Chapter 12

Question 1

Four types of inputs provided by households

Answer 1

1. Capital
2. Land
3. Labor
4. Entrepreneurship

Question 2

Four types of income associated with the inputs

Answer 2

Capital = interest
Land = rent
Labour = wages
Entrepreneurship = profits

Question 3

Income

Answer 3

This is a flow

Question 4

Wealth

Answer 4

This is a stock

Question 5

What should businesses consider when choosing to buy labor?

Answer 5

Derived demand

Question 6

Derived demand

Answer 6

This is when the demand for one thing depends on the other

Question 7

Marginal product

Answer 7

The additional output from hiring more labor

Question 8

When will marginal products fall?

Answer 8

In businesses that have fixed costs (operating at near capacity)

When more workers are hired, the marginal product decreases

Question 9

Marginal revenue product

Answer 9

The additional revenue received by selling the marginal product

Question 10

When will marginal revenue products fall?

Answer 10

In businesses that have fixed costs.

When more workers are hired, marginal productive revenue decreases

Question 11

How to maximize profits in labor?

Answer 11

Higher more workers when marginal revenue product is greater than marginal cost

Question 12

What should businesses consider when choosing to buy capital?

Answer 12

Present value

Question 13

Present value

Answer 13

The future value of money that is currently invested

Question 14

Formula for present value

Answer 14

amount of money available in n years / (1 + interest rate)^n

n = number of years

Question 15

How to maximize profits in capital?

Answer 15

The present value should be greater than the amount of money invested

Question 16

What should businesses consider when choosing to buy land?

Answer 16

Economic rent

Question 17

Economic rent

Answer 17

This is the income paid for an input in inelastic supply (land)

Question 18

Relationship between input prices and output prices

Answer 18

High input prices = high output prices

Question 19

Human capital

Answer 19

The chance of earning better if you have work experience, education, and on-the-job training

Question 20

Two things governments do to reduce poverty

Answer 20

1. By providing education and training
2. By using tax and transfer systems

Question 21

Three types of tax

Answer 21

1. Progressive tax
2. Regressive tax
3. Proportional tax

Question 22

Progressive tax

Answer 22

The amount of tax increases as your income increases

Question 23

Regressive tax

Answer 23

The amount of tax decreases as your income increases

Question 24

Proportional tax

Answer 24

The amount of tax stays the same regardless of your income

Question 25

Transfer payments

Answer 25

These are payments made by the government to households