Review for Multiple Choice Practice on Factor Markets

What is the least amount employers can legally pay their employees?

• law of decreasing wages

• wage law

• minimum wage

• minimum pay

Answer explanation

Minimum wage is a term for a wage floor. A price floor keeps the price from meeting equilibrium in the product market, and wage floor keeps the wage above equilibrium in the resource market. Like a price floor, a wage floor means you will have a surplus, but a surplus of labor.

Choose the correct factor payments for land, labor, capital, and entrepreneurship.

• rent, wage, interest, and profit

• rent, pay, revenue, and money

• real estate, workers, interest, and cash

• rent, pay, interest, and capital

Answer explanation

Factor payments are the exchanges in the resource market (aka factor market) on the circular flow model. Rent is the price for land, wage is the price of labor, interest is the price for capital, and profit is the price of entrepreneurship.

There is ___________ relationship between wage and the quantity of labor demanded.

• not a

• a contentious

• a direct

• an inverse

Answer explanation

There is an inverse relationship between wage and quantity labor demanded, because when wages increase, firms are less willing to employ people. If the wages decrease, then firms are more willing to hire people. Lower wages = lower costs for companies.

Tags

CCSS.RI.11-12.5

CCSS.RI.6.5

CCSS.RI.7.5

CCSS.RI.8.5

CCSS.RI.9-10.5

Which of the following is the correct formula for marginal resource cost (MRC)?

• MRC= Change in total cost/ Change in inputs

• MRC=Change in total product/Change in total costs

• MRC = Change in inputs/Change in total costs

• MRC= Total costs/Quantity of inputs

Answer explanation

To find the additional costs of one more resource, we must see the change in total costs divided by the change in inputs (or workers). While AP will usually keep the change in input to 1 worker (for example, adding one worker to the one you previously hired would be a change of 1 worker), AP may try to confuse you by adding 2 workers. Don't forget it's change in inputs; not always 1!

Which of the following is the correct formula for marginal revenue product (MRP)?

• MRP= Change in inputs/ Change in total product

• MRP= Change in total profit/change in revenue

• MRP= Change in total costs/change in input

• MRP= Change in total revenue/change in inputs

Answer explanation

Don't forget the R in MRP stands for revenue! We are looking for the additional revenue acquired by hiring one more person. MRP then can be found by looking at the change in revenue divided by the change in inputs.

A business's demand for labor is known as derived demand because

• a worker's pay depends on how much human capital has been invested by the business.

• workers want to work and try to keep their wages low to attract businesses.

• the business gains more total revenue through hiring more workers

• the number of workers needed depends on the products demanded by consumers in the product market.

Answer explanation

Businesses are seeking profit. Only NGOs and charity nonprofits are in business just to employ people. Profit-seeking companies must hire more people to keep up with consumer demand for their products. Seeking profits means you want to keep costs low . Hiring more labor would increase the costs. Only do it when you have to!

All of the following are shifters for the demand for labor EXCEPT:

• Price of an inferior good

• Price of the product

• Productivity of the worker

• Change in price of substitute goods or complementary goods.

Answer explanation

Firms are the ones demanding labor in the factor market. Businesses are reluctant to increase costs, because it cuts into profit. A shift happens due to something influencing the product-market. If there is an increase in demand for a good in the product market from consumers, businesses will demand more labor to produce more goods (derived demand).

All of the following are shifters for the supply of labor EXCEPT:

• Education and Training

• Cultural expectations

• Working conditions

• A change in the price of a substitute good

Answer explanation

Workers sell their labor in a free factor market. Shifters of the supply of labor are things that will either increase the workers willingness to sell their labor or increase their knowledge to enter other markets.

The least cost rule is _____________.

• MPx/Px = MPy/Py

• MPx + MPy =1

• MPx/MPy

• MPx-MPy/Mpy

Answer explanation

Just like maximizing utility in the product market in Unit 1, we are trying to get the biggest bang for our buck in the factor market. We are trying to get the most labor with the money budgeted to pay for the labor. To find that, we need to find the marginal product per dollar (MPx/Px). This will equal the other labor choice (MPy/Py).

A toy company has just built an assembly line which includes robots and machinery to make dolls. They begin to hire humans to maintain the machines. As more workers get hired, an economist will expect

• marginal product will increase sharply and then rise at a reduced rate as more people are hired.

• marginal product will be negative as more people are hired.

• marginal product will decrease at first and then rebound to equilibrium as more people are hired.

• marginal product will increase at first and then decrease as more people are hired.

Answer explanation

At first, more workers allows for job specialization and greater efficiency, but then there is a point where people start getting in each other's way or fighting for the fixed resources.

Tags

CCSS.8.F.B.4

CCSS.HSF.IF.B.6