Economics 302Spring 2005Practice Questions for Chapter 3Multiple Choice Questions for a Quick Review:1. A competitive firma. Is a price taker in both the output and the product markets.b. Is a price taker in the output market but not the product market.c. Is a price taker in the product market but not the output market.d. Is not a price taker in either the product nor the output market.2. A production function is a mathematical statement thata. Relates the level of output to the level of inputs used.b. Expresses the relationship between the prices of factors of production and the level of output produced.c. Expresses the relationship between the amount of inputs used and the prices of those inputs.d. May have the property of increasing returns to scale or constant returns to scale, but not the property of decreasing returns to scale.3. Aggregate income in an economy isa. Equal to the total number of dollars earned by workers.b. Always equal to aggregate production in that economy.c. Equivalent to the dollar amount of payments made to owners of capital.d. Equal to the total number of dollars earned as profits by firm owners.4. Constant returns to scale occurs when a. The production function is linearly homogenous.b. The exponents of capital and labor in the production function sum to one.c. A doubling of inputs results in a doubling of output.d. All of the above.5. Firms should continue to hire labor up to that point wherea. The marginal product of labor is just greater than the market wage rate.b. The market wage rate is just greater than the marginal product of labor.c. The marginal product of labor for the last unit of labor is just equal to the real wage rate.d. The marginal product of labor for the last unit of labor is just equal to the price of the output.6. According to Euler’s Theorem, total output is equal to the sum of all factor payments provided that a. Each factor of production is paid a real wage equal to its marginal product.b. The production function is linearly homogenous (that is, it has constant returns to scale).c. Equal amounts of capital and labor are used.d. (a) and (b)d. All of the above.7. Which of the following transactions is not counted as investment in the national income accounts?a. A homeowner purchases a new washer and dryer for their home.b. A homeowner purchases a new computer for their children.c. A museum purchases a painting by Van Gogh for $40 million.d. A homeowner purchases a new home built during the current calendar year.8. Which of the following statements is true?a. Total saving is equal to the sum of private saving plus public saving.b. Public saving is equal to G – T.c. Private saving is equal to Y – C – G.d. Private saving is equal to Y – C – G – T.9. Which of the following statements is true? If national saving is not dependent upon the level of interest rate, then an increase in government spending holding everything else constant musta. Increase the interest rate.b. Decrease the interest rate.c. Reduce the budget deficit.d. Increase the level of private investment.10. Which of the following statements is true? If national saving is not dependent upon the level of interest rate, then a decrease in taxes holding everything else constant musta. Increase the interest rate.b. Decrease the interest rate.c. Have no effect on the interest rate.d. May increase or decrease the interest rate depending upon how businesses alter their investment spending in response to the decrease in taxes.11. If the consumption function is C = 100 + .5(Y – T) then if disposable income decreases by $500 then consumption willa. Increase by $250.b. Decrease by $500.c. Increase by $500.d. Decrease by $250.12. If the consumption function is C = 100 + .5(Y – T) and Y = $4000 and T = $500 then the marginal propensity to consumer equalsa. $1750b. $1850c. .5d. $200013. A Cobb-Douglas production function a. Exhibits constant returns to scale.b. Is a production function that has a constant ratio of labor income to capitalincome.c. Exhibits diminishing marginal productivity of labor.d. Exhibits diminishing marginal productivity of capital.e. All of the above.Problems:1. Suppose you operate a firm with a fixed amount of capital (K), 4 units, where capital costs $10/unit. In addition to the capital you use, you also employ labor (L). You also know the relationship between the factors you employ and the output (Y) you produce can be summarized in the following equation:Y = F (K, L) = A K 1/2L1/2where A has a value of 2. You also know that the output produced by this competitive firm is sold for $10 per unit and that the nominal wage is equal to $10.a. Fill in the table below:# of WorkersUnits of OutputMarginal Product of Labor (approximation using the change in output divided by the change in laborMarginal Product of Labor (calculate using calculus)NominalWageReal Wage1 x x23459162536b. Graph this firm’s production function. Make sure you label the axes in your graph.c. Draw a second graph beneath your first graph and label the horizontal axis with the same units as the horizontal axis from the first graph. On this second graph plot out the firm’s marginal product of labor. Label the vertical axis appropriately.d. Does this firm experience diminishing marginal product of labor as it expands its use of labor?e. What level of labor should this firm employ? And what is the real wage rate at this level of production?f. Why should this firm not hire 16 workers? Explain your answer.g. Why should this firm not hire 2 workers? Explain your answer.h. What happens to the firm’s demand for labor if the product price increases, holding everything else constant?i. What happens to the firm’s demand for labor if the nominal wage rate decrease, holding everything else constant?j. What happens to the firm’s demand for labor if the value of A increases, holding everything else constant?2. Suppose you have a Cobb-Douglas production function described by the equation below:Y = 5K1/4L3/4a. Complete the following table:Capital (K) Labor (L) Output (Y)100 25200 50300 75400 100b. Does this production function exhibit constant returns to scale (allow for rounding error)?c. Can you provide a mathematical proof of this based on the lecture material?d. If this firm decides to hire 50 workers, what must the value of the real wage equal?e. If this firm decides to hire 200 units of capital, what must the value of the real rental price of capital equal?f. If