equal for capital and labor: 500/$100 =1,000/$200 = 5
units of output per dollar.Tackle the Test:
Multiple-Choice Questions
- c
- b
- c
- a
- d
Tackle the Test:
Free-Response Questions
- a. 20
b.10/$10 =1 pencil per dollar
c.The firm would hire 6 workers.
d.No. The marginal product per dollar spent on capital is
100/$50 =2 pencils per dollar. Thus, the firm is not fol-
lowing the cost-minimization rule because the marginal
product per dollar spent on labor (1) is less than the
marginal product per dollar spent on capital (2).
Module 73
Check Your Understanding
- a.False. Income disparities associated with gender, race, and
ethnicity can be explained by the marginal productivity
theory of income distribution, provided that differences
in marginal productivity across people are correlated with
gender, race, or ethnicity. One possible source for such
correlation is past discrimination. Such discrimination
can lower individuals’ marginal productivity by, for exam-
ple, preventing them from acquiring the human capital
that would raise their productivity. Another possible
source of the correlation is differences in work experience
that are associated with gender, race, or ethnicity. For
example, in jobs for which work experience or length of
tenure is important, women may earn lower wages
because on average more women than men take child-
care-related absences from work.
b.True. Companies that discriminate when their competi-
tors do not are likely to hire less able workers because
they discriminate against more able workers who are con-
sidered to be of the wrong gender, race, ethnicity, or
other characteristic. And with less able workers, such
companies are likely to earn less profit than their com-
petitors who don’t discriminate.
c.Ambiguous. In general, workers who are paid less
because they have less experience may or may not be
the victims of discrimination. The answer depends on
the reason for the lack of experience. If workers have
less experience because they are young or have chosen
to do something else rather than gain experience, then
they are not victims of discrimination as long as the
lower earnings are commensurate with the lower level
of experience (as opposed, for example, to earning a lot
less while having just a little less experience). But if
workers lack experience because previous job discrimi-
nation prevented them from gaining experience, then
they are indeed victims of discrimination when they are
paid less.
Tackle the Test:
Multiple-Choice Questions- a
- a
- a
- b
- e
Tackle the Test:
Free-Response Questions - a.Market power—firms with market power can organize to
pay lower wages than would result in a perfectly competi-
tive labor market. Monopsonies pay less than the value of
the marginal product of labor. And unions can organize
to demand higher wages than would result in a perfectly
competitive labor market.
b.Efficiency wages—some firms pay high wages to boost
worker performance and encourage loyalty.
c.Discrimination—some firms pay workers differently solely
on the basis of worker characteristics that do not affect
marginal productivity.
Module 74
Check Your Understanding- a.This is an externality problem because the cost of waste -
water runoff is imposed on the farms’ neighbors with no
compensation and no other way for the farms to inter-
nalize the cost.
b.Since the large poultry farmers do not take the external
cost of their actions into account when making decisions
about how much waste water to generate, they will create
more runoff than is socially optimal. They will produce
runoff up to the point at which the marginal social bene-
fit of an additional unit of runoff is zero; however, their
neighbors experience a high, positive level of marginal
social cost of runoff from this output level. So the quan-
tity of wastewater runoff is inefficient: reducing runoff by
one unit would reduce total social benefit by less than it
would reduce total social cost.
c.At the socially optimal quantity of waste water runoff, the
marginal social benefit is equal to the marginal social
cost. This quantity is lower than the quantity of waste-
water runoff that would be created in the absence of gov-
ernment intervention or a private deal. - Yasmin’s reasoning is not correct: allowing some late
returns of books is likely to be socially optimal. Although
you impose a marginal social cost on others every day
that you are late in returning a book, there is some posi-
tive marginal social benefit to you of returning a book
late—you get a longer period during which to use it for
education and pleasure. If you need it for a book report,
the additional benefit from another day might be large
indeed.
The socially optimal number of days that a book is
returned late is the number at which the marginal social
benefit equals the marginal social cost. A fine so stiff that
it prevents any late returns is likely to result in a situa-
tion in which people return books although the marginal
social benefit of keeping them another day is greater than
SOLUTIONS TO AP REVIEW QUESTIONS S-45