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Chapter 11
Practice Quiz
Labor Markets
1. Marginal revenue product measures the increase in
a. output resulting from one more unit of labor.
b. total revenue resulting from one more unit of output.
c. revenue per unit from one more unit of output.
d. total revenue resulting from one more unit of labor.
ANS:
d. MRP is the increase in total revenue to a firm resulting from hiring an additional unit
of labor or other variable resource.
2. Troll Corporation sells dolls for $10 each in a market that is perfectly competitive.
Increasing the number of workers from 100 to 101 would cause output to rise from 500 to
510 dolls per day. Troll should hire the 101st worker only when the wage is
a. $100 or less per day.
b. more than $100 per day.
c. $5.10 or less per day.
d. none of the above.
ANS:
a. Under perfect competition, the firm hires workers until the MRP equals the wage rate.
MRP equals $10 x MP (510 - 500) = $100.
3. Derived demand for labor depends on the
a. cost of factors of production used in the product.
b. market supply curve of labor.
c. consumer demand for the final goods produced by labor.
d. firm’s total revenue less economic profit.
ANS:
c. If consumers do not purchase goods, there is no MRP and no workers are hired.
4. If demand for a product falls, the demand curve for labor used to produce the product
will
a. shift leftward.
b. shift rightward.
c. shift upward.
d. remain unchanged.
ANS:
a. If consumers demand for a product decreases and supply remains constant, the price of
the product falls and the MRP (P x MP) decreases.
5. The owner of a restaurant will hire servers if the
a. additional labor’s pay is close to the minimum wage .
b. marginal product is at the maximum.
c. additional work of the employees adds more to total revenue than to costs.
d. servers do not belong to a union.
ANS:
c. If MRP exceeds the wage rate paid waiters, it is profitable for the restaurant to hire
more servers.
6. In a perfectly competitive market, the demand curve for labor
a. slopes upward.
b. slopes downward because of diminishing marginal productivity.
c. is perfectly elastic at the equilibrium wage rate.
d. is described by all of the above.
ANS:
b. As output expands in the short run, a fixed factor results in diminishing returns causing
MP to decrease. Correspondingly, MRP decreases.
7. A union can influence the equilibrium wage rate by
a. featherbedding.
b. requiring longer apprenticeships.
c. favoring trade restrictions on foreign products.
d. all of the above.
e. none of the above.
ANS:
d. Featherbedding and trade protectionism increase the demand for labor. Requiring
longer apprenticeship decreases the demand for labor
8. In which of the following market structures is the firm not a price taker in the factor
market?
a. Oligopoly.
b. Monopsony.
c. Monopoly.
d. Perfect competition.
ANS:
b. Monopsony is a labor market in which a single firm hires labor. For example, the
“company town” where everyone works for the same employer.
9. The extra cost of obtaining each additional unit of a factor of production is called the
marginal
a. physical product.
b. revenue product.
c. factor cost.
d. implicit cost.
c. The assumption of MFC is that the firm must pay a higher wage to each additional
worker as well as to all previously hired workers.
10. A monopsonist’s marginal factor cost curve lies above its supply curve because the
firm must
a. increase the price of its product to sell more.
b. lower the price of its product to sell more.
c. increase the wage rate to hire more labor.
d. lower the wage rate to hire more labor.
ANS:
c. The monopsonist can hire an additional worker only by raising the wage rate for all
workers. Therefore, the MFC exceeds the wage rate along the labor supply curve.
11. To maximize profits, a monopsonist will hire the quantity of labor to the point where
the marginal factor cost is equal to
a. marginal physical product.
b. marginal revenue product.
c. total revenue product.
d. any of the above.
ANS:
b. The MRP curve is the contribution of each worker to total revenue and MFC the
addition to total cost. When MRP > MFC, the firm hires more workers.
12. BigBiz, a local monopsonist, currently hires 50 workers and pays them $6 per hour.
To attract an additional worker to its labor force, BigBiz would have to raise the wage
rate to $6.25 per hour. What is BigBiz’s marginal factor cost?
a. $6.25 per hour.
b. $12.50 per hour.
c. $18.75 per hour.
d. $20.00 per hour.
ANS:
c. Its total cost would increase by $18.75 to hire that additional worker (25 x 50 + 6.25).
13. Suppose a firm can hire 100 workers at $8.00 per hour, but must pay $8.05 per hour
to hire 101 workers. Marginal factor cost (MFC) for the 101st worker is approximately
equal to
a. $8.00.
b. $8.05.
c. $13.05.
d. $13.00.
ANS:
c. The firm’s total cost would increase $13.05 to hire the 101st worker (.05 x 100 + 8.05).
14. A monopsonist in equilibrium has a marginal revenue product of $10 per worker
hour. Its equilibrium wage rate must be
a. less than $10.
b. equal to $10.
c. greater than $10.
d. equal to $5.
ANS:
a. Because of its monopoly in the labor market, a monopsony hires fewer workers and
pays a lower wage than a firm in a competitive labor market.
Exhibit 12 A Labor Market
18
C
14
12
B
Wage rate 10
(dollars per
8
hour)
Z

Labor
supply
A
X
6

Marginal
factor cost
(MFC)
4
Y
W
2
T
0
200
600
400
80o
Quantity of labor
(workers per hour)
Labor
demand
(MRP)
1,000
16
15. If the labor market shown in Exhibit 12 is a monopsony, the wage rate and number of
workers employed will be determined at point
a. A.
b. W.
c. C.
d. Y.
e. Z.
ANS:
b. The intersection of the MFC and MRP curves at point A determines that the
monopsony hires 400 workers per hour and pays only $4 per hour, which is enough to
attract this number of workers.