1)A mathematical expression relating the amount of output produced to quantities of capital and labor

utilized is the 

(a) real interest rate.

(b) productivity relation.

(c) production function.

(d) marginal product.

2.      In the production function Y = AF(K, N), A is _____, K is _____, and N is _____.

(a) total factor productivity; the capital stock; the number of workers employed

(b) total factor productivity; investment; the number of workers employed

(c) the productivity of labor; the capital stock; the size of the labor force

(d) the productivity of labor; investment; the size of the labor force

3.      In the production function Y = AF(K, N), total factor productivity is

(a)  Y/A.

(b)  A.

(c)  K/N.

(d)  Y/N.

4.      Suppose the economy’s production function is Y = A K^0.3N^0.7. If K = 2000, N = 100, and A = 1, then

Y = 246. If K and N both rise by 10%, and A is unchanged, by how much does Y increase?

(a) 5%

(b) 10%

(c) 15%

(d) 20%

5.      If Y = A × N × (75 + K/N), where K = 1000, N = 20, and A = 10, what happens if K doubles and

N doubles? 

(a)  Y is unchanged.

(b)  Y increases 50%.

(c)  Y doubles.

(d)  Y quadruples.

6.      Suppose the economy’s production function is Y = AK^0.3N^0.7. When K = 1000, N = 50, and A = 15,

what is Y?

(a) 1842

(b) 6106

(c) 750,000

(d) 123

7.      Suppose that in 2003 Freedonia had GDP equal to 2000 million, the capital stock was equal to

1700 million, the number of employees equaled 70 million. The production function is Y =

AK0.25_N0.75. Total factor productivity of the economy in that year was approximately equal to

(a) 0.09.

(b) 2.61.

(c) 4.19.

(d) 12.87.

Level of difficulty: 3

8.      The table below represents Freedonia’s macroeconomic data for 2003 and 2004.

Year

2003

2004

Y

2000

2100

K

1700

1785

N

70

75

Suppose that the production function is given by Y = AK0.25_N0.75. Between 2003 and 2004, total factor

productivity of Freedonia’s economy increased by

(a) –1.5%.

(b) 5.0%.

(c) 5.5%.

(d) 12.7%.

9.      The two main characteristics of the production function are

(a) it slopes downward from left to right, and the slope becomes flatter as the input increases.

(b) it slopes upward from left to right, and the slope becomes steeper as the input increases.

(c) it slopes upward from left to right, and the slope becomes flatter as the input increases.

(d) it slopes downward from left to right, and the slope becomes steeper as the input increases.

10.    If the marginal product of capital doesn’t change as the amount of capital increases, a figure

showing the relationship between output and capital

(a) is a straight line with constant upward slope.

(b) is a straight line with a slope of zero.

(c) is a vertical line.

(d) slopes upward with a slope that declines as the amount of capital increases.

11.    The marginal product of capital is the increase in

(a) capital needed to produce one more unit of output. 

(b) output from a one-unit increase in capital. 

(c) labor needed to accompany a one-unit increase in capital.

(d) output from a one-dollar increase in capital. 

12.    The fact that the production function relating output to capital becomes flatter as we move from left

to right means that

(a) the marginal product of labor is positive.

(b) the marginal product of capital is positive.

(c) there is diminishing marginal productivity of labor.

(d) there is diminishing marginal productivity of capital.

13.    The marginal product of labor

(a) is measured by the slope of the production function relating capital to employment.

(b) is larger when the labor supply is relatively larger.

(c) is smaller when the labor supply is relatively smaller.

(d) decreases as the number of workers already employed increases.

14.    The fact that the production function relating output to labor becomes flatter as we move from left to

right means that

(a) the marginal product of labor is positive.

(b) the marginal product of capital is positive.

(c) there is diminishing marginal productivity of labor.

(d) there is diminishing marginal productivity of capital.

15.    An adverse supply shock would

(a) shift the production function up and decrease marginal products at every level of employment.

(b) shift the production function down and decrease marginal products at every level of

employment.

(c) shift the production function down and increase marginal products at every level of

employment.

(d) shift the production function up and increase marginal products at every level of employment.

