Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization

Question 1

A dynamic decision is one that

Answer 1

involves planning over more than one time period

Question 2

A static decision is one that

Answer 2

involves planning over one time period

Question 3

The principle that consumers and firms optimize

Answer 3

is helpful because it allows us to analyze how economic agents respond to changes in their environment.

Question 4

It is useful to assume that there is a single representative consumer because

Answer 4

this is a useful abstraction if we are interested in problems where distribution effects are not important.

Question 5

The utility function captures

Answer 5

how an individual consumer ranks consumption bundles.

Question 6

The indifference map

Answer 6

captures the same information as the utility function

Question 7

The consumer’s work-leisure choice problem focuses on how a consumer’s work-leisure

Answer 7

preferences and constraints.

Question 8

Leisure does not include

Answer 8

market work

Question 9

The consumer wants to work because he/she

Answer 9

wants the income

Question 10

In macroeconomic analysis, what is the representative consumer’s role

Answer 10

plays the role of a stand-in for all consumers in the economy

Question 11

We consider the preferences of the consumer because

Answer 11

we want to understand the consumer’s reaction to changing circumstances.

Question 12

A consumption bundle

Answer 12

is a particular combination of consumption and leisure

Question 13

A utility function

Answer 13

needs to measure relative amounts of happiness for a single individual

Question 14

We use indifference curves because

Answer 14

they help represent preferences

Question 15

The preferences of the representative consumer over consumption and leisure are represented by use of a

Answer 15

utility function

Question 16

We assume that the representative consumer’s preferences exhibit the properties that

Answer 16

more is preferred to less and that the consumer prefers diversity.

Question 17

In the one-period model, what do we assume about household preferences

Answer 17

Households prefer more to less.

Question 18

when is a consumer said to be indifferent between two consumption bundles

Answer 18

when the two bundles provide equal amounts of utility.

Question 19

We assume that the representative consumer’s preferences exhibit the properties that

Answer 19

consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundle

Question 20

In the (consumption,leisure) space, what shape are indifference curves

Answer 20

downward sloping and bowed towards the origin.

Question 21

In the (consumption,leisure) space, indifference curves as we have assumed them have the property of presenting the highest levels of satisfaction in what corner

Answer 21

in the north-east corner.

Question 22

A good is normal for a consumer if

Answer 22

its consumption rises when income rises

Question 23

We assume leisure is a normal good. This implies that

Answer 23

an increase in taxes decreases the demand for leisure.

Question 24

A good is inferior for a consumer if

Answer 24

its consumption falls when income rises.

Question 25

what is a consumption bundle

Answer 25

a particular combination of consumption and leisure.

Question 26

what is an indifference curve

Answer 26

connects a set of consumption bundles among which the consumer is indifferent.

Question 27

Two key properties of indifference curves are that an indifference curve slopes

Answer 27

downward and is bowed in toward the origin

Question 28

what is the significance that indifference curves are downward sloping

Answer 28

it follows from the fact that more is preferred to less

Question 29

The fact that indifference curves are bowed in toward the origin

Answer 29

follows from the property that the consumer likes diversity in his or her consumption bundle

Question 30

what is the marginal rate of substitution

Answer 30

is minus the slope of the indifference curve.

Question 31

The property of diminishing marginal rate of substitution follows from the property that the indifference curve is

Answer 31

bowed in toward the origin.

Question 32

The marginal rate of substitution measures

Answer 32

the rate at which a consumer is willing to exchange one good for another

Question 33

The representative consumer acts competitively

Answer 33

when he or she is a price-taker.

Question 34

When consumers act as price-takers, we say that they behave

Answer 34

competitively.

Question 35

what is a barter economy

Answer 35

an economy without monetary exchange

Question 36

An economy without monetary exchange is called

Answer 36

a barter economy.

Question 37

A numeraire is

Answer 37

a good used as a unit of account

Question 38

Which of the following is false?

Answer 38

lump-sum taxes are realistic.

Question 39

The time constraint for the consumer is

Answer 39

expressed as leisure time + time spent working = total time available.

Question 40

The real wage denotes

Answer 40

the number of units of consumption goods that can be exchanged for one unit of labor time.

Question 41

A lump-sum tax is a tax that

Answer 41

does not depend on the actions of the economic agent being taxed

Question 42

In a one-period economy

Answer 42

consumption equals disposable income.

Question 43

A consumer's real disposable income equals

Answer 43

wage income plus profit income minus taxes.

Question 44

In a one-period economy, real consumption is equal to...

Answer 44

exactly equal to disposable income.

Question 45

In a one-period economy, all of the following are equivalent expressions of the budget constraint except

Answer 45

C = w(NS + l) + π - T.

Question 46

With consumption on the vertical axis and leisure on the horizontal axis, the slope of the budget line is equal to

Answer 46

-w.

Question 47

The vertical intercept of the consumer's budget line is equal to

Answer 47

wh + π - T.

Question 48

An increase in taxes has the following impact on the budget constraint

Answer 48

a parallel move down.

Question 49

If dividend income increases, the following does not happen

Answer 49

the substitution effect exceeds the income effect.

Question 50

The household budget constraint may have a kink because

Answer 50

leisure is limited by the number of available hours.

Question 51

The optimal consumption bundle is the point representing a consumption-leisure pair that is on the

Answer 51

highest possible indifference curve and is on or inside the consumer's budget constraint.

