Name _____________________________

Name ______________________________

Economics 2306 - 10 & H1

Principles of Microeconomics

Professor James Henderson

Fall 1996 Test No. 3

I. Answer the following multiple choice questions on your Scantron.

1. The resource market is different from the product market in that
a. in the resource market, firms don't maximize profit
b. in the resource market, households don't maximize utility
c. in the resource market, firms are demanders and households are suppliers
d. supply and demand do not apply in the resource market
e. supply and demand do not apply in the product market

2. Because people are receiving better preventive dental care, there is less demand for dentures. As a result, incomes of oral surgeons (dentists who pull teeth) will
a. decrease as the demand for oral surgeons decreases
b. decrease as the demand for oral surgeons increases
c. increase as the demand for oral surgeons decreases
d. increase as the demand for oral surgeons increases
e. decrease as the supply of oral surgeons increases

3. As more Americans live into their nineties, the incomes of geriatricians (doctors for the aged) will probably
a. increase as the supply of geriatricians increases
b. increase as the supply of geriatricians decreases
c. increase as the demand for geriatricians increases
d. increase as the demand for geriatricians decreases
e. decrease as the supply of geriatricians increases

4. Suppose that the number of law school graduates continues to increase. Which of the following is true?
a. Lawyers' salaries must fall.
b. Lawyers' salaries must rise.
c. Lawyers' salaries will fall only if demand increases.
d. Lawyers' salaries will fall only if demand increases more than supply increases.
e. Lawyers' salaries will fall only if demand rises less than supply.

5. Because the demand for labor is based on the demand for products, the demand for labor is called
a. a substitution demand
b. a complementary demand
c. an income demand
d. a derived demand
e. a marginal demand

6. Which of the following best illustrates the concept of derived demand?
a. As income rises, the demand for TVs rises.
b. A fall in the price of cameras will increase the demand for film.
c. A fall in the demand for tires will reduce the demand for rubber.
d. When the price of gasoline rises, the demand for automobile repair falls.
e. If consumers expect the price of coffee to rise, demand for coffee rises.

7. Suppose that the wage for drive-thru clerks is $6 an hour at Burger King and $5.50 at McDonald's. The jobs are alike in all other respects. We would expect
a. an increase in the supply of and demand for drive-thru clerks at Burger King
b. an increase in the supply and a decrease in the demand for drive-thru clerks at Burger King
c. a decrease in the supply of drive-thru clerks at Burker King but no change in demand
d. an increase in the supply of drive-thru clerks at Burger King but no change in demand
e. a decrease in the supply of and demand for drive-thru clerks at Burger King

8. When all of the returns to a resource are in the form of economic rent,
a. the demand curve for that resource must be horizontal
b. the demand curve for that resource must be vertical
c. the supply curve for that resource must be horizontal
d. the supply curve for that resource must be perfectly inelastic
e. the demand curve for that resource must be perfectly elastic

9. For a firm hiring resources in a perfectly competitive resource market, its demand curve for a resource is its
a. marginal product curve
b. marginal revenue product curve
c. marginal resource cost curve
d. marginal revenue curve
e. total revenue curve

10. If the marginal product of labor increases (i.e., an upward shift of the MP curve), it will likely cause
a. an increase in the price of output produced with labor
b. an increase in labor demand
c. an increase in labor supply
d. a fall in the wage paid to labor
e. a fall in the number of workers employed

11. In a perfectly competitive labor market, a profit maximizing firm will hire labor up to the point where
a. wage = MRC
b. wage < MRP
c. wage = MRP
d. wage > MRP
e. wage = MP

12. If the wage is below the marginal revenue product, then profit-maximizing firms will
a. employ more workers
b. employ fewer workers
c. see an increase in the demand for labor
d. see an increase in the supply of labor
e. see a fall in the demand for labor

13. A curve that shows the additional cost to the firm of hiring an additional unit of a resource is known as the
a. marginal product curve
b. marginal revenue product curve
c. total revenue product curve
d. marginal revenue curve
e. marginal resource cost curve

14. The more price elastic the demand for a final product,
a. the more price elastic the demand for the resource used to produce it
b. the less price elastic the demand for the resource used to produce it
c. the more price elastic the supply of the resource used to produce it
d. the less price elastic the supply of the resource used to produce it
e. the easier it is to substitute for the resources used in production

15. If coal and oil are substitute inputs in the production of electricity, an increase in the price of oil
a. will increase the demand for coal
b. will reduce the demand for coal
c. will increase the supply of coal
d. will reduce the supply of coal
e. will not affect the demand for coal

16. At a low wage,
a. there is no substitution effect
b. there is no income effect
c. the substitution effect usually outweighs the income effect
d. the income effect usually outweighs the substitution effect
e. the disutility of market work is usually high

17. College students often are interns at jobs that pay little or no income because
a. less prestigious jobs pay higher wages
b. they acquire valuable job experience
c. their nonwage incomes are low
d. they do not value the extra goods and services that higher incomes would buy
e. they provide inflexible work schedules

