AP_Krugman_Textbook

Module 71

Check Your Understanding

1. a.Clive is made worse off if, before the new law, he had
   preferred to work more than 35 hours per week. As a
   result of the law, he can no longer choose his preferred
   time allocation; he now consumes fewer goods and more
   leisure than he would like.
   b.Clive’s utility is unaffected by the law if, before the
   law, he had preferred to work 35 or fewer hours per
   week. The law has not changed his preferred time
   allocation.
   c.Clive can never be made better off by a law that restricts
   the number of hours he can work. He can only be made
   worse off (case a) or equally as well off (case b).


2. The substitution effect would induce Clive to work fewer
   hours and consume more leisure after his wage rate
   falls—the fall in the wage rate means the price of an hour
   of leisure falls, leading Clive to consume more leisure.
   But a fall in his wage rate also generates a fall in Clive’s
   income. The income effect of this is to induce Clive to
   consume less leisure and therefore work more hours,
   since he is now poorer and leisure is a normal good. If
   the income effect dominates the substitution effect, Clive
   will in the end work more hours than before.
   Tackle the Test:
   Multiple-Choice Questions


3. d


4. a


5. e


6. c


7. d
   Tackle the Test:
   Free-Response Questions


8. 
   

Module 72

Check Your Understanding

1. Yes, the firm is employing the cost-minimizing combina-
   tion of inputs because the marginal product per dollar is

Market labor

demand curve = MRPL 1

Market labor

supply curve

Wage

rate

Quantity of labor

(workers)

L*

E 1

W 2

MRPL 2

W*

L 2

E 2

c.

Module 70

Check your Understanding

1. a.This would increase the supply of land, shifting the sup-
   ply curve to the right and leading to a new equilibrium at
   a lower rental rate and a higher quantity.
   b.This would increase the marginal product of land and
   thus the value of the marginal product of land. The VMP
   curve for land would shift to the right, leading to a new
   equilibrium at a higher rental rate and a higher quantity.


2. When firms from different industries compete for the same
   land, an inter-industry land market develops and, other
   things being equal, each unit of land used by the various
   industries will rent for the same equilibrium rental rate, R.
   According to the marginal productivity theory of income
   distribution, VMP for land =Rfor the last unit of land rent-
   ed. Because each industry rents until VMP for land =R,the
   last unit of land rented in each of these different industries
   will have the same value of the marginal product of land.

Tackle the Test:

Multiple-Choice Questions

1. a


2. c


3. a


4. c


5. e

Tackle the Test:

Free-Response Questions

2. 
   

Quantity of land

Rental

rate

DLand = VMPLand

SLand

Q*Land

R*Land

Quantity of labor

Wage

rate

Original Labor

Demand

New Labor

Demand

S-44 SOLUTIONS TO AP REVIEW QUESTIONS