Quiz 2 Study Guide Questions and Answers

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Department of Finance and Business Economics Spring 2014 Macroeconomics for Business Econ 352X Dr. Reza Fazeli Date: 03/06/2014 Second Quiz Study Key 3.1 How Much Does the Economy Produce? The Production Function 1) In the production function Y = AF(K, N), A is ________, K is ________, and N is ________. A) total factor productivity; the capital stock; the number of workers employed B) total factor productivity; investment; the number of workers employed C) the productivity of labor; the capital stock; the size of the labor force D) the productivity of labor; investment; the size of the labor force Answer: A 2) In the production function Y = AF(K, N) , total factor productivity is A) Y/A. B) A . C) K/N. D) Y/N. Answer: B 3) Suppose the economy's production function is Y = A . If K = 2000, N = 100, and A = 1, then Y = 246. If K rises by 10%, and A and N are unchanged, by how much does Y increase? A) 30% B) 10% C) 6% D) 3% Answer: D 4) Suppose the economy's production function is Y = A . When K = 1000, N = 50, and A = 15, what is Y ? A) 1842 B) 6106 C) 750,000 D) 123 Answer: A 5) The table below represents Freedonia's macroeconomic data for Year 1 and Year 2. 1

Suppose that the production function is given by Y = A . Between Year 1 and Year 2, total factor productivity of Freedonia's economy increased by A) -1.5%. B) 5.0%. C) 5.5%. D) 12.7%. Answer: A 6) If the marginal product of capital doesn't change as the amount of capital increases, a figure showing the relationship between output and capital A) is a straight line with constant upward slope. B) is a straight line with a slope of zero. C) is a vertical line. D) slopes upward with a slope that declines as the amount of capital increases. Answer: A Diff: 2 Topic: Section: 3.1 Question Status: Previous Edition 7) Suppose the economy's production function is Y = A . Suppose K = 200, N = 2000, and A = 1. Calculate the marginal product of capital. A) 1.0 B) 1.5 C) 2.0 D) 2.5 Answer: B 8) The marginal product of labor A) is measured by the slope of the production function relating capital to employment. B) is larger when the labor supply is relatively larger. C) is smaller when the labor supply is relatively smaller. D) decreases as the number of workers already employed increases. Answer: D 9) The fact that the production function relating output to labor becomes flatter as we move from left to right means that A) the marginal product of labor is positive. B) the marginal product of capital is positive. C) there is diminishing marginal productivity of labor. D) there is diminishing marginal productivity of capital. Answer: C 10) An invention that speeds up the Internet is an example of 2

A) an income effect. B) an increase in labor. C) a substitution effect. D) a supply shock. Answer: D 11) Suppose the production function is Y = A . Suppose in 2000, K = 1000, N = 100, and Y = 199.5. In 2010, capital, labor, and output have doubled, so K = 2000, N = 200, and Y = 399. (a) By what percentage did productivity grow from 2000 to 2010? (b) If output had risen to 798 instead of 399, and capital and labor doubled, by what percentage would productivity have grown from 2000 to 2010? Answer: (a) From the production function, you can calculate that A = 1 in both 2000 and 2010, so A is unchanged. (b) Since output doubles (relative to the case in which Y = 399 in 2010) with the same amounts of capital and labor, A doubled. 12) Suppose the economy's production function is Y = A . Suppose K = 200, N = 2000, and A = 1. Calculate the marginal products of labor and capital. Answer: Using calculus, the marginal product of capital is dY/dK = 0.3A( N/K )0.7 and dY/dN = 0.7A( K/N )0.3. Plugging in the values for N and K gives: MPK = 0.3 (2000/200)0.7 = 1.5; MPN = 0.7 (200/2000)0.3 = 0.35. If you do not use calculus, you can arrive at the same answer (rounded) by plugging the values of for A , N and K into the production function to find Y = 1002.37. Increase K by 1 and recalculate Y ; it is now 1003.88. The difference is the MPK = 1003.88 - 1002.37 = 1.51. Increase N by 1 and recalculate Y; it is 1002.73. The difference is the MPN = 1002.73 - 1002.37 = 0.36. 3.2 The Demand for Labor 13) Changes in the capital stock occur ________, and changes in the amount of labor that firms employ occur ________. A) quickly; quickly B) slowly; slowly C) slowly; quickly D) quickly; slowly Answer: C 14) An increase in the real wage would result in a A) movement along the labor demand curve, causing an increase in the number of workers hired by the firm. B) shift of the labor demand curve, causing an increase in the number of workers hired by the firm. 3

