Q3W10AnswersExplained

Q3W10AnswersExplained - February 26, 2010 Quiz 3 True-False...

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February 26, 2010 Quiz 3 True-False Questions: 1. If the revenue a firm receives for its output exceeds the wages it pays to its workers, the firm can increase its profits by increasing the number of workers it hires. Answer: False Let’s go back to the Bergstrom Box Company. With one worker, the revenue was $40; with two workers, it was $64; and with three workers, it was $80. The wage was $20. With two workers, the firms receives $64 and it pays $40 to workers. Does it increase its profit by hiring another worker? No. The additional worker increases revenue by $16 and increases cost by $20. The firm would reduce profit by $4 if it hired a third worker. The point is that we determine the profit maximizing level of employment by comparing the marginal value product with the wage, not by comparing total or average revenue with total or average cost. 2. The free rider problem in the provision of a public good is caused by the fact that public goods are nonexcludable. Answer: True A good is nonexcludable if we can’t exclude people from enjoying the benefits of the good. This leads to the free rider problem because people can enjoy the benefits of a public good regardless of whether they contribute to providing that good. As a consequence, no one will have an incentive to voluntarily contribute to producing the good. That’s the free rider problem. 3. An unemployed worker is said to be voluntarily unemployed if the market wage employed workers receive is less than his or her reservation wage. Answer: True A worker is voluntarily unemployed if he or she would not be willing to work at the prevailing market wage, the wage paid to employed workers. A worker is not willing to work at the prevailing market wage if his or her reservation wage exceeds that market wage.
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4. If the demand curve for a good is price elastic, an inward shift in the supply curve for the good (less supplied at every price) will decrease the total revenue of suppliers. Answer: True Let’s start with the formula for the change in total revenue: q q p p R R Δ + , where R is total revenue ( pq ), p is price, and q is quantity. If supply shifts in, the equilibrium point is moving along the demand curve. Equilibrium quantity is decreasing, and equilibrium price is increasing. Which effect dominates? Is the percentage decrease in quantity greater than the percentage increase in price? Let’s look at the formula for price elasticity: p p q q E d = An elastic demand curve means that this price elasticity is a number less than -1. Moving up the demand curve, the percentage decrease in quantity must be greater than the percentage increase in price. The quantity effect dominates and quantity is decreasing, so total revenue is decreasing, too.
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5. If the supply curve for a good is perfectly inelastic, a per-unit tax levied on buyers of the good will decrease the competitive equilibrium price of the good by the amount of the tax. Answer:
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This note was uploaded on 12/12/2011 for the course ECON 1 taught by Professor Bergstrom during the Fall '07 term at UCSB.

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Q3W10AnswersExplained - February 26, 2010 Quiz 3 True-False...

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