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1. If the ratio between the price of labor and the price of capital (w/r) is sma

ID: 1126137 • Letter: 1

Question

1.

If the ratio between the price of labor and the price of capital (w/r) is smaller than the ratio between marginal product of labor and marginal product of capital (MPL/MPK)

the firm should hire more labor

the firm should hire more capital

the firm should hire capital and labor equally

the firm should reduce the amount of labor while keeping its capital constant

2.

Suppose the price of one unit of labor (wage) is $15 where its marginal product is 5 units of output. Thus we can say:

the marginal revenue the firm is greater than $5

the marginal cost of the firm is $5.

the marginal cost of the firm is $0.33

the marginal cost of the firm must be greater than its average cost

3.

In a kinked demand curve model, it is assumed that the demand curve faced by an oligopoly:

is less elastic when the firm raises the price

is less elastic when the firm lowers the price

is more elastic when it lowers the price

none of the above

4.

One explanation for the relative price stability in an oligopolistic market is the existence of some degree of decision interdependency among the firms in the market.

True

False

5.

Collusion among oligopolies leads to the formation of

a competitive price

a monopolistically competitive market

a labor union

a cartel

6.

Optimal markups vary across markets due to differences in:

production costs

price elasticity of demand  

total revenue

"a" and "b"

"b" and "c"

a.

the firm should hire more labor

b.

the firm should hire more capital

c.

the firm should hire capital and labor equally

d.

the firm should reduce the amount of labor while keeping its capital constant

Explanation / Answer

1> the firm should hire more capital

Reason

Since the capital is relatively cheaper, the firm should start buying it more.

2> the marginal cost of the firm must be greater than its average cost

Reason

The marginal cost must be greater than the avg cost because the wage rate is very high compared to marginal product.

3> is less elastic when the firm lowers the price

Reason

In kinked demand curve, the elasticity of demand depends on the price of it.

4> False

Oligopolitic market is very interdependent, so the players/firms do not make independent decisions.