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Flashcards in Module 9 – Income Distribution Deck (56):
1

A profit-maximising monopsonist will hire a factor of production up to the point at which _____ is equal to the _____.

the benefit of hiring one additional unit of the factor (i.e. the value of the marginal product of the factor);

cost to the firm of hiring that factor (i.e. the marginal cost of the factor)

1

If a union negotiates a wage that’s higher than that which would have prevailed in a competitive factor market, ...

then fewer people will be hired (given a downward sloping Marginal Product curve)

2

Given a monopsony and a trade union, by negotiating a wage that is higher then the going rate a trade union may...

...reduce the cost of hiring an additional person and so may increase in employment – this is because the MC will equal the negotiated rate

2

All market economies elect to alter distribution of income for equity reasons.  Discuss.

- Provide income for aged, sick and unemployed
- Tax-transfer are a common method (progressive tax structure)
- Payments in kind (e.g. school meals, subsidised housing, family income supplements)
- Those tax receive less than contribution to total output
- Recipients receive more

3

A monopsonist will not hire until Marginal Cost = _____, but instead hires until MC = _____

going wage rate;

 total cost of hiring one new employee

3

What do economists mean when they use the expression ‘exploitation of labour’? They mean employers are paying workers

A. a wage rate so low that workers’ living standards are below the minimum acceptable

B. from underdeveloped countries a lot less than they are paying domestic workers

C. a wage rate less than the value of the marginal product of labour

D. money wages which are less than foreign currency wages as measured by the purchasing power parity exchange rate

The correct answer is C. A profit maximising monopsonist will hire labour up to the point at which the benefit of hiring one more worker just equals the cost to the firm of hiring that factor. The monopsonist will not hire up to the point at which the value of the marginal product of labour equals the wage rate. This, the economists call ‘exploitation’.

4

The demand for goods and services determines the...

demand for the factors of inputs required to produce them

5

If all workers in this market become unionised and the union negotiated a wage rate significantly higher than 'We' then in this labour market


I. unemployment would appear
II. workers who remained employed would be better off
III. the total wage bill of all firms in the market would increase
Which of the following is correct?

A. I only
B. I and II only
C. II and III only
D. I, II and III

The correct answer is B. At a wage rate > We, S>D therefore unemployment will exist. I is true. Those who remain employed will have a higher wage rate and therefore a higher weekly income. Therefore II is true. Whether the total wage bill increases for all firms taken together will depend upon the wage elasticity of demand for labour. If inelastic, the total wage bill will increase ; if elastic, it will decrease. Thus III is not necessarily true.

6

A monopsonist

I. is the sole employer in a market
II. faces a completely wage elastic supply curve of labour
III. ’s marginal cost of labour exceeds the going wage rate

Which of the following is correct?

A. I only
B. II only
C. I and III only
D. I, II and III

The correct answer is C. By definition a monopsonist is the sole employer in a market. Thus I is true. The wage rate in a monopsony market will be determined by the demand for and supply of labour. However once that rate is determined if a monopsonist wishes to have more labour the monopsonist will have to offer a wage higher than the going rate to attract more people into the labour market but the higher rate will then have to be paid to all workers. Thus the marginal cost of labour will exceed the wage rate (III is true) and the monopsonist will not face an elastic labour supply curve. Thus II is wrong.

6

Under what condition can a trade union make the marginal cost of labour for an employer lower than it would have been in a non-unionised labour market? When the employer is

A. an imperfect competitor
B. a monopolist
C. an oligopolist
D. a monopsonist

The correct answer is D. Only a monopsonist faces a supply curve of labour where the marginal cost exceeds the wage rate; i.e. to have additional labour the monopsonist has not only to increase the wage to attract new labour but also offer the same new rate to existing labour. A trade union by negotiating a higher then equilibrium wage rate makes the marginal cost of hiring labour constant. Thus D is true. In competitive labour markets firms can hire as much labour as they wish at the going wage rate; unions, for those firms, make wage rates higher than they otherwise would have been.

7

The price paid for labor varies... 

depending on how much demand there is for that persons skills

8

The supplies for factors of production are determined by ?

