Micro Unit 5 Multiple Choice Practice

Suppose that the market for low-wage labor is perfectly competitive and initially in equilibrium. If the government establishes an effective minimum wage, which of the following will occur?

• Employment of low-wage workers will decrease and unemployment will increase.

• The quantity of low-wage workers supplied will be less than the quantity demanded.

• The total wage payment received by all low-wage workers will increase.

• Economic efficiency will increase, since firms were paying workers less than the value of their marginal revenue product.

• Low-wage workers will be motivated to form a union.

Answer explanation

An effective minimum wage above equilibrium leads to higher wages but fewer jobs, causing employment to decrease and unemployment to rise among low-wage workers.

Businesses employ workers from city neighborhoods and rural areas. These workers are perfect substitutes and cannot relocate in the short run. The government offers businesses a wage subsidy if they hire workers from city neighborhoods. What is the effect of the subsidy on the wage rate of rural workers and on the total hours they work?

• Increase, Decrease

• No change, Increase

• No change, Decrease

• Decrease, Decrease

• Decrease, No change

Answer explanation

The wage subsidy for city workers makes them more attractive to businesses, leading to a decrease in demand for rural workers. Consequently, the wage rate for rural workers decreases, and total hours worked also decline.

An increase in the effective minimum wage will have less of an impact on employment if the demand for labor is

• a derived demand

• decreasing

• relatively elastic

• relatively inelastic

• unit elastic

Answer explanation

An increase in the effective minimum wage will have less impact on employment if the demand for labor is relatively inelastic, as employers are less sensitive to wage changes and will maintain their workforce.

For a competitive labor market, an increase in which of the following will lead to an increase in the demand for labor?

• The supply of labor

• The minimum wage

• The cost of medical benefits provided to the labor hired by firms

• Labor union dues

• The demand for the good that labor produces

Answer explanation

An increase in the demand for the good that labor produces leads firms to hire more workers, thus increasing the demand for labor. Other options do not directly affect labor demand.

A firm's demand for labor is known as a derived demand because

• the firm gains utility from hiring more labor

• the wage rate paid to workers depends on the demand for labor

• the amount of labor demanded depends on the amount of capital invested

• the amount of labor demanded depends on the demand for the firm's product

• the firm will benefit from hiring additional labor

Answer explanation

A firm's demand for labor is derived from the demand for its product. If demand for the product increases, the firm needs more labor to produce it, making labor demand dependent on product demand.

If the price of a good produced by a competitive firm increases, then

• the marginal product of labor will increase

• the average product of labor will increase

• the marginal revenue product of labor will increase

• the short-run demand for labor will decrease

• the supply of labor will increase

Answer explanation

When the price of a good increases, the marginal revenue product of labor, which is the additional revenue generated from hiring one more unit of labor, also increases. This is because firms can earn more from selling their output.

Firm XYZ produces and sells corn in a perfectly competitive market and hires its workers in a perfectly competitive labor market. Which of the following best describes the demand curve for XYZ’s corn and XYZ’s demand curve for labor?

• Demand for XYZ’s Corn: Horizontal, XYZ’s Labor Demand: Horizontal

• Demand for XYZ’s Corn: Horizontal, XYZ’s Labor Demand: Downward sloping

• Demand for XYZ’s Corn: Horizontal, XYZ’s Labor Demand: Vertical

• Demand for XYZ’s Corn: Downward sloping, XYZ’s Labor Demand: Downward sloping

• Demand for XYZ’s Corn: Downward sloping, XYZ’s Labor Demand: Horizontal

Answer explanation

In a perfectly competitive market, the demand for XYZ's corn is horizontal, indicating a price taker. However, the demand for labor is downward sloping, as higher wages lead to fewer workers hired, reflecting the law of demand.

After which worker does diminishing marginal product first occur?

• Second worker

• Third worker

• Fourth worker

• Fifth worker

• Sixth worker

Answer explanation

Diminishing marginal product occurs when adding an additional worker results in a smaller increase in output than the previous worker. This first happens after the second worker, as the benefits of additional labor begin to decline.

If the firm can sell as many potatoes as it wants for $2 per pound and has to pay each worker $5 per hour, how many workers should the firm employ to maximize profits?

• 1

• 2

• 3

• 4

• 5

Answer explanation

To maximize profits, the firm should hire workers until the cost of hiring equals the revenue generated. Each worker costs $5 per hour, and selling 3 pounds of potatoes at $2 each generates $6, covering the cost.

A firm produces truffles by using labor and capital. The price of labor is $10 per unit, and the price of capital is $20 per unit. At current output level, the marginal product of labor is 40 truffles and the marginal product of capital is 60 truffles. To reduce the total cost of producing the current quantity of truffles, how should the firm change its spending on labor and capital?

• Labor - No change; Capital - Increase

• Labor - Decrease; Capital - No change

• Labor - Decrease; Capital - Increase

• Labor - Increase; Capital - No Change

• Labor - Increase; Capital - Decrease

Answer explanation

To minimize costs, the firm should compare the marginal products per dollar spent. Labor's marginal product per dollar is 4 (40/10) and capital's is 3 (60/20). Thus, the firm should increase labor and decrease capital to reduce costs.