16.    An invention that speeds up the Internet is an example of

(a) an income effect.

(b) an increase in labor.

(c) a substitution effect.

(d) a supply shock.

17.    A supply shock that reduces total factor productivity directly affects which term in the production

function Y = AF(K, N)?

(a)  A

(b)  F

(c)  K

(d)  N

18.    Economists often treat the economy’s capital stock as fixed because

(a) labor is a more important factor of production than capital, so economists ignore capital.

(b) it takes a long time for new investment and the scrapping of old capital to affect the overall

quantity of capital.

(c) there is very little capital in the economy compared to the amount of labor.

(d) unless the interest rate changes, the capital stock doesn’t change.

19.    Changes in the capital stock occur _____, and changes in the amount of labor that firms employ

occur _____.

(a) quickly; quickly

(b) slowly; slowly

(c) slowly; quickly

(d) quickly; slowly

20.    An increase in the real wage rate will cause

(a) the labor demand curve to shift to the right.

(b) the labor demand curve to shift to the left.

(c) the quantity of labor demanded to rise.

(d) a movement along the labor demand curve.

21.    A decrease in the real wage would result in a

(a) movement along the labor demand curve, causing an increase in the number of workers hired by

the firm.

(b) shift of the labor demand curve, causing an increase in the number of workers hired by the firm.

(c) movement along the labor demand curve, causing a decrease in the number of workers hired by

the firm.

(d) shift of the labor demand curve, causing a decrease in the number of workers hired by the firm.

22.    An increase in the number of workers hired by a firm could result from

(a) a decrease in the marginal product of labor.

(b) a decrease in the marginal revenue product of labor.

(c) an increae in the real wage.

(d) a decrease in the real wage.

23.    What two factors should you equate in deciding how many workers to employ?

(a) The marginal product of labor and the marginal product of capital

(b) The marginal product of labor and the real wage rate

(c) The marginal product of labor and the real interest rate

(d) The marginal product of capital and the real wage rate

24.    One reason that firms hire labor at the point where w = MPN is

(a) if w < MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring

them, so they should hire fewer workers.

(b) if w > MPN, the cost (w) of hiring additional workers is less than the benefits (MPN) of hiring

them, so they should hire more workers.

(c) if w < MPN, the cost (w) of hiring additional workers equals the benefits (MPN ) of hiring them,

so they have the right number of workers.

(d) if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring

them, so they should hire fewer workers.

25.    Firms hire labor at the point where the

(a) nominal wage rate equals the marginal product of labor.

(b) real wage rate equals the marginal revenue product of labor.

(c) nominal wage rate equals the marginal revenue product of labor.

(d) real wage rate equals the marginal revenue product of capital.

26.    The Upstart Company has the following production function.

Number of

  Workers

0

1

2

3

4

5

     Number of 

Cases Produced

  0

10

19

26

31

34

If the company hires 4 workers, which of the following could be the real wage rate?

(a) 2

(b) 4

(c) 6

(d) 8

27.    The Widget Company has the following production function.

Number of

  Workers

0

1

2

3

4

5

   Number of 

Widgets Produced

  0

  9

17

24

30

35

If widgets sell for $6 each and the wage rate is $33, how many workers will the company hire?

(a) 0

(b) 1

(c) 2

(d) 4

28.    Your boss wants to know if you should lay off any workers. You answer that you should lay off

workers if the

(a) marginal revenue product of labor is greater than the nominal wage rate.

(b) marginal product of labor is greater than or equal to the real wage rate.

(c) marginal revenue product of labor is equal to the nominal wage rate.

(d) marginal product of labor is less than the real wage rate.

29.    Zowie! Surfboards has the following production function.

Number of

  Workers

1

2

3

4

5

      Number of 

Surfboards Produced

12

21

29

36

42

If surfboards sold for $30 and the nominal wage rate was $200, how many workers would the firm

employ?

(a) 2

(b) 3

(c) 4

(d) 5

30.    The marginal product of labor (measured in units of output) for Expando Corp. is given by

MPN = A(400 – N)

where A measures productivity and N is the number of labor hours used in production. Suppose the

price of output is $3 per unit and A = 2.0. What will be the demand for labor if the nominal wage is

$18?

