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Practice Unit 9

1) Firms in this economy make economic rent by setting prices above marginal costs. They choose the nominal wage that corresponds to the level of worker effort that maximizes their profits. The more inelastic the demand curve faced by a firm, the higher the markup it will set over marginal costs. 2) At the profit-maximizing choice B, the firm's markup is equal to the price it sets P* minus the nominal wage W. 3) If the nominal wage W falls, the firm would remain at the same profit-maximizing choice B rather than producing more at the same price.

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65 views

Practice Unit 9

1) Firms in this economy make economic rent by setting prices above marginal costs. They choose the nominal wage that corresponds to the level of worker effort that maximizes their profits. The more inelastic the demand curve faced by a firm, the higher the markup it will set over marginal costs. 2) At the profit-maximizing choice B, the firm's markup is equal to the price it sets P* minus the nominal wage W. 3) If the nominal wage W falls, the firm would remain at the same profit-maximizing choice B rather than producing more at the same price.

Uploaded by

Shaheer Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1) "Consider an economy with firms selling differentiated products, where the only input to

production is labour. Which of the following statements is correct?"


a) "Firms make no economic rent."
b) "Workers receive no employment rent."
c) "Firms choose the level of nominal wage that corresponds to the workers’ maximum effort."
d) "The more inelastic the demand curve faced by the firm, the higher the markup set by the
firm."

2) "The following diagram depicts a firm’s isoprofit curves and demand curve, given the economy-
wide demand. Which of the following statements is correct?"

a) "In the model, the Marketing Department uses information from the HR department, the
Production Department and its market research to set the price, p*."
b) "At B, the marginal rate of substitution is (p*-W)/q*."
c) "The markup at the profit-maximising choice is p* – W."
d) "The firm would not be making a profit at C."

3) "The following diagram depicts a firm’s isoprofit curves and demand curve, given the economy-
wide demand. Which of the following statements is correct?"
a) "The higher the markup, the higher the profit."
b) "The firm would still be choosing B even with a less elastic demand curve."
c) "The isoprofit curves would be steeper for lower W."
d) "If there is a rise in W, then the firm would produce at a point to the right of B.”
4) "The figure depicts the labour market model. Which of the following statements are correct at
outcome X?"

a) "The firms’ wage offered is at the point of tangency between their isocost line and the
workers’ best response function curve for effort."
b) "The firms’ price and output are at the point of tangency between their isoprofit curve and
their demand curve."
c) "Once they have the job, employees are better off not exerting any effort in their work."
d) "The unemployed can get a job by offering to work for a wage lower than the equilibrium wage."
5) "The figure depicts the labour market when there has been a negative aggregate demand shock.
Which of the following statements are correct?"

a) "The derived demand for labour is N xat X, and is N B at B."


b) "The demand-deficient unemployment at B is N x – N B ."
c) "The equilibrium level of unemployment is N L – N B ."
d) " N L−N x and N L−N B are the levels of involuntary unemployment at X and B, respectively."

6) "The following diagram depicts a firm’s demand curve given the economy-wide demand, and its
tangent isoprofit curve. The firm faces a linear demand curve. The workers’ average product of
labour <U+03BB> equals 1. At B, which of the following statements is correct?"

a) "The slope of the isoprofit curve is -0.4."


b) "The markup is 0.1."
c) "Profits are $16,000."
d) "The marginal rate of substitution is -0.1."

7) "The following diagram depicts a firm’s demand curve given the economy-wide demand, and its
tangent isoprofit curve. The firm faces a linear demand curve. The workers’ average product of
labour <U+03BB> equals 1. The firm produces at point B. Now suppose the wage rate W falls to
20. At B, which of the following statements is correct?"

a) "The slope of the isoprofit curve is -0.1."


b) "The slope of the demand curve is -0.1."
c) "Profits are $4,000."
d) "Profits are maximised at B."
8) "The figure depicts the labour market when there has been a negative aggregate demand shock.
Which of the following statements is correct?"
a) "Firms may be reluctant to make the nominal wage adjustment from B to C."
b) "The demand increase from C to X is ensured by a price cut."
c) "Rather than wait for the wage and price adjustments, the central bank can aid demand
recovery by reducing the interest rate."
d) "The government can aid demand recovery by an increase in its spending, funded by higher
taxes."

9) "The following figures depict the labour market equilibrium and the Lorenz curve. Assume that
owners do not work. The Gini coefficient g can be calculated by g=u+η –(1 – u) s where u is
the unemployment rate, η is the fraction of the population that is employed, and s is the wage
share received by workers. In which of the following statements would the Gini coefficient
decrease, keeping all other factors unchanged?"
a) "A higher degree of product differentiation."
b) "A higher unemployment benefit."
c) "Better monitoring of employees’ effort."
d) "A fall in the absolute number of owners, while the size of the active labour market is
unchanged."
10) "The figure describes the effect of immigration on unemployment in the labour market. The
labour market equilibrium is at A and C before and after the influx of immigration, respectively.
Based on this figure, which of the following statements is correct?"

a) "All incumbent workers are unaffected while the labour market adjusts."
b) "All incumbent workers are no worse off in the new equilibrium."
c) "The unemployment rate is unchanged in the new equilibrium."
d) "Firms claim a higher markup in the new equilibrium."
11) "Which of the following statements is correct?"
a) "In contrast to competitive goods markets, in the labour market, sellers have market power."
b) "The market clears in both competitive goods and labour markets."
c) "The market equilibrium is efficient (no deadweight loss) in both the competitive goods market
and the labour market."
12) "Which of the following statements about how a firm sets prices is correct?"
a) "When all firms have set their profit-maximizing price, the real wage in the economy depends
on the elasticity of demand and the average product of labour."
b) "The firm’s unit labour cost is equal to the nominal wage minus output per worker."
c) "If the real wage is below the price-setting curve, firms can increase their profits by increasing
the price."

13) "Figure 9.8 depicts the market’s demand curve and the firm’s isoprofit curves. Based on this
information, which of the following statements is correct?"

a) "The slope of the demand curve is the firm’s marginal rate of substitution."
b) "Between points A and C, the firm would prefer point A as the output is higher."
c) "Having chosen its profit-maximizing price p*, the firm would then set its nominal wage level."
d) "If the firm finds itself producing at point C, it can increase its profit by selling more units at a
lower price."
14) "Figure 9.20 depicts the effect of union wage-setting. What can we conclude from this figure?"

a) "Compared to A, at C the effort per hour is higher and therefore the firm’s profit is higher."
b) "The resulting bargained wage-setting curve will be above the wage-setting curve with no
union."
c) "The effect of a strong union will always be to increase unemployment."
d) "Under union wage-setting, the firm is still setting the wage that maximizes its profits."
15)"Which of the following statements are correct?"
a) "Contracts are complete in both competitive goods markets and labour markets."
b) "In a competitive goods market the buyers are price-takers, while in a labour market the
buyers of `12 buyers or the sellers in competitive goods markets. In contrast, in labour
markets the sellers receive economic rents."
c) "Social norms do not affect the outcomes in either goods markets or in labour markets."

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