Q: A coffee shop can sell coffee for $4 per cup. If hiring a third worker increases output from 11 to 18 cups per hour, what is the value of marginal product (VMP) of the third worker?

$$VMP = 4 \times (18 - 11) = 4 \times 7 = 24$$

Question 1

Which of the following best describes the value of marginal product (VMP) for a factor of production?

Accepted Answer

The price of a unit of output multiplied by the marginal product of the factor: $$VMP = P 	imes MP$$

Question 2

A coffee shop can sell coffee for $4 per cup. If hiring a third worker increases output from 11 to 18 cups per hour, what is the value of marginal product (VMP) of the third worker?

Accepted Answer

$$VMP = 4 	imes (18 - 11) = 4 	imes 7 = 24$$

Question 3

In a competitive labour market, what condition must be met for a firm to maximize profit?

Accepted Answer

$$VMP = 	ext{wage rate}$$

Question 4

If the price of a firm's output increases, what happens to the firm's demand for labour?

Accepted Answer

The demand for labour increases and the demand curve shifts rightward.

Question 5

Which of the following is NOT traded in a market as a factor of production?

Accepted Answer

Entrepreneurship services

Question 6

Suppose a new technology automates coffee-making in a café. What is the most likely effect on the demand for labour in the café?

Accepted Answer

The demand for labour decreases as machines replace workers.

Question 7

In a monopsony labour market, how does the marginal cost of labour (MCL) compare to the wage rate?

Accepted Answer

MCL exceeds the wage rate.

Question 8

Which effect describes how a person responds to an increasing opportunity cost of leisure as wage rates rise?

Accepted Answer

Substitution effect

Question 9

At high wage rates, which effect dominates and causes the individual labour supply curve to bend backward?

Accepted Answer

Income effect

Question 10

A union wants to increase the wage rate for its members. Which strategy is LEAST likely to achieve this goal?

Accepted Answer

Increasing the supply of union labour

Question 11

If the price of using capital falls relative to the wage rate, what is the most likely effect on the demand for labour?

Accepted Answer

The demand for labour decreases as firms substitute capital for labour.

Question 12

Which formula correctly expresses the value of marginal product (VMP) for capital?

Accepted Answer

$$VMP_K = P 	imes MP_K$$

Question 13

According to the Hotelling Principle, if the expected rate of increase in the price of oil is less than the interest rate, what will happen?

Accepted Answer

Demand for oil decreases and supply increases.

Question 14

Which of the following is a derived demand?

Accepted Answer

The demand for labour by a coffee shop.

Question 15

In a competitive labour market, what does the market supply curve of labour represent?

Accepted Answer

The horizontal sum of all individual supply curves.

Question 16

If a minimum wage is imposed above the equilibrium wage in a monopsony labour market, what is the likely effect?

Accepted Answer

The quantity of labour hired increases and the wage rate paid increases.

Question 17

Which of the following is the fundamental determinant of the demand for oil in global commodity markets?

Accepted Answer

The value of marginal product of oil

Question 18

A firm is deciding whether to rent or buy capital. What is the implicit rental rate if the firm buys and operates the capital itself?

Accepted Answer

The sum of depreciation and interest costs

Question 19

Which of the following best explains why the market supply curve of labour slopes upward, even though individual supply curves may bend backward?

Accepted Answer

The market supply curve is the sum of many individuals, most of whom are at low wage rates where supply increases.

Question 20

Which of the following is NOT a key influence on the supply of oil in global commodity markets?

Accepted Answer

The wage rate of oil workers

Markets for Factors of Production: Microeconomics Study Notes

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