(a) 57

(b) 107

(c) 197

(d) 397

31.    An adverse supply shock, such as a reduced supply of raw materials, would

(a) increase the marginal product of labor.

(b) decrease the marginal product of labor.

(c) decrease the marginal product of capital, but have no effect on the marginal product of labor.

(d) not affect the marginal product of labor.

32.    Which of the following events would lead to an increase in the marginal product of labor for every

quantity of labor?

(a) An increase in the real wage

(b) A decrease in the real wage

(c) A favorable supply shock such as a fall in the price of oil

(d) An adverse supply shock, such as a reduced supply of raw materials

33.    A winter ice storm has paralyzed the entire east coast, reducing productivity sharply. This supply

shock shifts the marginal product of labor curve

(a) up and to the right, raising the quantity of labor demanded at any given real wage.

(b) down and to the left, reducing the quantity of labor demanded at any given real wage.

(c) up and to the right, reducing the quantity of labor demanded at any given real wage.

(d) down and to the left, raising the quantity of labor demanded at any given real wage.

34.    A technological breakthrough in using photons for computers will increase the productivity of those

working with computers a hundredfold. You would expect this breakthrough to shift the

(a) marginal product of labor curve up and to the right, raising the quantity of labor demanded at

any given real wage.

(b) marginal product of labor curve down and to the left, reducing the quantity of labor demanded at

any given real wage.

(c) labor supply curve up, reducing the quantity of labor demanded at any given real wage.

(d) labor supply curve down, raising the quantity of labor demanded at any given real wage.

35.    The aggregate supply of labor is the 

(a) total amount of time a person works over his or her lifetime.

(b) total amount of time a person spends in the labor force over his or her lifetime.

(c) unemployment rate.

(d) sum of the labor supplied by everyone in the economy.

36.    If Jeff’s wage rate rises, he decides to work fewer hours. From this, we can infer that

(a) for Jeff, the substitution effect is greater than the income effect.

(b) for Jeff, the substitution effect is equal to the income effect.

(c) for Jeff, the substitution effect is less than the income effect.

(d) Jeff is a nitwit.

37.    As a result of the superb economics essay that you wrote during this quarter, you won the Adam

Smith prize of $100. The receipt of these funds would be an example of

(a) the substitution effect being stronger than the income effect.

(b) the income effect being stronger than the substitution effect.

(c) a pure income effect.

(d) a pure substitution effect.

38. A person is more likely to increase labor supply in response to an increase in the real wage, the _____

is the income effect and the _____ is the substitution effect.

(a) larger; larger

(b) larger; smaller

(c) smaller; larger

(d) smaller; smaller

39.    A permanent increase in the real wage rate has a _____ income effect on labor supply than a

temporary increase in the real wage, so labor supply is _____ with a permanent wage increase than

for a temporary wage increase.

(a) larger; more

(b) larger; less

(c) smaller; more

(d) smaller; less

40.    The survey on labor supply by Killingsworth found that

(a) labor supply rises in response to a permanent increase in the real wage, but falls in response to a

temporary increase in the real wage.

(b) labor supply rises in response to a temporary increase in the real wage, but falls in response to a

permanent increase in the real wage.

(c) labor supply rises in response to both a temporary and a permanent increase in the real wage.

(d) labor supply falls in response to both a temporary and a permanent increase in the real wage.

41.    Suppose the marginal product of labor is

MPN = 200 – 0.5N

where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is

the real wage. What is the equilibrium real wage?

(a) 5

(b) 10

(c) 15

(d) 20

42.    Suppose the marginal product of labor is

MPN = 200 – 0.5N

where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is

the real wage. What is the equilibrium quantity of employment?

