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Practice Question Set Chpater 3
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) The marginal product of labor tells us
A) which employee is the most productive.
B) the additional output produced by the last employee hired.
C) how much money the firm can make from hiring each employee.
D) the average output produced by each employee.
1)
Table 3.1
Number of Workers
0
1
2
3
4
5
6
Total # of Pots
Produced Per Day
0
6
13
18
21
23
22
2) Referring to Table 3.1, diminishing marginal returns begins with the ________ employee.
A) first
B) second
C) third
D) sixth
2)
3) If the firm hires to a point where the marginal expense of labor is greater than the marginal
revenue product of labor, then
A) total cost must be greater than total revenue.
B) profits could be increased by increasing employment.
C) profits are maximized.
D) profits could be increased by reducing employment.
3)
4) For two substitutes in production, if the substitution effect dominates,
A) then the inputs could be either gross complements or gross substitutes.
B) then the inputs cannot be used at the same time.
C) then the inputs are gross substitutes.
D) then the inputs are gross complements.
4)
5) If an increase in the cost of labor causes the firm to use less capital, then
A) the substitution effect has dominated over the scale effect.
B) the scale effect has dominated over the substitution effect.
C) the firm has moved along an isoquant curve.
D) the firm has moved onto a higher isoquant.
5)
6) A competitive firm uses two inputs: capital and labor. At its current level of hiring of both
inputs, capital's marginal product is 12 while labor's marginal product is 18. Capital's cost (C) is
$8 per unit while labor's cost (W) is $9. In the long run, to produce the same output at a lower
cost, the firm should
A) hire less labor and more capital.
B) hire less labor and less capital.
C) hire more labor and more capital.
D) hire more labor and less capital.
6)
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7) If labor costs twice as much as capital (per unit), then, in the long run,
A) labor's marginal product will be twice that of capital.
B) the firm will hire twice as much labor as capital.
C) the firm will hire less labor and more capital.
D) labor will be half as productive as capital.
7)
8)
8)
Number of
Cooks
0
1
2
3
4
5
6
7
8
Total Meals
Produced
0
10
25
45
60
70
75
78
76
MPL
10
15
20
15
10
5
3
-2
Consider the short run production function for a hypothetical restaurant shown in the table.
Cooks are equally talented and hardworking. The MPL column in the table illustrates
A) that firms tend to hire the best workers first.
B) diminishing marginal returns in labor that derives from the fact that as employment
expands cooks have less capital per person to work with.
C) the law of supply.
D) increasing returns to scale followed by decreasing returns to scale, which is a fundamental
empirical proposition in economics.
9) Consider a firm using three inputs: unskilled labor, skilled labor, and capital. Unskilled labor
and capital are substitutes in production, while skilled labor and capital are complements in
production. If the price of capital decreases, then
A) employment of skilled labor increases and employment of unskilled labor decreases.
B) employment of skilled labor could increase or decrease and the employment of unskilled
labor definitely decreases.
C) employment of skilled labor increases but the effect on employment of unskilled labor is
ambiguous.
D) employment of both skilled and unskilled labor decreases.
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9)
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
10) The output of workers at a factory depends on the number of supervisors employed.
The factory sells its good in a competitive product market at a price of P = $5. The daily
wage of supervisors is W = $600. Fill in the MPL and MRPL columns in the table below.
Supervisors
0
1
2
3
4
5
6
7
8
Marginal
Marginal
Revenue
Product
Output (units
Product (MPL)
(MRPL)
per day)
100
500
860
1160
1400
1560
1640
1680
1680
How many supervisors should the firm employ? Explain why.
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10)
Answer Key
Testname: UNTITLED1
1) B
2) C
3) D
4) C
5) B
6) D
7) A
8) B
9) C
10)
Supervisors
0
1
2
3
4
5
6
7
8
Marginal
Marginal
Revenue Product
Output (units
Product (MPL)
(MRPL)
per day)
100
500
400
$2,000
860
360
$1,800
1160
300
$1,500
1400
240
$1,200
1560
160
$800
1640
80
$400
1680
40
$200
1680
0
$0
The firm should employ 5 supervisors. The first five supervisors all contribute more to the firm's revenue
(measured by their respective MRPs) than to the firm's costs (reflected in their $600 wage). If the firm employed a
sixth supervisor, that would increase revenue by $400 but would increase cost by $600, resulting in a $200 loss on
employment of that individual. The firm maximizes profit by employing five supervisors in this problem.
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