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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