Resource owners 

8

Definition of "exploitation of labour"

Paying a wage rate less than the value of the marginal product of the labour

8

Society’s total income is dependent on how _____

efficiently a society utilized resources

8

In terms of purchasing power where would you be best off?

In

A. New York with $500
B. London with £350
C. Bangkok with 20 000 Baht
D. Abu Dhabi with 2 500 Dirham

The correct answer is D. Converting each to dollars yields:

London $525 (£350 × 300/200)

Bangkok $500 (Baht 20 000 × 300/12 000)

Abu Dhabi $625 (Dirham 2 500 × 300/1 200)

9

In the US in the 1930s John L. Lewis successfully negotiated wage increases for coalminers. His union, it is alleged, achieved for the workers wage rates approximately 100 per cent higher than they would have been in the absence of the union. One cost associated with Lewis’s efforts was a dramatic decrease in the number of coalminers employed. If total wage income increased because of the union efforts, then

I. employers were no longer paying employed coalminers the value of their marginal product.

II. the employed coalminers could have compensated those laid off and each would have been better off. Which of the following is correct?

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

The correct answer is B. The fact that employers were forced to pay a higher-than- competitive equilibrium wage rate does not imply that they did not equate wage and marginal product. Indeed, the laying-off of workers indicates that they moved in that direction. Thus, there is no reason to suppose that response A is correct. Since total wage income rose, however, not only were the employed coalminers better off than before but they were in a position to pay the laid-off workers their original wage income, themselves their original wage income, and still have some income left over.

9

What is the name of the exchange rate which is calculated by comparing the costs of a basket of representa-tive goods in each country’s currency and converting them all to one currency?

A. The international exchange rate
B. The official exchange rate
C. The purchasing power parity exchange rate
D. The consumer price index exchange rate

The correct answer is C. This is a definitional question.

10

Definition of trade union.

A trade union represents a group of or all the resource owners in a market

10

If the market supply curve of labour were to shift to the left what would the profit maximising firm do?

A. Shift its VMP to the left
B. Move up its VMP and hire fewer man hours
C. Nothing in the short run
D. Leave the industry in the long run

The correct answer is B. The shift in the market supply curve to the left would produce a higher than We equilibrium wage rate. The profit maximising firm would equate the new wage rate with the value of the marginal product of labour, i.e. move up its VMP and hire fewer man hours.

11

At the equilibrium wage rate what is the return to all factors employed by the firm other than skilled labour?

A. (0We X 0Q) - (0we x oq)
B. Total Revenue - (0we xoq)
C. Total Revenue - (0We x 0q)
D. VMP X 0q X 0we

The correct answer is B. In equilibrium the return to skilled labour is the number of man hours × wage rate, i.e. owe×oq. The return to all factors is total revenue from the sale of the products (S). Thus the return to all factors other than skilled labour equals TR − (owe×oq).

12

In a resource market, the demand and supply of a factor of production determine... 

equilibrium price and equilibrium quantity supplied

13

The income earned by factors of production are:

  • the wages/salaries paid for labor
  • the interest and dividends paid to owners of capital 
  • the rent paid to owners of land and mineral deposits

14

What is the relationship between the market supply curve (S) and the firm’s value of the marginal product curve (VMP)?

A. There is no relationship between the market S curve and the firm’s VMP curve
B. S is the summation of the all the VMPs of firms in the market
C. S determines the position of VMP
D. S determines the equilibrium wage rate, We

The correct answer is A. D is the summation of all firms’ VMP; both are unrelated to the market supply curves.

15

At the equilibrium wage rate what is the firm’s total wage bill for skilled labour

A. The area under the VMP curve
B. 0Q X OWe
C. 0q X 0we
D. The answer cannot be determined from the figure

The correct answer is C. The firm will have labour up to the point at which the wage rate We equals the value of the marginal product of labour; this occurs when oq man hours are hired. The wage bill for the firm for skilled labour therefore will be owe×oq.

16

In an economy consisting of perfectly competitive labour markets and perfectly competitive firms what is the economic rent of a semi-skilled mechanic?