18. When a union sets a wage above the market equilibrium, each firm hiring from the union faces
a. a perfectly inelastic supply curve for labor
b. a perfectly elastic supply curve for labor
c. a perfectly inelastic demand curve for labor
d. a perfectly elastic demand curve for labor
e. perfectly inelastic supply and demand curves for labor

19. An appeal to consumers to purchase union-made products with slogans such as "look for the union label" represents an attempt to
a. increase the supply of union labor
b. increase the demand for union labor
c. decrease the supply of union labor
d. decrease the quantity demanded of union labor
e. decrease the demand for union labor

20. Which of the following is an example of featherbedding?
a. a craft union's restricting entry into its profession
b. a union-imposed wage floor
c. an increase in labor productivity that results from a decrease in quit rates
d. attempts to reduce the sale of nonunion goods
e. a construction workers union's requiring an unnecessarily large number of workers to do
a particular job.

21. If a union bargains with a monopsonist and is successful in achieving the wage rate it desires, then the
a. employment of union members will increase
b. employment of union members will decrease
c. employment of union members may increase, decrease, or remain the same
d. supply of labor curve facing the monopsony is downward sloping
e. supply of labor curve facing the monopsony is upward sloping

22. If the seller knows more about the good than the buyer, there exists
a. perfect information
b. an externality
c. a low marginal benefit of information for the buyer
d. asymmetric information
e. optimal search

23. A natural monopoly exists when, throughout the range of market demand,
a. average costs are increasing
b. there are diseconomies of scale
c. there are economies of scale
d. average costs are constant
e. marginal costs exceed average cost

24. Markets fail when externalities are present
a. because all of the costs and benefits of producing a good are reflected in the market price
b. because some of the costs and benefits of producing a good are not reflected in the market
price
c. only if they are negative; positive externalities are not market failures
d. because profits are not maximized
e. if the positive externalities are less than the negative externalities

25. Most income differences across U.S. households reflect
a. discrimination and thus are not a magger of public concern
b. the normal workings of resource markets
c. differences in government transfer payments and thus are a matter of public concern
d. differences in luck
e. differences in government transfer payments and thus are not a matter of public concern

II. True or False. Explain.

1. Marginal revenue product of labor is calculated by multiplying the wage rate by the marginal product of labor.

2. If a firm is in a perfectly competitive labor market, the firm's marginal resource cost slopes downward.

3. If a person's labor supply curve is positively sloped, the income effect outweighs the substitution effect.

4. On average, women in the United States earn 65 percent of what men earn, which shows that there is sex discrimination in the labor market.

5. If a union sets a wage greater than the competitive wage, the total union wage bill will necessarily decrease.

III. Short Answer

1. Using supply and demand graph, explain the effect of unions that raise their wage above a competitive level on nonunionized labor markets.

2. In precapitalist days when the Bible was written, what were the three uses of income? In the capitalist economy we live in, what is the fourth use? How does this change the way we view the accumulation of wealth?

BONUS:

Explain why unskilled workers earn little economic rent, while much of Troy Aikman's salary is rent.

Name ______________________________

Economics 2306 - 10 & H1

Principles of Microeconomics

Professor James Henderson

Fall 1996 Test No. 3

I. Answer the following multiple choice questions on your Scantron.

1. Because the demand for labor is based on the demand for products, the demand for labor is called
a. a substitution demand
b. a complementary demand
c. an income demand
d. a derived demand
e. a marginal demand

2. Suppose that the number of law school graduates continues to increase. Which of the following is true?
a. Lawyers' salaries must fall.
b. Lawyers' salaries must rise.
c. Lawyers' salaries will fall only if demand increases.
d. Lawyers' salaries will fall only if demand increases more than supply increases.
e. Lawyers' salaries will fall only if demand rises less than supply.

4. Because people are receiving better preventive dental care, there is less demand for dentures. As a result, incomes of oral surgeons (dentists who pull teeth) will
a. decrease as the demand for oral surgeons decreases
b. decrease as the demand for oral surgeons increases
c. increase as the demand for oral surgeons decreases
d. increase as the demand for oral surgeons increases
e. decrease as the supply of oral surgeons increases

5. The resource market is different from the product market in that
a. in the resource market, firms don't maximize profit
b. in the resource market, households don't maximize utility
c. in the resource market, firms are demanders and households are suppliers
d. supply and demand do not apply in the resource market
e. supply and demand do not apply in the product market

6. In a perfectly competitive labor market, a profit maximizing firm will hire labor up to the point where
a. wage = MRC
b. wage < MRP
c. wage = MRP
d. wage > MRP
e. wage = MP

7. If the marginal product of labor increases (i.e., an upward shift of the MP curve), it will likely cause
a. an increase in the price of output produced with labor
b. an increase in labor demand
c. an increase in labor supply
d. a fall in the wage paid to labor
e. a fall in the number of workers employed

