Question 1

Suppose a representative consumer faces the following budget constraint: $$C = wN^S + m - T$$, where $$C is $$consumption, $$w is $$the real wage, $$N^S is $$hours worked, $$m is $$real dividend income, and $$T is $$lump-sum taxes. If the government increases $$T$$ while holding all else constant, what is the most likely effect on the consumer's optimal choice of leisure and consumption?

Accepted Answer

Both leisure and consumption will decrease because both are normal goods and disposable income falls.

Question 2

The marginal rate of substitution of leisure for consumption ($$MRS_{l,c}) at $$the consumer's optimum is equal to:

Accepted Answer

$$MRS_{l,c} = w$$

Question 3

If the representative consumer's utility function is $$U(C, l)$$, which of the following statements about indifference curves is correct?

Accepted Answer

Indifference curves are convex to the origin, reflecting a preference for diversity.

Question 4

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

Accepted Answer

The marginal product of labour increases.

Question 5

Suppose the real wage $$w$$ increases. According to the model, what are the income and substitution effects on the consumer’s choice of leisure?

Accepted Answer

The substitution effect decreases leisure, while the income effect increases leisure.

Question 6

Which of the following best describes the effect of an increase in total factor productivity ($$z) in $$the production function $$Y = zF(K, N^d)$$?

Accepted Answer

It increases output for any given combination of $$K$$ and $$N^d.$$

Question 7

If a consumer’s preferences satisfy the assumption that 'more is always preferred to less,' which of the following must be true about their indifference curves?

Accepted Answer

Indifference curves slope downward.

Question 8

A profit-maximizing firm chooses its labour input $$N^d$$ such that:

Accepted Answer

$$MP_N = w$$

Question 9

During the COVID-19 pandemic, government transfers increased and there was an upper bound on hours worked. According to the model, what is the most likely effect on consumption and hours worked?

Accepted Answer

Both consumption and hours worked decrease.

Question 10

If the consumer’s budget constraint is $$C + wl = wh + m - T$$, what does the slope of the budget line represent?

Accepted Answer

The opportunity cost of leisure in terms of consumption, which is $$w.$$

Question 11

Suppose the government increases lump-sum transfers to consumers (i.e., $$m$$ increases). What happens to the consumer’s labour supply curve?

Accepted Answer

It shifts to the left because consumers can afford more leisure.

Question 12

Which of the following is NOT an assumption about the representative consumer’s preferences in this model?

Accepted Answer

Consumption and leisure are inferior goods.

Question 13

If the production function exhibits constant returns to scale, what happens to output if both capital and labour inputs are doubled?

Accepted Answer

Output exactly doubles.

Question 14

The Solow residual is used to measure:

Accepted Answer

Total factor productivity ($$z) as a $$residual from the production function.

Question 15

If a consumer is at a point where $$MRS_{l,c} \u003e w$$, what should they do to maximize utility?

Accepted Answer

Work fewer hours and consume more leisure.

Question 16

Which of the following would NOT cause an increase in total factor productivity ($$z$$)?

Accepted Answer

Stricter government regulations requiring pollution abatement equipment.

Question 17

If the consumer’s indifference curves are L-shaped, this implies that:

Accepted Answer

Consumption and leisure are perfect complements.

Question 18

A firm’s profit is given by $$\pi = zF(K, N^d) - wN^d. If $$the real wage $$w$$ increases, what happens to the profit-maximizing level of labour $$N^d$$?

Accepted Answer

It decreases because the cost of hiring labour is higher.

Question 19

Which of the following best describes the substitution effect of an increase in the real wage on the consumer’s labour supply?

Accepted Answer

The consumer supplies more labour because leisure is more expensive.

Question 20

Suppose the production function is Cobb-Douglas: $$Y = zK$$^{0.3}$$N^{0.7}. If$$ $$z$$ increases by 10% and all other inputs are unchanged, what happens to output $$Y$?

Accepted Answer

Output increases by 10%.

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

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