ECON-1006EL Chapter Notes - Chapter 6-7: Brand Loyalty, Takers, Efficient-Market Hypothesis

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plumbee368

6 Dec 2016

School

Laurentian

Department

Economics / Science Èconomique

Course

ECON-1006EL

Professor

Mac Lean Brian

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Document Summary

Chapter (cid:1010) productio(cid:374), cost, a(cid:374)d the quest for profit: Even though self-interest is the prime mover of economic activity, the end result is an allocation of goods and services that serves society"s collective interests remarkably well. If producers are offering too much of one product and not enough of another, profit opportunities alert entrepreneurs to the that fact and provide incentives for them to take remedial action. All the while, the system exerts relentless pressure on producers to hold the price of each good close to its cost of production and, indeed, to reduce that cost in any way possible. In the long-run, no factors of production are fixed and any input can be changed, including the amount of capital it uses, its size, and the combination of labour, capital, and other factors of production it uses. In the long-run, new firms may also enter a market or existing ones may leave it.

Related Questions

A competitive firmâs short-run demand for labor will rise when the price of its product rises.

	True
	False

As the wage rate rises, the marginal revenue product of labor increases.

	True
	False

A competitive firmâs demand for labor always slopes down in the short-run, but may slope upwards or downwards in the long run.

	True
	False

When labor an capital are complements in production, a higher wage will cause a firm to use more capital in the long run.

	True
	False

If labor is a regressive factor, then a firmâs long-run demand for labor may or may not be downward sloping.

	True
	False

The short-run demand curve for labor for a firm in any type of market for its output coincides with

	the upward-sloping portion of the marginal revenue product curve.
	the downward-sloping portion of the marginal revenue product curve.

	the downward-sloping portion of the marginal product curve.
	the marginal labor cost curve.

An increase in the price of labor will, in the short run, cause a competitive firmâs

	marginal cost to increase, the quantity it sells to decrease, and therefore reduce the quantity of labor demanded.
	price of its output to increase, leaving the quantity of labor demanded unchanged.

	marginal revenue product of labor to decrease, and therefore reduce demand for labor.
	marginal revenue product of labor to increase, and therefore increase demand for labor.

Which of the following would cause the firmâs short-run demand curve for labor to shift to the right?

	A decrease in the wage rate.
	An increase in the price of the firmâs product.

	An increase in the rental rate paid to capital.
	A decrease in the amount of complementary capital available.

If increased capital usage reduces the firmâs short-run demand for labor, then

	labor is a regressive factor.
	labor and capital are complements in production.

	labor and capital are substitutes in production.
	labor is a Giffen factor.

When is the law of demand violated for labor? That is, with regards to the law of labor demand, when does an increase in the wage not lead to a reduction in the quantity of labor demanded?

	Never.
	When the substitution and scale effects are in opposition, with the scale effect being the larger.

	When labor is a regressive factor.
	When labor earns zero economic rent.

If the wage rate rises, then the firmâs long-run marginal costs change, which in turn affects the firmâs output level and its employment of labor. This phenomenon is known as

	the substitution effect.
	the scale effect.

	the regressive-factor effect.
	the factor-price effect.

When will the scale effect of a wage increase cause a reduction in the quantity of labor demanded?

	Always.
	When labor is not a regressive factor.

	When labor and capital are substitutes in production.
	When labor and capital are complements in production.

Consider the usual case where a higher wage rate increases a firmsâ marginal costs. In this case, the industryâs demand curve for labor

	is more wage inelastic than the individual firmsâ demand curves would indicate.
	coincides with the horizontal sum of individual firmsâ demand curves.

	contains only substitution effects but no scale effects.
	is horizontal at the going wage rate.

To maximize profits, a monopolist will hire the quantity of labor at which marginal revenue product of labor

	is downward sloping and equal to the market wage rate.
	is downward sloping and equal to marginal labor cost.

	minus marginal labor cost is maximized.
	is maximized.

A firmâs revenue minus its factor payments equals

	zero.
	the profits or losses earned by the firm.

	the quasi-rents earned by the factors of production.
	the firmâs total revenue.

As the amount of labor used in production increases, total product

	increases at low levels of labor and decreases at higher levels of labor.
	increases at high levels of labor and decreases at low levels of labor.

	always increases.
	always decreases.

