ECON 111 Lecture Notes - Lecture 7: Reservation Wage, Relative Price, Opportunity Cost

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Time endowment split between labour (bad) & leisure (good: h = l + l. Consumption or total income is wage rate x time working: budget line: c = wl. Labour supply limited by total time & leisure time. Relative price of one in terms of other. Wage rate - opportunity cost or relative price of leisure. Marginal rate of substitution = relative price ratio. Internal trade-offs in terms of taste = external trade off in terms of possibilities. Line shifts upwards due to income but slope / wage unchanged. New slope still tangent to original curve. Increase in wages means leisure more expensive relative to consumption. Income effect - move ic curve to new bl line. Both effects push to increase consumption: substitution - favours less leisure income - favours more leisure. When below it - household chooses not to participate in labour market. Household indifferent between choosing point n & supplying 1st unit of labour.

Related Questions

Question 1

The law of demand states that there is a direct relationship between supply and demand.

True

False

4 points

Question 2

Equilibrium is a state of balance between supply and demand.

True

False

4 points

Question 3

Goods are scarce for both rich and poor.

True

False

4 points

Question 4

"The big corporations in this country, like ExxonMobil and GM, have deep pockets and need to be hiring more people." This is a positive statement about economic policy.

True

False

4 points

Question 5

The law of supply states that there is a direct relationship between price and quantity demanded.

True

False

4 points

Question 6

In the circular flow model, firms own economic resources, and householdsbuy the manufactured products and services.

True

False

4 points

Question 7

Households play a dual role of providing the factors of production whilepurchasing the goods and services of firms.

True

False

4 points

Question 8

Opportunity cost is the lowest valued benefit that must be sacrificed asthe result of choosing an alternative.

True

False

4 points

Question 9

Scarcity denotes that our desire for a good exceeds the amount that isfreely available from nature.

True

False

4 points

Question 10

Economics is a social science concerned with satisfying man's unlimitedwants with limited resources.

True

False

4 points

Question 11

Joint output of individuals or nations will be maximized when goods areexchanged between parties in accordance with the law of"comparative advantage".

True

False

4 points

Question 12

The production possibilities frontier assumes that the level of technologyvaries when applying the model.

True

False

4 points

Question 13

Excess demand in the market will cause the price of a product to decline.

True

False

4 points

Question 14

Demand is measured on the vertical axis and supply on the horizontalaxis.

True

False

4 points

Question 15

A change in quantity demanded is a movement along the same demandcurve.

True

False

4 points

Question 16

As globalization and world trade proliferates, individual markets withincountries' economies become more competitive.

True

False

4 points

Question 17

Which growth theory compares a subsistence real wage rate to the actual real wage rate?

		Classical growth theory
		Inflation growth theory
		Neoclassical growth theory
		New growth theory

4 points

Question 18

Suppose the working age population in Tiny Town is 100 people. If 25 of these people are NOT in the labor force, the ________ equals ________.

		unemployment rate; 25/100 Ã 100
		employment rate; 25/75 Ã 100
		labor force; 75
		labor force; 25/100 Ã 100

4 points

Question 19

Suppose there is a rise in the real wage rate. As a result, the quantity of labor demanded:

		increases.
		decreases.
		does not change because there is no change in the money wage rate.
		increases only if the price level also decreases.

4 points

Question 20

GDP can be computed as the sum of:

		all sales that have taken place in an economy over a period of time.
		the total expenditures of consumers and business over a period of time.
		the total expenditures of consumption, investment, and government expenditure on goods and services over a period of time.
		the total expenditures of consumption, investment, government expenditure on goods and services, and net exports over a period of time.

4 points

Question 21

The real wage rate equals:

		(100 x (money wage rate/price level)
		(100 x (price level/money wage rate)
		(money wage rate x (price level)
		(money wage + (number of hours worked/(price level)

4 points

Question 22

If the CPI was 121.5 at the end of 2007 and 138.3 at the end of 2008, the inflation rate over these two years was:

		10.2 percent.
		13.8 percent.
		12.2 percent.
		16.8 percent.

4 points

Question 23

A movement along the production function is the result of a change in:

		the quantity of labor.
		technology.
		capital.
		interest rates.

4 points

Question 24

All of the following are part of fiscal policy EXCEPT:

		setting tax rates.
		setting government spending.
		choosing the size of the government deficit.
		controlling the money supply.

