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resource prices are a major determinant of ______ _______. resource prices allocate scarce resources among _____ ________. resource prices, along with resource productivity, are important to firms in _____________.

money income, alternative uses, minimizing their costs

Which of the following statements best illustrates the concept of derived demand?

A) As income goes up the demand for farm products will increase by a smaller relative amount.

B) A decline in the price of margarine will reduce the demand for butter.

C) A decline in the demand for shoes will cause the demand for leather to decline.

D) When the price of gasoline goes up, the demand for motor oil will decline.

c

the demand for a resource that depends on the demand for the products it helps to produce

derived demand

When economists say that the demand for labor is a derived demand, they mean that it is related to the demand for the

product or service labor is producing.

We say that the demand for labor is a derived demand because

we demand the product that labor helps produce rather than labor service per se.

The demand for a resource depends primarily on the demand for

the demand for the product or service that it helps produce.

The demand for labor is derived from

consumer demand for the product or service it is helping to produce.

Marginal revenue product measures the amount by which

the extra production of one more worker increases a firm's total revenue.

The marginal revenue product schedule is the firm's

the firm's resource demand schedule.

The purely competitive employer of resource A will maximize the profits from A by equating the

price of A with the MRP of A.

The MRP curve for labor is the firm's

is the firm's labor demand curve

the amount an additional worker adds to the firm's total output

marginal product

The labor demand curve of a purely competitive seller slopes

because of diminishing marginal productivity.

A competitive employer should hire additional labor as long as

the MRP exceeds the wage rate.

A firm will find it profitable to hire workers up to the point at which their

marginal resource cost is equal to their MRP.

The labor demand schedule is identical with the:

marginal revenue product schedule.

The general rule for hiring any input (say, labor) in the profit-maximizing amount is MRC = MRP. This rule takes the special form W = MRP (where W is the wage rate) when the

firm is hiring labor under purely competitive conditions.

the increase in total resource cost associated with the hire of one more unit of the resource.

Marginal resource cost is

Other things equal, the resource demand curve of an imperfectly competitive seller will be less elastic then...

elastic than that of a purely competitive seller.

The MRP curve is the resource demand curve for both

the purely competitive and imperfectly competitive seller.

The labor demand curve of an imperfectly competitive seller is downward sloping:

both because of diminishing returns and the necessity to lower price to sell more output

If a firm is selling in an imperfectly competitive product market, then the marginal products...

successive workers must be sold at lower prices.

Other things equal, we would expect the labor demand curve of a monopolistic seller to deline..

decline more rapidly than that of a purely competitive seller

The MRP curve for labor is downlopping and shows...

the relationship between wage rates and the quantity of labor demanded.

a purely competitive and an imperfectly competitive producer will both hire less labor if

the wage rate increases

A competitive employer is using labor in such an amount that labor's MRP is $10 and its wage rate is $8. This firm:

A) should hire more labor because this will increase profits.

B) should hire more labor, although this may either increase or decrease profits.

C) is currently hiring the profit-maximizing amount of labor.

D) is selling its product in an imperfectly competitive market.

a

A firm is hiring the profit-maximizing amount of an input when:

A) AVC = MC. B) MP = MRC. C) MRC = MR. D) MRP = MRC.

d

For a firm selling its product in a purely competitive market, the marginal revenue product of labor can be found by

multiplying marginal product by product price

For a firm selling its product in an imperfectly competitive market, the marginal revenue product of labor can be found by:

A) adding marginal product to total product as one more unit of labor is employed.

B) adding marginal revenue to total product as one more unit of labor is employed.

C) multiplying marginal product by product price.

D) multiplying marginal product by marginal revenue.

d

The labor demand curve of a firm will shift to the left if

the price of the product the labor is producing falls

Assume that a firm's production technique is such that varying combinations of labor and capital can be used to produce output. If the price of labor falls relative to the price of capital and the firm decides to use more labor in the production process, this decision is:

A) solely the result of the substitution effect.

B) solely the result of the output effect.

C) probably the result of both the substitution and output effects.

D) the result of neither the substitution nor the output effect.

c

If technology dictates that labor and capital must be used in fixed proportions, an increase in the price of capital will cause a firm to use less...

less labor as a consequence of the output effect

77. If resources A and B are complementary and employed in fixed proportions:

A) a change in the price of A will have no effect on the quantity of B employed.

B) an increase in the price of A may either increase or decrease the demand for B.

C) an increase in the price of A will increase the demand for B.

D) an increase in the price of A will decrease the demand for B

d

If two resources are highly substitutable for one another:

A) a decrease in the price of one will increase unit costs of production.

B) an increase in the price of one will increase the demand for the other.

C) an increase in the price of one will reduce the demand for the other.