(a) 12

(b) 190

(c) 380

(d) 760

43.    Suppose the marginal product of labor is

MPN = 200 – 0.5N

where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is

the real wage. If a supply shock increases the marginal product of labor by 10 (to MPN = 210 –

0.5 N), by how much does the real wage increase?

(a) 1

(b) 2

(c) 3

(d) 4

44.    Suppose the marginal product of labor is

MPN = 200 – 0.5N

where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is

the real wage. If a supply shock increases the marginal product of labor by 10 (to MPN = 210 –

0.5 N), by how much does employment increase?

(a) 0

(b) 4

(c) 8

(d) 16

45.    A tremendous flood along the Mississippi River destroys thousands of factories, reducing the

nation’s capital stock by 5%. What happens to current employment and the real wage rate?

(a) Both employment and the real wage rate would increase.

(b) Both employment and the real wage rate would decrease.

(c) Employment would increase and the real wage would decrease.

(d) Employment would decrease and the real wage would increase.

46.    A sharp increase in stock prices makes people much wealthier. If the main effect of this increased

wealth is felt on labor supply, what happens to current employment and the real wage rate?

(a) Both employment and the real wage rate would increase.

(b) Both employment and the real wage rate would decrease.

(c) Employment would increase and the real wage would decrease.

(d) Employment would decrease and the real wage would increase.

47.    An adverse oil-price shock reduces labor demand. What happens to current employment and the real

wage rate?

(a) Both employment and the real wage rate would increase.

(b) Both employment and the real wage rate would decrease.

(c) Employment would increase and the real wage would decrease.

(d) Employment would decrease and the real wage would increase.

48.    The equilibrium level of employment, achieved after the complete adjustment of wages and prices,

is known as the 

(a) zero-unemployment level of employment.

(b) natural state.

(c) invisible handshake.

(d) full-employment level of employment.

49.    Full-employment output is the level of output that firms in the economy supply when

(a) taxes are zero.

(b) wages and prices have fully adjusted.

(c) the unemployment rate is zero.

(d) all capital is fully utilized.

50.    What is the unemployment rate if there are 150 million people employed, 25 million people

unemployed, and 25 million not in the labor force?

(a) 14.3%

(b) 13.4%

(c) 12.5%

(d) 25.0%

51.    The _____ is the number of unemployed divided by the labor force and the _____ is the number of

employed divided by the adult population.

(a) unemployment rate; employment rate

(b) unemployment rate; employment ratio

(c) unemployment ratio; participation rate

(d) discouraged worker ratio; employment rate

52.    What is the participation rate if there are 125 million people in the labor force, 100 million people

employed, and 25 million not in the labor force?

(a) 83%

(b) 80%

(c) 75%

(d) 67%

53.    How many people are unemployed if the employment ratio is 75%, there are 90 million people

employed, and there are 20 million people not in the labor force?

(a) 20 million

(b) 10 million

(c) 5 million

(d) 0 million

54.    The city of Hope has a labor force of 1000. Twenty people lose their jobs each month and remain

unemployed for exactly one month before finding jobs. On January 1, May 1, and September 1 of

each year, 50 people lose their jobs for a period of four months before finding new jobs. What is the

unemployment rate in any given month?

(a) 2%

(b) 3%

(c) 5%

(d) 7%

55.    The city of Hope has a labor force of 1000. Twenty people lose their jobs each month and remain

unemployed for exactly one month before finding jobs. On January 1, May 1, and September 1 of

each year, 50 people lose their jobs for a period of four months before finding new jobs. What is the

average duration of an unemployment spell?

(a) 2.15 months

(b) 2.85 months

(c) 3.14 months

(d) 3.43 months

56.    Frictional unemployment arises when

(a) unskilled or low-skilled workers find it difficult to obtain desirable,

long-term jobs.

(b) labor must be reallocated from industries that are shrinking to areas that are growing.

(c) workers must search for suitable jobs and firms must search for suitable workers.

(d) output and employment are below full-employment levels.

57.    Cyclical unemployment arises when

(a) unskilled or low-skilled workers find it difficult to obtain desirable,

long-term jobs.

(b) labor must be reallocated from industries that are shrinking to areas that are growing.

(c) workers must search for suitable jobs and firms must search for suitable workers.

(d) output and employment are below full-employment levels.

58.    According to Okun’s law, an increase in the unemployment rate will cause _____ in the level of

employment and _____ in the level of output.