4 points

Question 25

Along a production possibilities frontier for real GDP and the quantity of leisure time, as leisure time increases, real GDP:

		decreases.
		increases.
		stays the same.
		could increase, decrease or stay the same.

lavenderminnow570

A change in demand for a given factor of production will not occurif:
Answer
A. the productivity of that factor increases.
B. there is a decrease in the price of a substitute factor.
C. the price of that factor falls.
D. the productivity of that factor decreases.

Question 2

In terms of contribution to total income, the single most importantfactor of production is:
Answer
A. labor.
B. entrepreneurship.
C. natural resources.
D. capital.

Question 3

The trade off between work and leisure underlying the supply oflabor involves the substitution effect and the:
Answer
A. complementary effect.
B. elasticity effect.
C. production effect.
D. income effect.

Question 4

(Exhibit: Marginal Revenue Product and Demand) If the product priceis $4 per unit and the price of the factor of production is $80 perunit, the profit-maximizing quantity of the factor is _______unit(s).
Answer
A. 1
B. 5
C. 7
D. 3

Question 5

In perfect competition:
Answer
A. MFCL is greater than the price of labor.
B. the supply curve of labor to the firm is a horizontalline.
C. MRPL equals the price of the good.
D. MFCL is less than the price of labor.

Question 6

An increase in the participation rate of women in the U.S. laborforce:
Answer
A. has shifted the supply curve of labor to the right.
B. has increased the demand for labor.
C. resulted in a faster increase in wages.
D. has shifted the supply of labor to the left.

Question 7

A firm's demand curve for labor is:
Answer
A. the downward-sloping portion of its marginal revenue productcurve.
B. the upward-sloping portion of its marginal revenue productcurve.
C. horizontal for the firm in perfect competition.
D. the downward-sloping portion of its marginal productcurve.

Question 8

Since the 1970s, wage rates in the United States have _______ more_______ than they did in the previous two decades.
Answer
A. decreased; slowly
B. decreased; rapidly
C. increased; rapidly
D. increased; slowly

Question 9

Which of the following statements is true?
Answer
A. If the MFCL = MRPL the firm should hire more labor.
B. If MFCL < MRPL the firm should hire more labor.
C. If MFCL > 0, the firm should shut down.
D. If the MFCL > MRPL the firm should hire more labor.

Question 10

A leftward shift in the labor supply curve would result if:
Answer
A. people have less nonlabor income.
B. transit costs to and from work decline.
C. the population increases.
D. people value leisure more highly.

Question 11

A firm is in equilibrium when the marginal factor cost is:
Answer
A. equal to the marginal revenue product.
B. less than the price of the factor.
C. equal to the average product.
D. greater than the average product.

Question 12

A leftward shift in the labor supply curve would result if:
Answer
A. transit costs to and from work increase.
B. people value leisure less highly.
C. the population increases.
D. people have less nonlabor income.

Question 13

(Exhibit: Wage Determination in Perfect Competition) Which of thefollowing statements is true?
Answer
A. The firm will hire L1 units of labor, as shown in Panel(a).
B. The individual firm is a wage setter.
C. The firm's MFC of labor is equal to the price of the firm'soutput.
D. Total employment is equal to L1, as shown in Panel (a).

Question 14

(Exhibit: Marginal Revenue Product and Demand) If the product priceis $2 per unit and the price of the factor of production is $20 perunit, the profit-maximizing quantity of the factor is _______units.
Answer
A. 6
B. 4
C. 8
D. 2

Question 15

(Exhibit: Marginal Revenue Product and Demand) Assume that theproduct price is $2 per unit, the price of the factor of productionis $40 per unit, and 8 units are being hired. Profit can bemaximized by hiring _______ unit(s).
Answer
A. 2 more
B. 1 more
C. 3 fewer
D. 1 fewer

Question 16

(Exhibit: Demand and Supply of Bricklayers in a PerfectlyCompetitive Labor Market) If the price for "bricks laid in thewall" by a bricklayer is $.10 a brick, the marginal product of thesecond bricklayer is _______ bricks.
Answer
A. 1,200
B. 1,400
C. 1,300
D. 1,500

Question 17

In a perfectly competitive labor market, each firm can hire:
Answer
A. larger quantities of labor at going market wages perworker.
B. all the labor it wants, but only by outbidding itscompetitors.
C. larger quantities of labor at rising wages per worker.
D. only a fixed amount of labor at the going wage.