C) movement along the labor demand curve, causing a decrease in the number of workers hired by the firm. D) shift of the labor demand curve, causing a decrease in the number of workers hired by the firm. Answer: C 15) One reason that firms hire labor at the point where w = MPN is A) if w < MPN , the cost ( w ) of hiring additional workers exceeds the benefits ( MPN ) of hiring them, so they should hire fewer workers. B) if w > MPN , the cost ( w ) of hiring additional workers is less than the benefits ( MPN ) of hiring them, so they should hire more workers. C) if w < MPN , the cost ( w ) of hiring additional workers equals the benefits ( MPN ) of hiring them, so they have the right number of workers. D) if w > MPN , the cost ( w ) of hiring additional workers exceeds the benefits ( MPN ) of hiring them, so they should hire fewer workers. Answer: D 16) The Upstart Company has the following production function. If the company hires 4 workers, which of the following could be the real wage rate? A) 2 B) 4 C) 6 D) 8 Answer: B 17) Zowie! Surfboards has the following production function. If surfboards sell for $30 and the nominal wage rate is $200, how many workers should the firm employ? A) 2 B) 3 4

C) 4 D) 5 Answer: C 18) The marginal product of labor (measured in units of output) for Expando Corp. is given by MPN = A( 400 - N) where A measures productivity and N is the number of labor hours used in production. Suppose the price of output is $3 per unit and A = 2.0. What will be the demand for labor if the nominal wage is $18? A) 57 B) 107 C) 197 D) 397 Answer: D 19) A technological breakthrough in using photons for computers will increase the productivity of those working with computers a hundredfold. You would expect this breakthrough to shift the A) marginal product of labor curve up and to the right, raising the quantity of labor demanded at any given real wage. B) marginal product of labor curve down and to the left, reducing the quantity of labor demanded at any given real wage. C) labor supply curve up, reducing the quantity of labor demanded at any given real wage. D) labor supply curve down, raising the quantity of labor demanded at any given real wage. Answer: A 20) Suppose a firm's hourly marginal product of labor is given by MPN = A (200 - N ). (a) If A = 0.2 and the real wage rate is $10 per hour, how much labor will the firm want to hire? (b) Suppose the real wage rate rises to $20 per hour. How much labor will the firm want to hire? (c) With the real wage rate at $10 per hour, how much labor will the firm want to hire if A rises to 0.5? Answer: (a) The firm will hire labor such that w = MPN , or 10 = 0.2(200 - N ), so N = 150. (b) Now 20 = 0.2(200 - N ), so N = 100. The firm's labor demand falls when the wage rate rises. (c) Now 10 = 0.5(200 - N ), so N = 180. The increase in productivity increases labor demand. 3.3 The Supply of Labor 21) The income effect of a higher real wage on the quantity of labor supply is the A) idea that workers feel psychologically wealthier when wages are higher, so they work 5

more. B) effect that income must rise when wages rise. C) tendency of workers to supply more labor in response to becoming wealthier. D) tendency of workers to supply less labor in response to becoming wealthier. Answer: D 22) As a result of the superb economics essay that you wrote during this quarter, you won the Adam Smith prize of $100. The receipt of these funds would be an example of A) the substitution effect being stronger than the income effect. B) the income effect being stronger than the substitution effect. C) a pure income effect. D) a pure substitution effect. Answer: C 23) Research on labor supply generally shows that A) labor supply rises in response to a permanent increase in the real wage, but falls in response to a temporary increase in the real wage. B) labor supply rises in response to a temporary increase in the real wage, but falls in response to a permanent increase in the real wage. C) labor supply rises in response to both a temporary and a permanent increase in the real wage. D) labor supply falls in response to both a temporary and a permanent increase in the real wage. Answer: B 24) Over the past 100 years, what has happened to the average workweek in the U.S. manufacturing industry? Why has this occurred? What are the implications for the size of the income and substitution effects? Answer: The average workweek in manufacturing has declined from about 56 hours a week a century ago to just over 40 hours a week more recently. The primary reason for the decline in the workweek is the higher real wage. This suggests that the income effect of a permanently higher real wage dominates the substitution effect, as workers choose to have more leisure and to work fewer hours per week. 3.4 Labor Market Equilibrium 25) Suppose the marginal product of labor is MPN = 200 - 0.5 N where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8 w , where w is the real wage. What is the equilibrium real wage? A) 5 B) 10 C) 15 D) 20 Answer: B 6

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