A. His salary
B. His salary minus search costs in seeking another job
C. What he could earn with a different firm
D. Zero

The correct answer is D. In a perfectly competitive labour market each type of labour will be homogenous and each classification of worker will earn an identical wage/salary rate. If a semi-skilled mechanic leaves one firm and joins another it will be at the same salary. The economic rent will be zero.

18

A profit maximizing firm will hire a resource up to the point at which...

marginal benefit of that resource equals its marginal cost

20

One way to counteract monopsonists’ power is for labour to organise itself in the form of a _____.

trade union

22

Individuals who _____ and _____ will have a higher income

own lots of resources; have a higher VMP

23

To maximise profit, how many pickers should the farmer hire and why?

A. One tomato picker because his contribution to output is greatest.

B. Three tomato pickers because the fourth costs more than he earns.

C. Eight tomato pickers because costs will equal revenue.

D. Nine tomato pickers because the value of the marginal product of the tenth picker is zero.

The correct answer is B. A profit-maximising firm will hire an additional worker if that worker contributes more to revenue (value of his marginal product) than to cost (going wage rate). In the table the value of the marginal product of labour steadily declines as workers are hired. The third worker adds $1.40

23

The local authorities, in an attempt to make tomato pickers better off, legislate that tomato pickers must be paid a wage no less than $1.60 per day.

If our profit-maximising farmer complies with the legislation, then

I. each of the tomato pickers our farmer had previously hired will become better off. II. the value of the average product of labour will fall.

III. the quantity of tomato output will fall. Which of the following is correct?

A. I only.
B. II and III only.
C. III only.
D. I, II and III.

The correct answer is C. Prior to the $1.60 minimum-wage legislation, the farmer was hiring three pickers. However, profit-maximising behaviour dictates that the farmer now hires only two pickers because the third picker’s marginal product of $1.40 ($6.20 − $4.80) is less than the wage rate of $1.60. Thus that picker will be fired and become worse off, although the other two workers will benefit. Output per worker (the value of the average product of labour) will rise, but total output will fall.

24

Which of the following contains the purchasing power parity dollar exchange rates?

A.
Baht per Dollar .025
Dirham per Dollar .25
Pound per Dollar 1.5

B.
Baht per Dollar .25
Dirham per Dollar 2.5
Pound per Dollar 1.5

C.
Baht per Dollar 4 
Dirham per Dollar 0.4
Pound per Dollar .67

D.
Baht per Dollar 40
Dirham per Dollar 4
Pound per Dollar .67
 

The correct answer is D. Each of the sums quoted is equivalent in terms of purchasing power to $300. To find the exchange rate, i.e. what $1.00 is worth in each of the currencies each sum has to be divided by 300 yielding 40, 4 and .67 respectively.

26

Not all factors markets are perfectly competitive and so not all returns to factors are... 

...determined by the marginal productivity theory

28

Definition of Economic rent?

Economic Rent is the difference between the value of the marginal product of a factor of production in its most productive use and its next best alternative 

28

The cost to a monopsonist of hiring more units of a factor input, i.e. the marginal cost of that factor, equals the _____, plus the _____

 higher rate necessary to attract more of a factor; increase in rate to existing employed units of that factor

29

The monopsonist will not hire a factor until the value of the marginal product equals _____ since the _____.

the going rate for that factor;

marginal cost will exceed the going rate

31

Definition of Monopsony?

Monopsony, the opposite of monopoly, means only one buyer in a market and occurs when only one employer of factor inputs exists in a market

33

How is the equilibrium price of a factor of production (eg labor) determined?

By the demand and supply of that factor

34

If you were to divide the total income of a country by its population at what figure would you arrive? A figure representing the average

A. income earned by each worker
B. materialistic well-being of each person
C. cost of a basket of goods and services
D. wage rate per worker

The correct answer is B. National income of a country is the income earned by all the factor inputs which produce the total flow of goods and services usually measured over one year which in turn is a measure of the materialistic well-being of that country. Divided by the population yields an average measure of such well-being.

36

The number of units of each factor hired by the monopsonist determines...