A profit-maximizing price taker will produce at a level where

	the wage equals the marginal product of labor.
	the marginal revenue product of labor equals the price of their output.

	the wage rate equals the price of their output.
	the marginal revenue product of labor equals the wage rate.

If the wage rate is $10 per hour and one worker can produce 2 units of output per hour, then the marginal cost of production is

	$5.
	$10.

	$20.
	The answer cannot be determined from the information given.

A firmâs long-run demand for labor is more wage-elastic than its short-run demand for labor.

	True
	False

A monopsonistâs short-run demand curve for labor coincides with its marginal revenue product of labor curve.

	True
	False

Workers will receive higher wages when an employer faces an upward-sloping supply curve for labor.

	True
	False

The profit an owner receives is equivalent to the rent received for her entrepreneurial services.

	True
	False

When high levels of labor are employed, total production tends to increase at a decreasing rate.

	True
	False

The substitution effect on labor always decreases the quantity of labor demanded when the wage rate increases.

	True
	False

A firmâs marginal revenue product of labor equals the marginal product of labor multiplied by the per-unit cost of labor.

	True
	False

Tastes and preferences are relevant to individual choices for consumption but not relevant to choices for supplying labor.

	True
	False

A higher wage will always cause a worker to increase the quantity of labor supplied.

	True
	False

The substitution and income effects of a wage increase both cause consumption to rise.

	True
	False

A workerâs labor supply may either rise or fall when nonlabor income increases, depending on whether the substitution effect or the income effect dominates.

	True
	False

When an increase in marginal productivity increases workersâ nonlabor income, the effect on the quantity of labor supplied is ambiguous/uncertain.

	True
	False

A technological improvement that is permanent is more likely to raise employment than one that is temporary.

	True
	False

Other factors being constant, firms that provide on-the-job training to workers will tend to pay higher wages.

	True
	False

If there is discrimination, employers engage in it a cost.

	True
	False

Human capital tends to increase over the course of a personâs life.

	True
	False

In the indifference curve budget line model of labor supply,

	labor is measured along the horizontal axis and leisure is measured along the vertical axis.
	labor is measured along the horizontal axis and consumption is measured along the vertical axis.

	consumption is measured along the horizontal axis and labor is measured along the vertical axis.
	consumption is measured along the horizontal axis and leisure is measured along the vertical axis.

In the indifference curve budget line model of labor supply, the slope of the indifference curve is used to measure

	the wage rate.
	laborâs marginal product.

	the workerâs nonlabor income.
	the marginal value of leisure.

If a worker has chosen a quantity of labor where the marginal value of leisure exceeds the wage rate, she would be better off by

	choosing less leisure.
	providing fewer hours of labor.

	providing more hours of labor.
	staying at this combination of labor and consumption.

When there is an increase in the wage rate there will be

	both a substitution effect and an income effect.
	only a substitution effect.

	only a substitution effect.
	either a substitution effect or an income effect.

When the wage rate rises, the substitution effect leads a worker to

	increase consumption while the income effect leads to a decrease in consumption.
	decrease consumption while the income effect leads to an increase in consumption.

	increase consumption, as does the income effect.
	substitution sleep for other leisure.

Consider the indifference curve budget line model of labor supply, and assume consumption and leisure are both normal goods. A higher wage rate would result in

	more consumption and less leisure.
	a reduction in the workerâs marginal value of leisure.

	reduced consumption if the income effect is larger than the substitution effect.
	increased labor only if the substitution effect outweighs the income effect.

When the wage rate rises, a worker chooses to replace some leisure hours with work hours, even if he would remain equally well off. This phenomenon is known as

	compensating differential.
	the income effect.

	the substitution effect.
	intertemporal substitution.

Which of the following will shift a workerâs labor supply curve to the left?

	Higher nonlabor income.
	A lower wage rate, assuming the substitution effect dominates the income effect.

	New machinery that substitutes for labor and lowers its marginal product.
	A decrease in the marginal value of leisure.

Which of the following would cause a rightward shift in the labor demand curve?

	Manna from heaven.
	A rise in the wage rate.

