Module 71
Check Your Understanding
- 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). - 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 - d
- a
- e
- c
- d
Tackle the Test:
Free-Response Questions
Module 72
Check Your Understanding
- 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
- 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. - 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
- a
- c
- a
- c
- e
Tackle the Test:
Free-Response Questions
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