694 section 13 Factor Markets
Tackle the Test: Multiple-Choice Questions
- The implicit cost of capital that you own is
a. the rental rate.
b. greater than the rental rate.
c. the original purchase price of the capital.
d. greater than the original purchase price of the capital.
e. zero because you already own it. - Which of the following is true in relation to a very steep supply
curve for land?
I. It is relatively elastic.
II. The quantity of land is very responsive to price changes.
III. Finding new supplies of land is relatively expensive and
difficult.
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III - The explicit cost of land you don’t own is equal to the
a. rental rate.
b. interest rate.
c. profit received from using that land.
d. market wage rate.
e. marginal product of land.
4. A firm will continue to employ more land until its value of the
marginal product of land is
a. zero.
b. maximized.
c. equal to the rental rate.
d. equal to the wage rate.
e. equal to the value of the marginal product of labor and
capital.
5. According to the marginal productivity theory of income
distribution,
a. each unit of a factor will be paid the value of its marginal
product.
b. as more of a factor is used, its marginal productivity
increases.
c. factors that receive higher payments are less productive.
d. capital should receive the highest portion of factor income.
e. each factor is paid the equilibrium value of its marginal
product.
Tackle the Test: Free-Response Questions
- Refer to the table below. Assume that the price of the product is
$10 and the rental rate for capital is $100 per unit.
Quantity of capital (units) Quantity of output
00
130
255
370
478
585
689
a. What is the VMPof the 2ndunit of capital?
b. Will the firm employ the 2ndunit of capital? Explain.
c. How many units of capital will the firm hire? Explain.
Answer (5 points)
1 point:VMP= 25 ×$10=$250
1 point:Ye s
1 point:Because the VMPof $250 is greater than the rental rate of $100
1 point: 3
1 point:Because the VMPexceeds the rental rate for the first 3 units- Draw a correctly labeled graph showing how the market rental
rate and quantity of land are determined in the land market. On
your graph, be sure to include each of the following: the supply
and demand curves for land, the equilibrium rental rate, the
equilibrium quantity of land employed, and correct labels on
the axes.