Q3F10AnswersExplained

Q3F10AnswersExplained - November 17, 2010 Quiz 3 True-False...

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November 17, 2010 Quiz 3 True-False Questions: 1. If a firm is hiring the number of workers that maximizes its profits, it will also be maximizing profit per worker. Answer: False A firm will hire a worker if the marginal value product of the worker is greater than or equal to the wage. Consider the case in which the marginal value product declines as the firm hires more workers. This is the case in our experiment and every example I talked about in lecture. The profit added because the firm hires the first worker is the marginal value product of that worker minus the wage the firm pays. The profit added because the firm hires the second worker is the marginal value product of that workers minus the wage. Because the marginal value product of the second worker is less than the marginal value product of the first worker, the profit added by the first worker is less than the profit added by the second worker. As a consequence, profit per worker will decline as the firm adds the second worker. But, if the marginal value product of the second worker is greater than the wage, the firm will increase profit by adding the second worker. The fundamentals in experiment 5 illustrate this point. A firm can hire 0, 1, or 2 workers. If it hires zero workers, its revenue is zero. If it hires 1, its revenue is $20. If it hires 2 workers, its revenue is $10. Let’s suppose that the wage is $5 per worker. The marginal value product of the first worker is $20, and the marginal value product of the second worker is $10. So, the firm should hire two workers. The table below shows the profit and profit per worker for each level of employment. Workers Profit Profit per Worker 1 $15 $15 2 $20 $10 The firm has a profit of $20 if it hires two workers. But, profit per worker is higher with one worker.
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2. If the demand curve for a good is price inelastic, an outward shift in the supply curve for the good (more supplied at every price) will decrease the total revenue of suppliers. Answer: True Moving along the demand curve (as would happen with a shift in supply), the percentage change in revenue is approximately equal to the percentage change in price plus the percentage change in quantity. In this case, quantity is increasing and price is decreasing. If demand is price inelastic, the percentage change in quantity will be smaller in absolute value than the percentage change in price. In other words, the percentage change in price will dominate and total revenue will change in the same direction as price. Price is decreasing so total revenue is decreasing, too. 3. Because the development of new technologies produces positive externalities, market competition encourages private firms to invest too much in research and development. Answer: False The social benefit of producing a good is the private benefit the producer experiences plus the external benefit the producer creates for others. Private firms will ignore these positive externalities and thus produce too little of the good. The house painting example in lecture illustrated this point.
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Q3F10AnswersExplained - November 17, 2010 Quiz 3 True-False...

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