The entire amount of tax will be shifted to workers in the form of a decrease in their wages by the amount of payroll taxes

Question 43

What are the different forms of government subsidies of employers' payroll?

Answer 43

Cash payments Tax credit to employers

Question 44

How do government subsidies affect the labor demand curve?

Answer 44

They shift the curve to the right, thus creating pressures to increase employment levels and the wages received by employees