  • the prices (rates) and the
  • evels of employment

36

If the firm were to hire oq+ 1 man hours, i.e. just greater than oq

I. the VMP curve would shift to the left
II. the market demand curve would shift to the left

Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is D. By hiring more labour than oq the firm is only moving along its VMP curve. This will shift neither the market D or S curves.

37

If a minimum wage law were enacted which introduced a minimum wage rate for child labour lower than OWe what impact would this have on the firm and in the labour market?

A. Firm: Increased employment; Labour market: None
B. Firm: None; Labour market: Shift to the right of supply curve
C. Firm: Decreased employment; Labour market: Shift to the left of supply curve
D. Firm: None; Labour market: None

The correct answer is D. Since the minimum wage is lower than the market determined equilibrium wage rate it would have no impact on either the behaviour of the firm or the position of the D and S curves in the market.

38

A star soccer player earning $2 million per year is offered a job as an advertising agent when he retires in an expected 10 years or earlier. This job will pay $50 000 and is the best offer he will receive. His current contract prevents him for ever playing soccer with any other team. What is the soccer player’s economic rent?

A. $50 000
B. $1 950 000
C. $250 000
D. −$195 000

The correct answer is B. By definition the difference between the value of the marginal product of a factor input in its most productive use (i.e. $2 million as a soccer player) and its best alternative ($50 000 as an advertising agent) is $1 950 000 ($2 million − $50 000).

40

Market economies alter the distribution of income for _____

equity reasons

41

Which of the following is correct? If the market supply curve for labour is upward-sloping, a profit-maximising monopso-
nistic employer (a sole employer) would necessarily ‘exploit’ unorganised workers in the sense that it would

A. pay a wage below subsistence level.
B. pay lower wages than a competitive firm.
C. pay a wage below the value of labour’s marginal product.
D. maintain substandard working conditions.

The correct answer is C. The profit-maximising monopsonistic firm will hire labour up to the point at which the benefit to the firm of hiring one more worker (the value of the marginal product of labour) is equal to the cost to the firm of hiring that worker (the marginal cost of labour). Consequently the monopsonist will not hire labour up to the point at which the value of the marginal product of labour equals the wage rate because, given the upward-sloping supply curve of labour, the marginal cost of labour will exceed the wage rate. This is what economists mean by ‘the exploitation of labour’ – Marxists have a different definition.

43

How can a worker can increase the value of his marginal product?

...by taking a training course and thereby increasing his equilibrium wage

44

Which of the following contains the purchasing power parity pound sterling exchange rate?

A.
Baht per Pound 60
Dirham per Pound 6
Dollar per Pound 1.5

B.
Baht per Pound 6
Dirham per Pound 0.6
Dollar per Pound .15

C.
Baht per Pound .0167
Dirham per Pound .167
Dollar per Pound .67

D.
Baht per Pound .167
Dirham per Pound 1.67
Dollar per Pound .67
 

The correct answer is A. Each of the sums quoted is equivalent in terms of purchasing power to £200 sterling. Thus £4 is equivalent to each sum divided by 200, i.e. 60, 6 and 1.5 respectively.

45

Tax causes individuals to receive _____

less than their contribution to total output , ie. less than the marginal products

46

Assuming the market is composed of perfectly competitive firms and assuming the market is in equilibrium initially what would happen if the firm hired oq− 1 man hours, where oq− 1 is less that oq?

A. The market demand curve would shift to the left
B. The market supply curve would shift to the left
C. The firm would earn less than normal returns
D. The firm would go out of business.

The correct answer is C. By hiring only oq − 1 man hours the firm is moving up its VMP curve. The position of the market D and S curves will not move. Thus A and B are wrong. By not hiring oq man hours the firm will produce less than the profit maximising output; it will produce at a point where AR > ATC and as a consequence will earn less than normal returns. Thus C is correct. The firm however might not go out of business. Thus D is wrong.

47

The schedule below shows how many units of output a firm can produce in a day by
varying only the amount of labour.

