Practice_Ch12_

# Practice_Ch12_ - Chapter 12 Practice Test The Demand for...

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Chapter 12 Practice Test The Demand for Resources 1. According to the marginal productivity theory of income distribution, each resource owner receives income: a. equal to the value of her contribution to total output b. in proportion to her need c. in proportion to the amount of property she inherits d. equal to marginal product divided by price Answer: a Feedback: In competitive markets, firms minimize average cost and maximize profit by combining resources in such a way that price times marginal product for each resource is equal to the price of the resource. P x MP is equal to the value of the resource’s contribution to output, and the price of the resource is the amount of payment (income) received by the resource owner. 2. True or false: If two resources are substitutable, an increase in the price of one will always increase the demand for the other. a. True b. False Answer: b Feedback: When the price of one of the resources increases, two opposing effects are put into motion. First, the higher price increases the cost of production and the firm responds by reducing output. Less output implies less need for all resources. At the same time, the firm will alter its input mix, using relatively less of the input whose price has increased and relatively more of the input whose price has not changed. Whether the demand for the other input increases or decreases depends on the relative size of these two effects, known as the output effect and the substitution effect, respectively. 3. To find the amount by which the production of an additional worker increases a purely competitive firm’s total revenue: a. subtract the wage from marginal product b. divide marginal product by the wage rate c. subtract marginal cost from marginal revenue d. multiply marginal product by product price Answer: d Feedback: Marginal product is equal to the amount by which production increases with the addition of one worker. Product price is the amount by which each of these units of output increases the firm’s revenue. The increase in revenue from the additional worker, known as marginal revenue product, is the product of the two. 4. Production of Mrs. Field’s Cookies uses flour and sugar in fixed proportions. An increase in the price of flour will: a. increase the demand for sugar solely because of the substitution effect b. decrease the demand for sugar solely because of the substitution effect c. increase the demand for sugar solely because of the output effect d. decrease the demand for sugar solely because of the output effect Answer: d Feedback: The two inputs are complementary, so no substitution is possible. However, the higher price of flour raises production costs and reduces output, reducing the demand for sugar.

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5. A small accounting firm has two CPAs on staff, each preparing 5 tax returns per 8 hour day. Hiring a third CPA would increase the number of returns per day to 14. If each client is charged \$120 per return: a. the third CPA should be hired b. the third CPA should not be hired
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Practice_Ch12_ - Chapter 12 Practice Test The Demand for...

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