D) a decline in the price of one will increase the demand for the other.

b

a change in the price of a resource will alter costs and therefore the equilibrium output.

output effect

Suppose complementary inputs A and B are being used by a firm in the profit-maximizing amounts. If the price of A now increases, the firm should use:

A) more of B, provided the substitution effect exceeds the output effect.

B) more of B because of the substitution effect.

C) less of B because of the substitution effect.

D) less of B because of the output effect.

d

The substitution effect indicates that a profit-seeking firm will use:

A) more of an input whose price has fallen and less of other inputs in producing a given output.

B) more of all inputs if production costs fall.

C) more of those inputs whose marginal productivity is the greatest.

D) less of an input whose price has fallen and more of other inputs in producing a given output.

a

Assume the price of capital doubles and, as a result, firms make no change in the relative quantities of capital and labor they employ. This implies that:

A) labor is not readily substitutable for capital. C) the firms are producing an inferior good.

B) the law of diminishing returns is not applicable. D) the demand for capital is highly price elastic.

a

The demand curve for labor would shift leftward as the result of:

a decrease in the productivity of labor.

Capital and labor:

A) are always complementary. C) may be either complementary or substitutable.

B) are always substitutable. D) are both normal inputs.

c

If the price of capital declines, the consequent output effect would be greater because

the more elastic the demand for the product

Suppose the productivity of labor increases and at the same time the price of capital, which is complementary to labor, increases. As a result, the demand for labor:

A) will increase. B) will decrease. C) may either increase or decrease. D) will not change.

c

A change in the price of an input will usually:

A) shift a firm's cost curves.

B) cause the firm to alter the combination of inputs it employs.

C) induce the firm to change its level of output.

D) do all of the above.

d

Suppose a technological improvement increases the productivity of a firm's capital and, simultaneously, its workers' union negotiates a wage increase. We can predict that:

A) the firm will use relatively more capital and relatively less labor.

B) the firm will use relatively more labor and relatively less capital.

C) inputs of capital and labor will be unchanged.

D) the firm's equilibrium output will necessarily increase.

a

A manufacturer using both capital and labor decides to use more labor and less capital because of an increase in the price of capital. This is likely the result of:

capital and labor being substitute inputs

Suppose there is a decline in the demand for the product labor is producing. Furthermore, the price of capital, which is complementary to labor, increases. Thus the demand for labor

will decrease

Suppose that the price of capital increases relative to the wage rate and, as a result, the demand for labor increases. This means that the substitution effect is

greater than the output effect

Elasticity of resource demand is measured by the:

A) absolute change in resource quantity demanded divided by the absolute change in resource price.

B) percentage change in resource quantity demanded divided by the percentage change in resource price.

C) absolute change in resource price divided by the absolute change in resource quantity demanded.

D) percentage change in resource price divided by the percentage change in resource quantity demanded.

b

When the elasticity coefficient for resource demand is less than one, resource demand is

inelastic

When the elasticity coefficient for resource demand is greater than one, resource demand is

elastic

T/F : The marginal revenue product curve of a purely competitive seller declines solely because of the law of diminishing returns.

true

T/f:. Producers should hire resources until the total output of each is equal.

false

T/F : It will be profitable for a firm to hire additional units of any resource up to the point at which its MRP is equal to its MRC.

true

t/f: The more elastic the demand for a product the less elastic will be the demand for the resources employed in producing it

false

t/f: The demand for a resource depends on its productivity and the market value of the product it is producing.

true

If two resources are complementary, a decrease in the price of one will reduce the demand for the other.

false

The more elastic the demand for a product the less elastic will be the demand for the resources employed in producing it.

false

t/f: Other things equal, the less competitive the market in which a firm sells its product, the less elastic will be its resource demand curve.

true

If the substitution effect outweighs the output effect, an increase in the price of a substitute resource will increase the demand for labor.

true

The demand for labor is a derived demand whereas the demand for capital is not.

false

The MRP of labor curve is the labor demand curve.

true

Marginal revenue product (MRP) is the change in total product (total output) associated with hiring an additional unit of labor.

true

The demand for labor is a derived demand whereas the demand for capital is not.

false

The MRP of labor curve is the labor demand curve.

true

Marginal revenue product (MRP) is the change in total product (total output) associated with hiring an additional unit of labor.

false

A firm should reduce its employment of a resource whose marginal resource cost exceeds its marginal revenue product.

true

In percentage terms, many of the 10 most rapidly declining U.S. occupations include jobs for which capital is readily substitutable for labor.

true

Elasticity of resource demand is measured by dividing "percentage change in resource price" by "percentage change in resource quantity."

false

An increase in the price of capital will reduce the demand for labor if capital and labor are complementary resources.

true

The marginal productivity theory of income distribution holds that all resources are paid according to their marginal contribution to society's output.

true

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