Question 18

(Exhibit: Demand and Supply of Bricklayers in a PerfectlyCompetitive Labor Market) If the equilibrium wage in the market forbricklayers is $100 a day, but a minimum wage for bricklayers of$130 a day is set by the government:
Answer
A. 3 workers who otherwise would have been employed are nowunemployed.
B. the firm will shut down.
C. 6 workers will now be hired by the firm.
D. all bricklayers are better off.

Question 19

A factor demand curve will shift because of:
Answer
A. the proportion of the factor's cost relative to totalcost.
B. changes in technology.
C. the slope of the MP curve.
D. the elasticity of demand for the final product.

Question 20

Which of the following statements is true?
Answer
A. MFC = change in total cost/ change in the quantity of afactor.
B. MFC = the change in the quantity of a factor times the change inthe price of the factor.
C. MRPL = MC of the output.
D. MRPL = MPL x (P), where P is the price of labor.

31. A country's tax system influences the attractiveness of investing in that country and affects the relative level of profitability for an MNC.

a. True

b. False

32. Points inside a production possibilities frontier represent

a. unattainable production combinations

b. efficiency

c. situations where supply exceeds demand

d. unemployment of resources

33. Firms in a high-wage nation like the U.S. can compete effectively with imports from low-wage nations if

a. the U.S. reduces tariffs on imports

b. low-wage nations impose tariffs on U.S. made goods

c. labor productivity is higher in the low-wage nation

d. labor productivity is higher in the U.S.

34. Assume that production in the United States is valued at $100,000. National income is therefore $100,000. Of their income, workers save $2000, pay $6,000 in taxes, spend $89,000 on consumer goods, and spend $2000 on imports. Businesses spend $5,000 in new investment spending. And, foreigners spend $1000 on exports. To avoid any problems of inflation or unemployment, the government should have a budget deficit or surplus of:

a. $2,000 surplus

b. $1,000 deficit

c. $2,000 deficit

d. $1000 surplus

e. $0 deficit

35. Autarky means-----------------------------------------------------------------

a. the absence of government

b. lack of agriculture

c. self-sufficient, in the absence of international trade

d. short of exchange rates

36. The more people there are----------------------, the less the public as a whole will spend on goods and services.

a. unemployed

b. underemployed

c. employed

d. as discouraged workers

37, Which of the following theories holds that countries will produce and export products that use large amounts of production factors that they have in abundance?

a. Mercantilism

b. The theory of absolute advantage

c. The factor endowment theory

d. None of the above.

38. Suppose that a consumer has a marginal propensity to consume of 0.79. If this consumer earns an extra $1220, her saving would be expected to increase by-----------------------------

39. Many countries in Asia, Africa, and South America-----------------------

a. Are developing countries

b. Are industrialized nations

c. Have a high demand for nonessential products

d. Do not trade

40. Which two of the following are regarded as the main aims of the World Trade Organization (WTO)?

a) To eliminate discrimination in world trade

b) To provide financial assistance to countries with debt

c) To reduce tariff barriers

d) To make infant industry protection illegal

e) To help give preferences to smaller economies

b) and e) a) and c) a) and d) c) and e) b) and d)

41. Last year Sophia's nominal income increased by 12% while the price level rose by 5.5%. Consequently, Sophia's real income:

a. rose by approximately 7%

b. fell by approximately 1%

c. rose by approximately 2%

d. ------------------------------------

42. Consumer surplus

a. is always positive.

b. for a particular unit of consumption is computed by taking the difference between quantity demand and quantity supplied.

c. for all units consumed is the area below demand and below market price over all the units consumed.

d. added to producer surplus provides a measure of the net gain to society from the production and consumption of the good.

43. A decline in Real GDP for six or more consecutive months is called-------------------------------

a. A trough

b. A recession

c. An expansion

d. A recovery

44. What do we call the situation where capital grows faster than the labor force?

a. economic growth

b. technological change

c. productivity growth

d. capital deepening

45. The terms of trade are-------------------------------------------

a. the cost of transportation between countries

b. the ratio of wages in two countries

c. the terms which are used in the trade negotiations

d. the rate at which two products can be exchanged

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ECON 111 Lecture Notes - Lecture 7: Reservation Wage, Relative Price, Opportunity Cost

ECON 111 Full Course Notes

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