MODULE 73: Theories of Income Distribution

Multiple-Choice Questions

Question

The four principal classes of factors of production are
A.
money, capital, land, and labor.
B.
money, capital, labor, and entrepreneurship.
C.
money, labor, land, and entrepreneurship.
D.
land, labor, capital, and entrepreneurship.
E.
land, labor, entrepreneurship, and money.

The four principal classes of factors of production are
Question

Because it results from the demand for automobiles, the demand for automobile workers is a/an
A.
derived demand.
B.
irrational demand.
C.
elastic demand.
D.
inelastic demand.
E.
unit elastic demand.

Because it results from the demand for automobiles, the demand for automobile workers is a/an
Question

In the United States, the percentage of factor income earned by labor is close to
A.
10%.
B.
30%.
C.
50%.
D.
70%.
E.
90%.

In the United States, the percentage of factor income earned by labor is close to
Question

For a perfectly competitive firm in both the product market and the factor market, the demand curve for labor slopes downward due to
A.
market power.
B.
economies of scale.
C.
diseconomies of scale.
D.
diminishing marginal returns.
E.
increasing marginal returns.

For a perfectly competitive firm in both the product market and the factor market, the demand curve for labor slopes downward due to
Question

If marginal product is positive and falling as the firm hires more workers, then
A.
total product is rising at a decreasing rate.
B.
total product is falling at a decreasing rate.
C.
average product must be falling.
D.
the marginal revenue product of labor is increasing.
E.
the diminishing returns to labor are decreasing.

If marginal product is positive and falling as the firm hires more workers, then
Question

Use the following production data for a firm operating in both a perfectly competitive product market and a perfectly competitive factor market to answer Questions 6–8.

Number of workers Total output/hour
1 10
2 22
3 30
4 36
5 40
6 43
7 45
8 46

Based on the production data above, at what level of employment does the firm begin to experience diminishing marginal returns?
A.
There are no diminishing marginal returns.
B.
3 workers
C.
4 workers
D.
5 workers
E.
6 workers

Use the following production data for a firm operating in both a perfectly competitive product market and a perfectly competitive factor market to answer Questions
Question

Assume the firm sells its product for $2 each and must pay each worker $8 per hour. What is the marginal revenue product of labor for the second worker?
A.
$10
B.
$22
C.
$24
D.
$60
E.
$176

Assume the firm sells its product for $2 each and must pay each worker $8 per hour. What is the marginal revenue product of labor for the second worker?
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Question

Assume the firm sells its product for $2 each and must pay each worker $8 per hour. How many workers should the firm hire in order to maximize profit?
A.
2
B.
3
C.
5
D.
6
E.
8

Assume the firm sells its product for $2 each and must pay each worker $8 per hour. How many workers should the firm hire in order to maximize profit?
Question

Which of the following would shift the demand curve for labor to the right?
A.
a decrease in the wage rate
B.
an increase in the wage rate
C.
an increase in labor productivity
D.
a decrease in the final price of the product produced
E.
a decrease in the availability of physical capital per worker

Which of the following would shift the demand curve for labor to the right?
Question

Suppose a firm produces coffee mugs in a perfectly competitive output market. Which of the following would shift the firm’s demand curve for labor to the left?
A.
an increase in the demand for mugs
B.
a decrease in the price of mugs
C.
an increase in the price of mugs
D.
improvements in technology that increase the marginal product of labor
E.
an increase in the availability of physical capital per worker

Suppose a firm produces coffee mugs in a perfectly competitive output market. Which of the following would shift the firm’s demand curve for labor to the left?
Question

Suppose a firm hires labor in a perfectly competitive labor market. If the marginal revenue product is less than the wage, the firm should definitely
A.
shut down in the short run.
B.
shut down in the long run.
C.
hire more workers.
D.
hire fewer workers.
E.
not change the number of workers it hires.

Suppose a firm hires labor in a perfectly competitive labor market. If the marginal revenue product is less than the wage, the firm should definitely
Question

Compared to the supply curve for capital, the supply curve for land is
A.
flatter, more elastic, and more responsive to factor prices.
B.
flatter, less elastic, and less responsive to factor prices
C.
steeper, more elastic, and more responsive to factor prices.
D.
steeper, less elastic, and less responsive to factor prices.
E.
steeper, more elastic, and less responsive to factor prices.

Compared to the supply curve for capital, the supply curve for land is
Question

The supply curve for labor slopes downward when
A.
the substitution effect outweighs the income effect.
B.
the income effect outweighs the substitution effect.
C.
the substitution effect equals the income effect.
D.
workers experience an overall decrease in wealth.
E.
wage rates are at very low levels.