	A rise in workersâ marginal productivity.
	A decline in workersâ nonlabor incomes.

When some jobs are inherently more risky or unpleasant than other jobs, different workers will be paid different wages because of

	differences in human capital.
	differing access to capital.

	compensating differentials
	discrimination.

Discrimination is difficult to measure empirically because

	it is hard to measure and control for differences in marginal productivity.
	data on racial and gender differences is rarely available.

	discrimination is practiced by very few employers.
	economists find no significant wage differentials due to gender or race.

Intertemporal substitution dictates that

	people will work less in periods of high productivity.
	people will spend more in periods of high productivity.

	people will work more in periods of high productivity.
	people will spend less in periods of high productivity.

A decrease in the wage rate causes the budget line to

	become flatter.
	become steeper.

	shift upward.
	shift downward.

An increase in the marginal productivity of labor will tend to

	shift the labor supply curve rightward if the change is temporary.
	result in an increase in employment if the change is temporary.

	result in an increase in employment if the change is permanent.
	all of the above.

A downward shift in a workerâs budget line is a result of

	an increase in the wage rate.
	a decrease in the wage rate.

	an increase in nonlabor income.
	a decrease in nonlabor income

One deficiency of the labor-leisure indifference curve analysis is that because indifference curves are always tangent to the workerâs budget line, the model cannot explain why some people choose not to work.

	True
	False

pinkcheetah77

Managers of a monopoly under rate of return regulation have an incentive to

a. underestimate the firm's costs.

b. exaggerate the firm's costs.

c. minimize the monopoly's deadweight loss.

d. exaggerate the firm's profit.

e. earn zero economic profit.

Which of the following is correct?
i. All linear demand curves have a constant slope and a constant price elasticity of demand.
ii. The price elasticity of demand changes while moving along a downward-sloping linear demand curve.
iii. The magnitude of the slope of all linear demand curves is equal to the price elasticity of demand.

a. iii only.

b. ii only.

c. i, ii, and iii.

d. i only.

e. i and ii.

________ natural monopolies is a commonly used, potential solution to the problems presented by natural monopolies.

a. Giving incentives to firms to become

b. Regulating

c. Breaking up firms that are

d. Outlawing price discrimination by

e. Refusing to grant patents to

In the short run, a perfectly competitive firm

a. must suffer an economic loss.

b. must earn an economic profit.

c. might make an economic profit, incur an economic loss, or make a normal profit.

d. must make either an economic profit or a normal profit.

e. must earn a normal profit.

To determine if a market is an oligopoly, we need to determine if

a. cartels are legal in their market.

b. the firms are so few that they recognize their mutual interdependencies.

c. the firms make identical or differentiated products.

d. there are many firms in the market.

e. the market's HHI is less than 900.

Increasing marginal returns to labor

a. occur only when there are increasing marginal returns to capital.

b. are the result of specialization and division of labor in the production process.

c. describe the portion of a total product curve where the marginal product is negative.

d. mean that two workers produce less than twice the output of one worker.

e. occur when a particularly efficient worker is employed.

The return to entrepreneurship, which is what the firm's owner could earn running another business, is known as

a. entrepreneur's profit.

b. economic profit.

c. excessive profit.

d. accounting profit.

normal profit.

Both price supports and a price floor can

a. decrease the price below the equilibrium price.

b. increase consumer surplus.

c. create a deadweight loss.

d. decrease output below the equilibrium quantity.

e. have no effect on producer surplus.

In economics, cost is ________, and benefit is ________.

a. the amount of money that you pay for something; the amount of money that someone else is willing to pay you
b. what you must give up to get something; what you are willing to give up to get it
c. the amount of money that you pay on the margin; the amount of money that you receive on the margin
d. what you are willing to give up to get it; what you must give up to get something
e. what you are willing to pay on the margin; what the government pays you when you are unemployed or retired

If a substitute good is easy to find, then demand for a good is

a. unit elastic.

b. perfectly inelastic.

c. elastic.

d. inelastic.

e. Substitutes don't have any effect on elasticity.

Q5. Table 5.5

Total Output Total Costs

0 10

1 18

2 21

3 23

4 24

5 26

6 29

7 33

8 38

9 44

10 51

In Table 5.5, the marginal cost of the third unit is

a. 2.

b. 4.

c. 3.

d. 1.

