# Q3W11AnswersExplained - Quiz 3 True-False Questions 1 A...

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Unformatted text preview: Quiz 3, February 25, 2011 True-False Questions: 1. A profit maximizing firm will hire the number of workers that maximizes profit per worker. Answer: False To maximize profits, a firm should hire any worker for whom the marginal value product is greater than the wage. When marginal product is diminishing, following that rule means that profit per worker will fall as the firm hires more workers. The Bergstrom Box Company provided a good example. One worker could move 5 boxes. Each box sold for \$8, so the marginal value product of one worker was \$40. Two workers could move 8 boxes, which means that the marginal value product of the second worker is \$24. Three workers could move 11 boxes, which means that the marginal value product of the third worker is \$16. If the wage is \$20, the firm should hire two workers. If it does so, its profit will \$64-\$40=\$24. Profit per worker is \$12. If the firm hires only one worker, profit is \$20 (\$40- \$20). Profit per worker is also \$20. So, hiring the second worker reduces profit per worker, but it increases profit because the marginal value product of that worker exceeds the wage. 2. If the demand for labor obeys the Law of Demand, the supply of labor obeys the Law of Supply, and the minimum wage exceeds the competitive equilibrium wage, an increase in the minimum wage will increase involuntary unemployment. Answer: True Involuntary unemployment is the difference between the number of people willing to work for a given wage and the number of workers firms are willing to hire at that wage. That difference is depicted in the figure below for a minimum wage of W. If that minimum wage was increased to W’, the demand for workers would fall and the supply would increase. The gap between supply and demand (involuntary unemployment) would grow. wage workers demand supply W involuntary unemployment ninimum wage W’ 3. The free rider problem is more severe for a small group of people than for a large group of people. Answer: False The free rider problem concerns the voluntary provision of a public good. Because people cannot be excluded from enjoying the benefits of a public good even if they did not contribute to providing it, people will logically depend on others to provide the good and enjoy the benefits without paying for them. Everyone will want to take a “free ride” on the contributions of others. The result will be that little or perhaps even none of the good will be provided. In small groups, this problem may be partially overcome by a mutual agree of everyone to contribute. In large groups, however, these mutual agreements are difficult to enforce. Furthermore, in large groups, any one person’s contribution to the good has little effect on the amount of the good provided. In that sense, no one person’s contribution is missed all that much. As a result, the incentive to free ride are even stronger than in small groups. This is explained in the paragraph beginning on the bottom of page 293 of Taylor. explained in the paragraph beginning on the bottom of page 293 of Taylor....
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Q3W11AnswersExplained - Quiz 3 True-False Questions 1 A...

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