Q3F09answers

Q3F09answers - November 18, 2009 Quiz 3 Economics 1...

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November 18, 2009 Quiz 3 Economics 1 True-False Questions: 1. If the demand curve for a good slopes downward, its supply curve slopes upward, and the government sets a ceiling on the price of the good that is below the competitive equilibrium price for the good, the quantity supplied of the good will exceed the quantity demanded of the good. False Examine the supply and demand diagram. When the price is equal to the price ceiling, which is below the competitive equilibrium price, the quantity demanded exceeds the quantity supplied. quantity supplied quantity demanded price supply demand price ceiling quantity
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2. A minimum wage that exceeds the competitive equilibrium wage will increase voluntary unemployment. False A worker is voluntarily unemployed if the he or she does not chose to work at the prevailing market wage. A minimum wage exceeding the competitive equilibrium wage will increase the prevailing market wage. No one who chose to work at the competitive equilibrium wage will decide not to work now. So, voluntary unemployment can’t go up. And some people who chose not to work at the competitive equilibrium wage might be willing to work at the higher wage prevailing after the minimum wage is imposed. So, voluntary unemployment could actually go down. However, with the minimum wage, some workers who want to work may not be able to find a job. Unemployment of that kind is called involuntary unemployment. The minimum wage should be expected to decrease voluntary unemployment and increase involuntary unemployment. 3. If the total revenue of a firm divided by the number of workers it employs exceeds the wage it must pay its workers, the firm will increase its profits by hiring an additional worker. False If the marginal value product of labor exceeds the wage a firm must pay its workers, it will increase profits by hiring an additional worker. However, total revenue divided by the number of workers is the average value produce of labor, not the marginal value product. Just because the average product of labor is higher than the wage, the marginal value product of labor is not necessarily higher than the wage. Here’s an example taken from the lecture of November 2. Suppose the wage a firm must pay is $25 per day. The table below shows revenue for different levels of employment, as well as average value product, marginal value product, cost and profit. Workers Value of Ouput Average Value Product Marginal Value Product Cost Profit 1 $40 $40 $40 $25 $15 2 $70 $35 $30 $50 $20 3 $90 $30 $20 $75 $15 4 $104 $26 $14 $100 $4 For the first worker, the marginal value product exceeds the wage so adding that worker increases profits. The same is true of the second worker. However, adding the third worker increases revenue by $20 and increases cost by $25. Adding the third worker decreases profit. Notice, however, that the average value product of the third worker, $30, exceeds the wage. So, with the third worker average value product exceeds the wage, but adding
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This note was uploaded on 03/20/2010 for the course ECON 1 taught by Professor Bergstrom during the Spring '07 term at UCSB.

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Q3F09answers - November 18, 2009 Quiz 3 Economics 1...

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