(a) an increase; an increase

(b) an increase; a decrease

(c) a decrease; an increase

(d) a decrease; a decrease

59.    Assume that the full–employment level of output is $5000 billion and the natural unemployment rate

is 5%. Suppose the current unemployment rate is 8%. What would be the current level of output

according to Okun’s law (when the Okun’s law coefficient is 2)?

(a) $4500 billion

(b) $4700 billion

(c) $4900 billion

(d) $5000 billion

60.    According to Okun’s law, if output grew 7% and full-employment output rose 5%, what would be

the change in the unemployment rate?

(a) –4%

(b) –1%

(c) 1%

(d) 4%

T Essay Questions

1.      Suppose the production function is Y = A K^0.3 N^0.7. Suppose in 1990, K = 1000, N = 100, and Y =

199.5. In 2000, capital, labor, and output have doubled, so K = 2000, N = 200, and Y = 399. 

(a) By what percentage did productivity grow from 1990 to 2000? 

(b) If output had risen to 798 instead of 399, and capital and labor doubled, by what percentage

would productivity have grown from 1990 to 2000? 

2.      In the U.S. economy in 1991, real GDP was 4861.4 (in billions of 1987 dollars), the capital stock

was 13,806.2 (in billions of 1987 dollars), and employment was 118.4 (in millions of workers). In

1992 the numbers were: real GDP 4986.3, capital stock 14,040.8, employment 119.2. Suppose the

production function in both years is Y = A K0.25_N0.75_.

(a) Calculate total factor productivity for 1991 and 1992.

(b) How much did total factor productivity grow from 1991 to 1992?

(c) Calculate the percent increase in real output between 1991 and 1992.

(d) Suppose tax incentives had raised the capital stock in 1992, making it 10% higher, to 15,444.9.

If employment didn’t change, what would have been the percent increase in real output between

1991 and 1992?

(e) Instead of the increase in the capital stock in part d, suppose employment was 10% higher in

1992, making it 131.1. With the capital stock fixed at 14,040.8, what would have been the

increase in real output between 1991 and 1992?

3.      Suppose a firm’s hourly marginal product of labor is given by MPN = A (200 – N).

(a) If A = 0.2 and the real wage rate is $10 per hour, how much labor will the firm want to hire?

(b) Suppose the real wage rate rises to $20 per hour. How much labor will the firm want to hire?

(c) With the real wage rate at $10 per hour, how much labor will the firm want to hire if A rises

to 0.5?

4.      How would each of the following events affect Cheryl Shirker’s supply of labor?

(a) Cheryl’s firm announces a reorganization plan, in which she will get a big promotion and raise

in six months.

(b) Cheryl’s speculative investment in plutonium futures pays off big, netting her a profit of

$300,000.

(c) Cheryl’s father, who had planned to leave her a large bequest, must spend all his wealth on

medical bills after a prolonged illness.

5.      Suppose the marginal product of labor in the economy is given by MPN = 200 – 0.5 N, while the

supply of labor is 100 + 4w.

(a) Find the market-clearing real wage rate.

(b) What happens if the government imposes a minimum wage of 40? Is there involuntary

unemployment?

(c) What happens if the government imposes a minimum wage of 60? Is there involuntary

unemployment?

Chapter 3     Productivity, Output, and Employment        47

6.      How would each of the following events affect the level of employment and the real wage rate?

(a) A tremendous boom occurs in the stock market, increasing people’s wealth by $100 billion

overnight.

(b) A major government loan-guarantee program goes bust, losing $500 billion. To pay off the loss,

the government announces that tax rates will rise 30% in the future.

(c) A nuclear mishap contaminates all auto plants in the Detroit area, destroying their capital.

(d) Medical science cures the common cold, causing fewer work days lost due to illness, thus

greatly increasing labor productivity.

7.      Over the past 100 years, what has happened to the average workweek in the U.S. manufacturing

industry? Why has this occurred? What are the implications for the size of the income and

substitution effects?

8.         Suppose oil prices fall temporarily, as oil becomes more plentiful. What impact is this likely to have

on the production function, the marginal products of labor and capital, labor demand, employment,

and the real wage?