The supply curve for labor slopes downward when
Question

The supply curve for labor may shift to the left due to
A.
an increase in wealth.
B.
an increase in the wage rate due to the income effect.
C.
a decrease in the wage rate due to the income effect.
D.
an increase in the wage rate due to the substitution effect.
E.
a decrease in the wage rate due to the substitution effect.

The supply curve for labor may shift to the left due to
Question

For a monopsony, the marginal factor cost of labor curve lies above the supply curve at every quantity of labor due to
A.
diminishing marginal returns.
B.
increasing marginal returns.
C.
different workers receiving different wage rates.
D.
all workers receiving the same wage rate.
E.
decreasing opportunity cost of leisure.

For a monopsony, the marginal factor cost of labor curve lies above the supply curve at every quantity of labor due to
Question

Compared to a competitive labor market, a firm with monopsony power in the labor market would pay a
A.
higher wage rate and hire more workers.
B.
higher wage rate and hire fewer workers.
C.
lower wage rate and hire more workers.
D.
lower wage rate and hire fewer workers.
E.
lower wage rate but hire the same amount of workers.

Compared to a competitive labor market, a firm with monopsony power in the labor market would pay a
Question

Assume an effective minimum wage is imposed on a monopsony labor market, and the minimum wage is set below the wage that would exist in a perfectly competitive market. Employment would
A.
decrease, and there would be unemployment.
B.
decrease, and there would be a shortage of workers.
C.
increase, but there would be a shortage of workers.
D.
increase, but there would be unemployment.
E.
increase, and there would be no shortages or surpluses of labor.

Assume an effective minimum wage is imposed on a monopsony labor market, and the minimum wage is set below the wage that would exist in a perfectly competitive market. Employment would
Question

Assume a firm is operating as a monopolist in the product market and as a perfect competitor in the factor market. The firm’s demand curve for labor will be
A.
horizontal due to the competitive labor market.
B.
horizontal due to the effects of market power.
C.
downward-sloping due to diminishing marginal returns and decreasing marginal revenue.
D.
downward-sloping due solely to diminishing marginal returns.
E.
downward-sloping due solely to decreasing marginal revenue.

Assume a firm is operating as a monopolist in the product market and as a perfect competitor in the factor market. The firm’s demand curve for labor will be
Question

If a former monopolist in the product market begins to face competition as firms enter the market, the firm’s demand curve for labor would
A.
not change.
B.
become more elastic.
C.
become less elastic.
D.
show the effects of more rapidly diminishing marginal returns.
E.
show the effects of less rapidly diminishing marginal returns.

If a former monopolist in the product market begins to face competition as firms enter the market, the firm’s demand curve for labor would
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Question

Suppose that a firm is currently producing its desired quantity of output and that the firm’s marginal product of labor is 20, its marginal product of capital is 100, the wage rate for labor is $5, and the rent for capital is $25. All data are per hour. The firm should
A.
employ more labor and rent more capital.
B.
employ less labor and rent less capital.
C.
employ less labor and rent more capital.
D.
employ more labor and rent less capital.
E.
employ/rent the current amount of labor and capital.

Suppose that a firm is currently producing its desired quantity of output and that the firm’s marginal product of labor is 20, its marginal product of capital is 100, the wage rate for labor is $5, and the rent for capital is $25. All data are per hour. The firm should
Question

According to marginal productivity theory, a factor of production will be paid based on the
A.
increase in revenue generated by the last unit of the factor employed in the market.
B.
increase in output generated by the last unit of the factor employed in the market.
C.
average revenue generated by the factor of production employed in the market.
D.
average output generated by the factor of production employed in the market.
E.
average revenue generated by all factors of production employed in the market.

According to marginal productivity theory, a factor of production will be paid based on the
Question

According to marginal productivity theory, wage inequality in perfectly competitive markets can be attributed to
A.
compensating differentials.
B.
union activity.
C.
discrimination.
D.
efficiency wages.
E.
the similarity in quality and quantity of human capital among all workers.

According to marginal productivity theory, wage inequality in perfectly competitive markets can be attributed to
Question

An increase in which of the following practices would help to minimize wage inequality in labor markets?
A.
discrimination
B.
compensating differentials
C.
efficiency wages
D.
educational opportunities for the poor
E.
the wages paid to workers that produce a higher value of marginal product

An increase in which of the following practices would help to minimize wage inequality in labor markets?
Question

Efficiency wages are wages that
A.
are below market equilibrium wages.
B.
are above market equilibrium wages.
C.
usually result in high turnover of employees.
D.
usually result in lower levels of output.
E.
usually necessitate greater amounts of worker supervision.

Efficiency wages are wages that

Number of workers	Total output/hour
1	10
2	22
3	30
4	36
5	40
6	43
7	45
8	46