Workers per day 0 1   2   3   4   5   6   7   8   9   10 11 12

Output per day    0 10 20 35 50 60 70 78 86 91 95 98 100

If the going wage rate is $9 per day and if the selling price of the product is $1 per unit, how many people should the firm hire if it wants to maximise profit?

A. 6.
B. 7.
C. 10.
D. 12.

The correct answer is A. Since the wage of $9 per day is constant, the marginal cost of labour is $9. A profit-maximising firm will hire labour up to the point at which the value of the marginal product of labour just equals the wage rate. This equality is never actually reached in the table. In hiring a sixth worker, the addition to output is 10 units (70 − 60) worth $10 ($1 × 10). This exceeds the wage rate of $9, and this worker should therefore be hired. However, the value of the marginal product of the seventh worker is only $8 and therefore he should not be hired.

49

Which of the following is correct? The differences in rates of pay between managing directors and unskilled labourers

A. are unexplained exceptions to the marginal productivity theory of wages.

B. exist because of politics and power, not economic rationality.

C. would be largely eliminated in a truly competitive, free-enterprise economy.

D. are basically the result of influences of supply and demand.

The correct answer is D. Profit-maximising firms hire factors of production up to the point at which their contribution to output (the value of their marginal product) equals the going rate. In competitive markets, wages are determined for managing directors and unskilled workers by demand and supply conditions. The reason the wages of the former typically exceed those of the latter is because of relative demand and supply conditions.

50

In perfectly competitive labour markets what determines the equilibrium wage rate of a skilled worker?

A. The number of years of training required to acquire the skills
B. Age and experience of the worker
C. The demand for, and supply of, skilled workers
D. The demand for the goods which the skilled workers help make

The correct answer is C. The number of years of training and experience will be factors affecting the position of the supply curve of skilled workers but will not determine the wage rate. Thus A and B are wrong. The demand for final goods will affect the position of the demand curve for skilled workers but will not determine the wage rate, thus D is wrong. It is the demand for, and supply of, skilled workers which will determine the equilibrium quantity hired and the equilibrium wage rate.

51

In a perfectly competitive economic system in equilibrium, which of the following will be true?

A. Incomes will be equal if all people are born with equal ability.
B. Incomes will differ insofar as people differ in how long or how hard they work.
C. Average income could not be increased by labour moving from one firm to another.
D. Average income will be sufficiently high so that no working individual will starve.

The correct answer is C. Equilibrium exists in a competitive economic system when no incentive exists for any factor of production to seek alternative employment. This neither implies equality of income among people with similar abilities – they could have different preferences for work versus leisure – nor does it imply no one will starve, i.e. that someone with no marketable skills will be unemployed. Also, an unskilled labourer could work very hard but have a much lower income than a skilled football player who may work very little.

53

How can resources be acquired?

- Can be bequeathed by nature (e.g. talent)
- Bequeathed by other individuals (e.g. inheritance)
- Acquired by employing resources (e.g. training, education)

54

If a competitive firm operating in a competitive labour market discovered that, at its current level of output and employment, the wage rate exceeded the marginal revenue product of labour, then

I. the wage rate would fall.

II. some workers would be laid off by that firm.

Which of the following is correct?

A. I only.
B. II only.
C. Either I or II or both. D. Neither I nor II.

The correct answer is B. The actions of any one firm in a competitive labour market affect neither the going wage rate nor the equilibrium level of employment. Were a firm operating at an output level at which the wage rate exceeded labour’s marginal revenue product, profit-maximising behaviour dictates that the firm reduce its level of employment until the contribution of the last worker hired (marginal revenue product) just equals the wage rate.

55

In determining how well off an individual/family is in the economy, we must consider:

- Size of nation’s income
- Distribution of total income

56

What is the relationship between the market demand curve (D) for a factor input and the firm’s value of the marginal product curve (VMP) of that factor input?

A There is no relationship; one refers to the market, the other to a firm.
B. D is the summation of all the VMPs of firms in the market
C. D determines the position of VMP
D. D determines the equilibrium wage rate, We

The correct answer is B. The market demand curve is the summation of the individual firms’ demand curves for labour. Each firm’s demand curve for labour is determined by the value of the marginal product of labour.