Q6. When marginal physical product begins to decline, marginal cost begins to increase.

a. true

b. false

Q7. It is possible for a firm to have positive fixed cost and zero total cost.

a. true

b. false

Q8. Which one of the following is TRUE?

a. Marginal cost increases as marginal physical product decreases.

b. Marginal cost decreases as marginal product decreases.

c. Total cost is the difference between marginal cost and total variable cost.

d. Total cost is the sum of marginal cost plus total variable cost.

Q9. The slope of the production function becomes negative when diminishing returns set in.

a. true

b. false

Q10. Table 5.7

Q Total Variable Cost Average Variable Cost Total Cost Average Total Cost

1 10 50

2 50 90

3 40

Refer to Table 5.7. What is the firm's total fixed cost?

a. 20

b. 40

c. 10

d. 30

Q11. When there are economic profits in a perfectly competitive industry

a. firms have no incentive to exit or enter the industry.

b. firms exit the industry.

c. firms enter the industry.

d. the high barriers to entry prevent further competition.

Q12. The market structure of perfect competition is defined by hundreds of firms producing an essential product, with barriers to the entry of new firms.

a. true

b. false

Q13. A single supplier of a good or service for which there is no close substitute is referred to as a(n)

a. monopolistic competitor.

b. strategic competitor.

c. monopoly.

d. oligopoly.

Q14. For the perfectly competitive firm the selling price of its product is determined by

a. the length of time it has been in business.

b. the amount it chooses to spend on marketing.

c. the interaction of market supply and demand.

d. the number of competing firms.

Q15. A company finds that at the MR = MC output level, its total cost is $500, total variable cost is $400, and total revenue is $450. Your advice to the firm is to

a. reduce output to reduce the cost of production.

b. continue to produce, as total revenue covers total variable cost.

c. increase output to reduce the per unit cost of production.

d. shut down immediately.

Q16. For a monopolist

a. P > MR.

b. P = MC.

c. P = ATC.

d. P = MR.

Q17. The perfect competitor

a. chooses the profit-maximizing quantity.

b. chooses the profit-maximizing price.

c. chooses a quantity that will make the most efficient use of his labor and capital resources.

d. produces what he thinks can be sold, regardless of cost.

Q18. In perfect competition, the larger firms will be able to charge a higher price than the smaller firms.

a. true

b. false

Q19. For the perfectly competitive firm, price equals marginal revenue.

a. true

b. false

Q20. For a monopolist, selling more units requires

a. allowing more firms to enter the industry.

b. hiring a more productive labor force.

c. forming a cartel.

d. lowering the selling price.

Q21. Monopolistic competition means

a. monopolies from several countries compete in the global market.

b. a large number of firms producing differentiated products.

c. a large number of firms producing homogeneous products.

d. few firms producing differentiated products.

Q22. Opportunistic behavior is discouraged by the desire to have repeat transactions.

a. true

b. false

Q23. By saying that firms in an oligopoly are interdependent, we mean that

a. actions by one will prompt reactions by others.

b. if one increases its profits, all others will increase profits as well.

c. all firms sell identical products.

d. if one increases its profits, all others will lose profits.

Q24. Price leadership is a form of

a. barrier to entry.

b. tacit collusion.

c. opportunistic behavior.

d. noncooperative behavior.

Q25. A monopolistically competitive firm in the long run

a. earns positive economic profits.

b. earns negative economic profits.

c. earns zero economic profits.

d. suffers economic losses.

Q26. Monopolistically competitive firms produce a product that is homogeneous.

a. true

b. false

Q27. Which of the following is a characteristic of both perfect competition and monopolistic competition?

a. In the long run, the firm will produce the output which minimizes average total cost.

b. Firms sell a homogeneous product.

c. In the long run, the firm will earn zero economic profit.

d. The firm seeks to differentiate its product from those of its competitors.

Q28. A monopolistically competitive firm uses advertising to

a. lower its costs.

b. differentiate its product.

c. signal its competitors that it is serious about staying in business.

d. motivate its work force.