8. For a firm hiring resources in a perfectly competitive resource market, its demand curve for a resource is its
a. marginal product curve
b. marginal revenue product curve
c. marginal resource cost curve
d. marginal revenue curve
e. total revenue curve

9. When all of the returns to a resource are in the form of economic rent,
a. the demand curve for that resource must be horizontal
b. the demand curve for that resource must be vertical
c. the supply curve for that resource must be horizontal
d. the supply curve for that resource must be perfectly inelastic
e. the demand curve for that resource must be perfectly elastic

10. Suppose that the wage for drive-thru clerks is $6 an hour at Burger King and $5.50 at McDonald's. The jobs are alike in all other respects. We would expect
a. an increase in the supply of and demand for drive-thru clerks at Burger King
b. an increase in the supply and a decrease in the demand for drive-thru clerks at Burger King
c. a decrease in the supply of drive-thru clerks at Burker King but no change in demand
d. an increase in the supply of drive-thru clerks at Burger King but no change in demand
e. a decrease in the supply of and demand for drive-thru clerks at Burger King

11. Which of the following best illustrates the concept of derived demand?
a. As income rises, the demand for TVs rises.
b. A fall in the price of cameras will increase the demand for film.
c. A fall in the demand for tires will reduce the demand for rubber.
d. When the price of gasoline rises, the demand for automobile repair falls.
e. If consumers expect the price of coffee to rise, demand for coffee rises.

12. College students often are interns at jobs that pay little or no income because
a. less prestigious jobs pay higher wages
b. they acquire valuable job experience
c. their nonwage incomes are low
d. they do not value the extra goods and services that higher incomes would buy
e. they provide inflexible work schedules

13. At a low wage,
a. there is no substitution effect
b. there is no income effect
c. the substitution effect usually outweighs the income effect
d. the income effect usually outweighs the substitution effect
e. the disutility of market work is usually high

14. If coal and oil are substitute inputs in the production of electricity, an increase in the price of oil
a. will increase the demand for coal
b. will reduce the demand for coal
c. will increase the supply of coal
d. will reduce the supply of coal
e. will not affect the demand for coal

15. The more price elastic the demand for a final product,
a. the more price elastic the demand for the resource used to produce it
b. the less price elastic the demand for the resource used to produce it
c. the more price elastic the supply of the resource used to produce it
d. the less price elastic the supply of the resource used to produce it
e. the easier it is to substitute for the resources used in production

16. A curve that shows the additional cost to the firm of hiring an additional unit of a resource is known as the
a. marginal product curve
b. marginal revenue product curve
c. total revenue product curve
d. marginal revenue curve
e. marginal resource cost curve

17. If the wage is below the marginal revenue product, then profit-maximizing firms will
a. employ more workers
b. employ fewer workers
c. see an increase in the demand for labor
d. see an increase in the supply of labor
e. see a fall in the demand for labor

18. A natural monopoly exists when, throughout the range of market demand,
a. average costs are increasing
b. there are diseconomies of scale
c. there are economies of scale
d. average costs are constant
e. marginal costs exceed average cost

19. If the seller knows more about the good than the buyer, there exists
a. perfect information
b. an externality
c. a low marginal benefit of information for the buyer
d. asymmetric information
e. optimal search

20. If a union bargains with a monopsonist and is successful in achieving the wage rate it desires, then the
a. employment of union members will increase
b. employment of union members will decrease
c. employment of union members may increase, decrease, or remain the same
d. supply of labor curve facing the monopsony is downward sloping
e. supply of labor curve facing the monopsony is upward sloping

21. Which of the following is an example of featherbedding?
a. a craft union's restricting entry into its profession
b. a union-imposed wage floor
c. an increase in labor productivity that results from a decrease in quit rates
d. attempts to reduce the sale of nonunion goods
e. a construction workers union's requiring an unnecessarily large number of workers to do
a particular job.

22. An appeal to consumers to purchase union-made products with slogans such as "look for the union label" represents an attempt to
a. increase the supply of union labor
b. increase the demand for union labor
c. decrease the supply of union labor
d. decrease the quantity demanded of union labor
e. decrease the demand for union labor

23. When a union sets a wage above the market equilibrium, each firm hiring from the union faces
a. a perfectly inelastic supply curve for labor
b. a perfectly elastic supply curve for labor
c. a perfectly inelastic demand curve for labor
d. a perfectly elastic demand curve for labor
e. perfectly inelastic supply and demand curves for labor

24. Most income differences across U.S. households reflect
a. discrimination and thus are not a magger of public concern
b. the normal workings of resource markets
c. differences in government transfer payments and thus are a matter of public concern
d. differences in luck
e. differences in government transfer payments and thus are not a matter of public concern

25. Markets fail when externalities are present
a. because all of the costs and benefits of producing a good are reflected in the market price
b. because some of the costs and benefits of producing a good are not reflected in the market
price
c. only if they are negative; positive externalities are not market failures
d. because profits are not maximized
e. if the positive externalities are less than the negative externalities