Wage, Rent, Interest, Profit, Unemployment, and Inflation

A firm can hire 10 workers at a wage rate of $12 per hour, but must pay $13 to all of its employees to attract an 11th worker. The marginal resource (labor) cost of the 11th worker is:

• $13

• $20

• $23

• $143

Answer explanation

Initially, the firm's wage bill is $12 times 10 = $120. Hiring the 11^th worker causes the firm's labor cost to rise to $143 (= $13 x 11) or $23 more. Figured a different way, hiring the 11^th worker costs $13 plus a $1 raise given to each of the initial 10 workers, for a total of $23 extra.

A firm hiring from a purely competitive labor market sells its output for $5 and pays a wage of $12. Its marginal resource cost is:

• $5

• $7

• $12

• $60

Answer explanation

For a competitive firm, marginal resource cost is equal to the wage rate.

Refer to the diagram. The competitive wage and monopsony wage, respectively, are:

• W2 and W1

• W1 and W4

• W1 and W5

• W2 and W4

Answer explanation

In a competitive market, the wage is determined by the intersection of market supply and market demand: Q₃ workers are hired at a wage of W₂. A monopsony maximizes profits by equating the marginal resource cost (MRC in the diagram) with marginal revenue product (D in the diagram), so hires Q₂ workers. In order to attract Q₂ workers it need only pay a wage of W₁.

Which of the following best exemplifies the creation of human capital?

• Ford Motor Company increases its wages in an attempt to hire better quality workers

• A carpenter buys a new and improved set of tools

• A nurse attends a continuing education seminar

• A homemaker reenters the labor force once her last child enters school

Answer explanation

An investment in human capital is an expenditure on education or training that improves the skills and productivity of the worker.

Refer to the diagram. If an inclusive union were to bargain with this employer:

• the wage could not increase above $B

• employment would fall to F

• the wage would rise to $C

• employment may increase to as much as G

Answer explanation

In the absence of the union, the firm would hire F workers at a wage of $A. If the union negotiated wage a wage of $B, this wage would become the firm's marginal resource cost rather than the MRC curve shown in the diagram. The firm would respond by hiring G workers.

Wages above $B would cause the firm to reduce employment from G, moving up the demand curve; a lower wage would also lead to less employment, as not enough workers would be available to meet demand at the negotiated wage.

Refer to the diagrams. These diagrams illustrate three grades of land available for the development of a new shopping complex. The same amount of labor, capital, and other inputs for the shopping complex would be used regardless of which land is chosen. In terms of the land's ability to generate potential revenue for the developers, we can say that:

• land in figure (a) is most productive

• land in figure (b) is most productive

• land in figure (c) is most productive

• we cannot compare the productivity of the three grades of land

Answer explanation

Under the stated conditions, the demand for the land will differ solely because of differences in the "productivity" of the land, productivity in this example referring to the ability of the land to generate revenue. In this example, the land in figure (c) is most productive, as evidenced by its having the highest demand.

Suppose Congress, in an attempt to increase taxes on the wealthy, passes a law doubling the tax rate on interest income. Considering the markets in which most households save, this law would most likely:

• increase the supply of loanable funds and decrease equilibrium interest rates

• decrease the supply of loanable funds and increase equilibrium interest rates

• increase the demand for loanable funds and increase equilibrium interest rates

• decrease the demand for loanable funds and decrease equilibrium interest rates

Answer explanation

Higher taxes on interest income would likely deter individuals from saving, a major source of loanable funds. The reduction in supply would drive up equilibrium interest rates. Of course for the savers, the interest rates received net of paying the tax will likely decline.

In a loanable funds market (all else equal):

• a decrease in bank lending will decrease the interest rate

• an increase in saving will increase the interest rate

• an increase in the productivity of business investments will decrease the interest rate

• an increase in government borrowing will increase the interest rate

Answer explanation

An increase in the demand for or a decrease in the supply of loanable funds will increase the interest rate in the market. Higher government borrowing will increase the demand for loanable funds in the market for government bonds, raising the interest rate in this market.

The XYZ Corporation can make a 4% real (inflation-adjusted) return on an investment. It can borrow funds to finance the investment at a nominal rate of 6% and the inflation rate is 1%. We can conclude that the:

• investment will be profitable

• investment will be unprofitable

• real rate of interest is 3%

• real rate of interest is 7%

Answer explanation

The real rate of interest in this example is 5%—the difference between the nominal interest rate and the inflation rate. Since the company can earn only 4% on the investment in real terms, it will not earn enough to cover the interest payments and the project will be unprofitable.

Which of the following is an uninsurable risk an entrepreneur may have to bear?

• Loss of profit due to employee theft and shoplifting

• Loss of productive work time due to employee injury on the job

• Loss of profit due to higher state and local taxes

• Loss of a factory due to fire

Answer explanation

Any risk which is measurable and predictable in the aggregate is insurable. These include fire, flood, employee injury, theft and the like. Risk due to changes in government policy is not predictable and is therefore uninsurable.