Question 1

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

Accepted Answer

The value to the firm of hiring one more unit of a factor, calculated as the price of output multiplied by the marginal product of the factor: $$VMP = P 	imes MP$$

Question 2

A coffee shop sells coffee for $4 per cup. If hiring a third worker increases output from 11 to 15 cups per hour, what is the value of marginal product (VMP) of the third worker?

Accepted Answer

Question 3

In a competitive labour market, how is the equilibrium wage rate determined?

Accepted Answer

By the intersection of the market supply and demand curves for labour.

Question 4

If the wage rate is $$18 and the value of marginal product (VMP) of the last worker hired is 22$$, what should a profit-maximizing firm do?

Accepted Answer

Hire more workers until VMP equals the wage rate.

Question 5

Which of the following would cause a rightward shift in the demand for labour curve for a firm?

Accepted Answer

An increase in the price of the firm's output.

Question 6

Suppose a new technology automates a task previously done by workers in a factory. What is the most likely effect on the demand for labour in that factory?

Accepted Answer

The demand for labour will decrease because the technology substitutes for workers.

Question 7

Which of the following best explains why an individual's labour supply curve may bend backward at high wage rates?

Accepted Answer

At high wage rates, the income effect dominates the substitution effect, leading to more leisure and less labour supplied.

Question 8

A monopsony in the labour market is characterized by:

Accepted Answer

One buyer and many sellers of labour.

Question 9

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 rises.

Question 10

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

Accepted Answer

Entrepreneurship

Question 11

A labour union can increase the wage rate for its members by:

Accepted Answer

Encouraging consumers to buy more union-made goods, increasing the value of marginal product.

Question 12

The opportunity cost of holding an inventory of oil for future sale is best described as:

Accepted Answer

The forgone interest that could have been earned by selling the oil and investing the proceeds.

Question 13

According to the Hotelling Principle, the price of a nonrenewable resource like oil is expected to:

Accepted Answer

Rise at a rate equal to the interest rate.

Question 14

A profit-maximizing firm will hire capital services up to the point where:

Accepted Answer

$$VMP_{capital} = 	ext{rental rate of capital}$$

Question 15

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

Accepted Answer

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

Question 16

Which of the following best describes a derived demand?

Accepted Answer

A demand that arises from the demand for another good or service.

Question 17

Suppose the expected future price of oil increases significantly. What is the likely effect on the present supply and demand for oil?

Accepted Answer

Present demand increases and present supply decreases.

Question 18

Which of the following statements about the market supply curve of labour is correct?

Accepted Answer

It is the horizontal sum of individual labour supply curves and generally slopes upward.

Question 19

In a bilateral monopoly (a union facing a monopsony), the wage rate and employment level are determined by:

Accepted Answer

Bargaining between the union and the monopsony, depending on their relative market power.

Question 20

Which of the following is a key influence on the supply of oil in the global market?

Accepted Answer

The expected future price of oil.

Markets for Factors of Production: Microeconomics Study Notes

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