Question

1. How does a profit-maximizing firm that is operating in a competitive labor market respond to an increase in the wage rate?

A.	The firm will demand less capital due to the substitution effect.

B.	The firm will demand more labor due to the substitution effect.

C.	The firm will produce less output due to the scale effect.

D.	The firm will demand more capital due to the scale effect.

E.	The firm will demand more labor due to the scale effect.

2. Labor demand is more elastic

A.	the greater is the supply elasticity of capital.

B.	the greater is the elasticity of substitution between labor and capital.

C.	the greater is the elasticity of demand for the firm's output.

D.	the greater is labor's share in total costs.

3. What is the most accurate description of the value of a worker to the firm?

A.

The wage.

B.	The firm's total output when holding capital fixed.

C.	The firm's average product when holding capital fixed.

D.	The dollar value of the worker's output.

E.	The dollar value of the average worker's output.

Answer 1

1. Labour is an input thus, due to increase in wage rate the output will decline.

C. The firm will produce less output due to scale effect.

2. Labour demand is more elastic then greater the elasticity of substitution between Labour and capital.

Thus is because the firm is less willing to pay for Labour when it is easy for them to substitute Labour and capital.

Option C. The greater is the elasticity of substitution between Labour and capital.

3. D. The dollar value of the workers output.

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