I’m providing some explanation of the questions on the exam that most students had difficulty with on the mid-term. Since the numbering differed from test colour to test colour, I’ve numbered the separately here.
1.
Refer to the graph above. At point B:
Correct Answer: marginal product is zero.
This is a total product curve (See the TP on the curve, and the label on the axis). At B totalproduct is at the maximum. At that point, adding one more worker adds nothing to output, so marginal product is zero. Note that at C, marginal product is negative, since adding more workers reduces total product (very silly to hire those workers).
2.
Refer to the graph above. If the price is set at Pc:
Correct Answer: a non-price rationing mechanism must determine which buyers will be able to purchase the product.
At Pc, the quantity demanded Q1 is greater than the quantity firms are willing to supply, Q0. As a result, more people will wish to buy the good than can buy it. Some method will determine who gets the good. If the product were gasoline, the people most willing to spend long hours in line at fuel pumps might get it – that would be the non-price rationing mechanism. If the product were housing units, then landlords might choose people of the social status they prefer to rent to.
3. If the government imposes an excise tax on cars equal to $5000 per automobile, the supply of automobiles will shift:
Correct answer: upward and the price of automobiles will increase by an unknown amount.
Firms would like to collect $5000 more per automobile because they have to pay a tax of $5000 per car. But as the price rises, the quantity demanded falls along the demand curve. With the information given we cannot be sure how much the price will increase.
4. The law of diminishing marginal productivity holds:
Correct Answer: in the short run.
It holds whenever there is AT LEAST ONE fixed factor and other factors are variable. In the long-run, all factors are variable, so diminishing returns do not hold. Whenever all factors are variable, there is no need for diminishing returns.
If ALL factors were fixed, then inputs couldn’t change, so output couldn’t change, so we couldn’t talk about any types of returns.
5.
Refer to the graph above. Within which section(s) of the production function is marginal product increasing?
Correct answer: A.
Marginal product is the slope of the total product curve. In section A the slope is becoming increasingly steep, so marginal product is increasing. Each added worker as more to total product that the previous worker. In Section B total product is rising, but at a decreasing rate. The slope of the TP curve is becoming ever flatter. Marginal product is positive, but decreasing. Each additional worker adds to total product, but a little less than the last worker. In Section C, total product is falling. Marginal product is negative. An additional worker decreases TP.