Question 1

Which of the following best describes the consumer’s budget constraint in the work-leisure model?

Accepted Answer

It shows all combinations of consumption and leisure that the consumer can afford given the market wage rate and nonwage income.

Question 2

Suppose a consumer receives an increase in nonwage income (such as dividends). Assuming both consumption and leisure are normal goods, what is the predicted effect on the consumer’s choices?

Accepted Answer

Both consumption and leisure will increase.

Question 3

If the consumer’s utility function is $$U(C, l)$$, and the marginal rate of substitution between leisure and consumption is $$MRS_{l,C}$$, what does the slope of the indifference curve represent?

Accepted Answer

The rate at which the consumer is willing to substitute leisure for consumption while keeping utility constant.

Question 4

A firm’s production function is given by $$Y = zF(K, N^d). If$$ $$z$$ increases, what happens to the marginal product of labour ($$MP_N$$)?

Accepted Answer

The marginal product of labour increases for each quantity of labour input.

Question 5

Which of the following is a property of indifference curves in the consumption-leisure model?

Accepted Answer

Indifference curves cannot cross each other.

Question 6

If the market real wage rate increases, what are the likely effects on consumption and leisure, assuming both are normal goods?

Accepted Answer

Consumption must rise, but leisure may rise or fall.

Question 7

A firm maximizes profit by hiring labour up to the point where:

Accepted Answer

$$MP_N = w$$

Question 8

If the marginal product of labour decreases as more labour is used, this is an example of:

Accepted Answer

Diminishing marginal returns to labour.

Question 9

Suppose the consumer’s optimal bundle is at the kink of the budget constraint, where $$l = h. $$What does this imply about the consumer’s labour supply?

Accepted Answer

The consumer chooses not to work at all.

Question 10

If a firm’s production function exhibits constant returns to scale, what happens to output if all inputs are doubled?

Accepted Answer

Output will double.

Question 11

Which of the following best describes the income effect of an increase in the real wage rate for a consumer?

Accepted Answer

The consumer feels wealthier and increases both consumption and leisure.

Question 12

If consumption and leisure are perfect complements for a consumer, the indifference curves will be:

Accepted Answer

L-shaped, with right angles along the line $$C = a l$$

Question 13

A parallel outward shift of the consumer’s budget constraint can be caused by:

Accepted Answer

An increase in nonwage income, such as dividends.

Question 14

Which of the following statements about the marginal product of labour ($$MP_N) is $$correct?

Accepted Answer

$$MP_N$$ increases as the quantity of capital input increases.

Question 15

If a firm’s profit is given by $$\pi = zF(K, N^d) - wN^d$$, what does the firm do to maximize profit?

Accepted Answer

Hire labour until $$MP_N = w$$

Question 16

Which of the following is NOT an assumption about consumer preferences in the work-leisure model?

Accepted Answer

The consumer prefers less to more.

Question 17

If the marginal product of capital decreases as more capital is used, this is an example of:

Accepted Answer

Diminishing marginal returns to capital.

Question 18

Which of the following best describes the labour demand curve for a profit-maximizing firm?

Accepted Answer

It is the marginal product of labour curve.

Question 19

Suppose a government decreases taxes for consumers. What is the likely effect on the labour supply curve?

Accepted Answer

The labour supply curve shifts to the left.

Question 20

If a consumer is indifferent between 6 units of consumption and no leisure, and 3 units of consumption and 4 units of leisure, what does this imply about their preferences?

Accepted Answer

The consumer values both consumption and leisure and is willing to trade off one for the other.

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

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