Q29. For the monopolistic competitor, which is INCORRECT?

a. The profit maximizing rate of output is where the marginal cost curve intersects the marginal revenue curve.

b. The marginal revenue curve is downward sloping and lies below the demand curve.

c. Because the firm has some control over price, its demand curve slopes downward.

d. If the firm in a monopolistically competitive industry were making economic losses, firms would enter the industry.

Q30. Which of the following is TRUE?

a. In the model of price leadership, the dominant firm consistently charges the lowest price.

b. Opportunistic behavior is discouraged by the desire to have repeat transactions.

c. The strategic dependence that characterizes oligopoly means that no firms can earn positive accounting profits.

d. Price wars are most common in perfect competition.

Q31. Antitrust legislation seeks to correct market failure by ensuring that all firms in the industry earn an economic profit.

a. true

b. false

Q32. Market failures arise when

a. people look out for their own best interests.

b. there is a gap between the social and private costs of producing or consuming a good.

c. firms look out for their own best interests.

d. society seeks to operate at a point on the production possibilities curve.

Q33. Cases prosecuted under the Sherman Antitrust Act are intended to correct market failure arising from negative externalities.

a. true

b. false

Q34.

Figure 8.2

Refer to Figure 8.2. The market equilibrium is Q1. Point Q2 represents the optimal point of production. To reach Q2,

a. consumption of the good could be taxed.

b. a subsidy could be given to consumers.

c. production of the good could be taxed.

d. the industry producing the good should operate as a cartel.

Q35. What would happen in a free market system when production of a good generates negative externalities?

a. There would be a shortage of the good.

b. The equilibrium quantity of the good would be more than the efficient amount.

c. The equilibrium quantity of the good would be less than the efficient amount.

d. There would be a surplus of the good.

Q36. If providing a service results in negative external costs, then

a. the market price is below the true opportunity cost of resources used to provide the service.

b. the market price is above the true opportunity cost of resources used to provide the service.

c. the market quantity is too low.

d. market forces will always correct the problem.

Q37. The problem of positive externalities can be addressed by having some firms exit the industry.

a. true

b. false

Q38. The first case prosecuted under the Sherman Act was the antitrust case against Microsoft.

a. true

b. false

Q39. If your marginal tax rate is always higher than your average tax rate, then the tax system is a

a. proportional tax system.

b. regressive tax system.

c. fair tax system.

d. progressive tax system.

Q40. Private goods are characterized by the principle of rival consumption.

a. true

b. false

Q41. Collective bargaining is the process by which unions and employers negotiate the conditions of employment and wages.

a. true

b. false

Q42. The marginal physical product of labor is the addition to total revenue a firm experiences when it hires one additional worker.

a. true

b. false

Q43. A firm's marginal revenue product of labor curve is also

a. its labor demand curve.

b. its total revenue line.

c. its long-run input cost function.

d. its marginal cost curve.

Q44. An increase in the selling price of a product

a. increases the supply of labor to the industry.

b. increases the productivity of labor.

c. raises the firm's demand for labor.

d. decreases the supply of labor to the industry.

Q45. If unions succeed at restricting the supply of labor in any one area of the economy, wages in that sector will increase.

a. true

b. false

Q46. The fact that the labor supply curve slopes upward indicates that

a. workers seek to work more hours when the wage rises.

b. the income effect of a wage increases outweighs the substitution effect.

c. workers seek to work more hours when the wage decreases.

d. firms want to hire more workers when the wage rises.

Q47. The upward slope of the labor supply curve suggests that the income effect of a wage increase outweighs the substitution effect.

a. true

b. false

Q48. The number of strikes occurring in U. S. firms has steadily increased over the past 25 years.

a. true

b. false

Q49. Suppose a perfectly competitive firm faces a labor market in which the going wage rate is $480 per week. If the last worker hired has a marginal physical product of 12 units of output per week, what is the selling price of the firm's output?

a. $40 per unit

b. $480 per unit

c. $240 per unit

d. $12 per unit

Q50. If workers in an industry become less productive due to low employee morale, we would expect the

a. demand for workers to decrease.

b. wages in the industry to increase.

c. supply of workers to increase.

d. demand for workers to increase.

ECON-1006EL Chapter Notes - Chapter 6-7: Brand Loyalty, Takers, Efficient-Market Hypothesis

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