Question 52

At the optimal consumption bundle, the marginal rate of substitution of leisure for consumption is equal to

Answer 52

the real wage and the budget line is tangent to an indifference curve.

Question 53

Saying the consumer is rational means

Answer 53

the consumer makes the best choices.

Question 54

A defense for the assumption that consumers maximize is that

Answer 54

consumers do not consistently make the same mistakes.

Question 55

An increase in real dividend income minus taxes represents

Answer 55

a pure income effect

Question 56

A positive, pure income effect can be obtained by

Answer 56

increasing the dividend.

Question 57

A pure positive income shock leads to

Answer 57

an increase in leisure and consumption.

Question 58

When consumption and leisure are both normal goods, after an increase in real dividend income minus taxation, the rational consumer

Answer 58

increases consumption and increases leisure.

Question 59

When consumption and leisure are both normal goods, after an increase in real dividend income minus taxation, the rational consumer

Answer 59

increases consumption and reduces labor supply.

Question 60

An increase in the real wage

Answer 60

represents a combination of income and substitution effects.

Question 61

An increase in the real wage

Answer 61

increases consumption and has an ambiguous effect on labor supply

Question 62

When the wage increases, the substitution effect in the household's choices leads to

Answer 62

an increase in consumption and a decrease in leisure

Question 63

When the wage increases, the income effect on the household's choices leads to

Answer 63

an increase in consumption and leisure.

Question 64

Theoretically, an increase in the real wage

Answer 64

has an ambiguous effect on leisure.

Question 65

The substitution effect measures

Answer 65

the responses of quantities to changes in the relative prices of goods

Question 66

Labor supply

Answer 66

increases if the substitution effect exceeds the income effect.

Question 67

If labor supply is increasing in the real wage, then

Answer 67

the substitution effect is larger than the income effect.

Question 68

A production function describes the

Answer 68

technological possibilities for converting factor inputs into outputs.

Question 69

In the production function, Y = zF(K, Nd), total factor productivity is

Answer 69

z

Question 70

Capital, K, includes

Answer 70

machinery

Question 71

The marginal product of a factor of production

Answer 71

is equal to the amount of additional output that can be produced with one additional unit of that factor input, holding constant the quantities of the other factor inputs.

Question 72

Constant returns to scale means that, given any constant x > 0

Answer 72

xzF(xK, xNd)= zF(xK, xNd).

Question 73

The construct of a representative firm is most helpful in describing the behavior of all of the firms in the economy when

Answer 73

there are constant returns to scale.

Question 74

We are assuming that returns to scale are

Answer 74

Constant

Question 75

As the quantity of labor increases, the marginal product of labor

Answer 75

decreases.

Question 76

As the quantity of labor increases, the marginal product of capital

Answer 76

increases

Question 77

As the quantity of capital increases, the marginal product of capital

Answer 77

decreases

Question 78

The assumption that the marginal product of labor decreases as the labor input increases implies that

Answer 78

the production function is concave

Question 79

The production function is concave in labor because

Answer 79

the contribution to production of each additional unit of labor decreases

Question 80

The production function is concave in capital because

Answer 80

the contribution to production of each additional unit of capital decreases

Question 81

An increase in total factor productivity shifts the production function

Answer 81

upward and increases the marginal product of labor.

Question 82

Of the following, which is the least likely example of an increase in total factor productivity?

Answer 82

an increase in immigration

Question 83

An increase in total factor productivity could be the result of

Answer 83

the introduction of new manufacturing methods.

Question 84

Look at the production schedule of the Widget Company below: Number of workers 0 1 2 3 4 5 Number of widgets 0 12 22 30 36 40

Answer 84

10

Question 85

Look at the production schedule of the Widget Company below: Number of workers 0 1 2 3 4 5 Number of widgets 0 12 22 30 36 40

Answer 85

3

Question 86

Look at the production schedule below: Workers 0 1 2 3 4 5 Output 0 45 80 100 130 165

Answer 86

decreasing marginal product of labor

Question 87

Look at the production schedule below: Workers 0 1 2 3 4 5 Output 0 45 80 100 130 165

Answer 87

4

Question 88

Which is a good example of an increase in total factor productivity?

Answer 88

good weather

Question 89

If the firm hires more labor, everything else held constant, then

Answer 89

the marginal product of labor falls.

Question 90

Total factor productivity encompasses

Answer 90

know-how

Question 91

The goal of the representative firm is to

Answer 91

maximise profits

Question 92

An increase in total factor productivity

Answer 92

changes both the slope and the position of the production function.

Question 93

The Solow residual is a measure of

Answer 93

total factor productivity.

Question 94

A Cobb-Douglas production function is

Answer 94

a particular production function that fits the data well.

Question 95

The profit-maximizing quantity of labor equates the marginal product of labor with

Answer 95

the real wage

Question 96

When the representative firm maximizes profits,

Answer 96

the wage equals marginal labor productivity

Question 97

When the representative firm maximizes profits

Answer 97

the marginal product of labor equals the wage.

Question 98

Suppose the representative firm suddenly has less capital at its disposal. What happens to labor demand?

Answer 98

It decreases.

Question 99

If the real wage is equal to 7 widgets, and only an integer number of workers can be hired, the Widget company should hire

Answer 99

3 workers.

Question 100

Labor demand is decreasing in the wage because

Answer 100

the production function is concave.