Chapter 12 | Inputs, Income & Inequality

Question 1

Incomes are determined by prices and quantities in input markets, where households supply to businesses labour, capital, land, and entrepreneurship in exchange for wages, interest, rent, and profits.

Answer 1

Incomes are determined by prices and quantities in input markets, where households supply to businesses labour, capital, land, and entrepreneurship in exchange for wages, interest, rent, and profits.

Question 2

In input markets, households are sellers and businesses are buyers.

Answer 2

In input markets, households are sellers and businesses are buyers.

Question 3

Income — what you earn — is a flow.

Answer 3

— Flow — amount per unit of time.
— Income for labour, capital, and land = price of input × quantity of input

Question 4

Flow

Answer 4

amount per unit of time.

Question 5

Wealth

Answer 5

total value of assets you own — is a stock.

Question 6

Stock

Answer 6

fixed amount at a moment in time.

Question 7

Key concepts for explaining input incomes are

Answer 7

— marginal revenue product for labour
— present value for capital
— economic rent for land

Question 8

Entrepreneurs earn profits. Economic profits are a residual — what is left over from revenues after all opportunity costs of production (including normal profits) have been paid.

Answer 8

Entrepreneurs earn profits. Economic profits are a residual — what is left over from revenues after all opportunity costs of production (including normal profits) have been paid.

Question 9

What Have You Done for Me Lately? Labour and Marginal Revenue Product

Answer 9

For maximum profits, businesses should hire additional labour when marginal revenue product is greater than marginal cost.

Question 10

To hire labour, business must pay the market wage reflecting the best opportunity cost of the input owner.

Answer 10

To hire labour, business must pay the market wage reflecting the best opportunity cost of the input owner.

Question 11

Business demand for labour is a derived demand — demand for output and profits businesses can derive from hiring labour.

Answer 11

Business demand for labour is a derived demand — demand for output and profits businesses can derive from hiring labour.

Question 12

derived demand

Answer 12

demand for output and profits businesses can derive from hiring labour.

Question 13

Marginal product

Answer 13

— additional output from hiring one more unit of labour.

— When businesses hire additional labourers there is diminishing marginal productivity — as you add more of a variable input to fixed inputs, the marginal product of the variable input eventually

Question 14

diminishing marginal productivity

Answer 14

— as you add more of a variable input to fixed inputs, the marginal product of the variable input eventually diminishes.

Question 15

Marginal revenue product

Answer 15

— additional revenue from selling output produced by an additional labourer.

— marginal revenue product = marginal product × price of output.
— Marginal revenue product diminishes for additional labourers.

Question 16

Recipe for maximum profits for business — hire additional inputs when marginal revenue product is greater than marginal cost.

Answer 16

Recipe for maximum profits for business — hire additional inputs when marginal revenue product is greater than marginal cost.

Question 17

All Present and Accounted For: Interest on Capital and Present Value

Answer 17

Present value tells you what money earned in the future is worth today. Present value compares the price you pay for today’s investment against the investment’s future earnings. For a smart choice, the present value of the investment’s future earnings is greater than the investment’s price today.

Question 18

Present value

Answer 18

The present value of a future amount of money is the amount that, if invested today, will grow as large as the future amount, taking account of earned interest.

Question 19

PV Formula

Answer 19

PV = Amount of money available in n Years / (1+Interest Rate)^n

Question 20

Revenues available in the future are not worth as much as revenues today because today’s revenues earn interest.

Answer 20

— Discount — reduction of future revenues for forgone interest.

Question 21

Discount

Answer 21

reduction of future revenues for forgone interest.

Question 22

Present value simplifies the future stream of revenues from an investment to a single number today. It converts the flow of future revenues into stock concept, a value today that you compare with cost today to make a smart choice.

Answer 22

Present value simplifies the future stream of revenues from an investment to a single number today. It converts the flow of future revenues into stock concept, a value today that you compare with cost today to make a smart choice.

Question 23

Recipe for a smart investment choice — invest when the present value of the stream of future earnings is greater than the price of the investment.

Answer 23

Recipe for a smart investment choice — invest when the present value of the stream of future earnings is greater than the price of the investment.

Question 24

Why Sidney Crosby Plays by Different Rules: Land, Economic Rent, and Superstars

Answer 24

Income for any input in inelastic supply, for example land or superstar talent, is economic rent, which is determined by demand alone.

Question 25

Economic rent

Answer 25

— income paid to any input in relatively inelastic supply.

— Land is a classic example of an input in inelastic supply.

Question 26

For inputs like land in inelastic supply, prices are effectively determined by demand alone.

Answer 26

For inputs like land in inelastic supply, prices are effectively determined by demand alone.

Question 27

For most products and services, high input prices cause high output prices.

Answer 27

For most products and services, high input prices cause high output prices.

Question 28

For inputs in inelastic supply, high output prices cause high input prices — high economic rents.

Answer 28

For inputs in inelastic supply, high output prices cause high input prices — high economic rents.

Question 29

What Should You Be Worth? Inequality and Poverty

Answer 29

Government policies to address the market’s unequal distributions of income and wealth involve trade-offs between efficiency and equality.

Question 30

“What are you worth?” is a positive question; depends on quantities of inputs you own and prices markets place on those inputs.

Answer 30

“What are you worth?” is a positive question; depends on quantities of inputs you own and prices markets place on those inputs.

Question 31

What should you, or any person, be worth?” is a normative question you must answer as a citizen.

Answer 31

What should you, or any person, be worth?” is a normative question you must answer as a citizen.

Question 32

Poverty results from not owning labour skills or assets that the market values, or from not getting a high enough price for what you do own.

Answer 32

Poverty results from not owning labour skills or assets that the market values, or from not getting a high enough price for what you do own.

Question 33

Policy options to reduce inequality and poverty: education, training, progressive tax and transfer system.

Answer 33

Policy options to reduce inequality and poverty: education, training, progressive tax and transfer system.

Question 34

Improving human capital through education and training addresses underlying cause of poverty: lack of inputs the market values.

Answer 34

Human capital — increased earning potential from work experience, on-the-job training, education.

Question 35

Human capital

Answer 35

— increased earning potential from work experience, on-the-job training, education.

Question 36

Federal and provincial tax systems use

Answer 36

progressive taxes
regressive taxes
proportional (flat rate) taxes
marginal tax rate
transfer payments

Question 37

progressive taxes

Answer 37

— tax rate increases as income increases.

Question 38

Regressive taxes

Answer 38

tax rate decreases as income increases.

Question 39

Proportional (flat-rate) taxes

Answer 39

tax rate the same regardless of income.

Question 40

Marginal tax rate

Answer 40

rate on additional dollar of income.

Question 41

Transfer payments

Answer 41

— payments by government to households.

Question 42

Due to incentive effects, “A more equally shared pie may be a smaller pie.”

Answer 42

Due to incentive effects, “A more equally shared pie may be a smaller pie.”

Question 43

An efficient market outcome is not necessarily fair or equitable. May include poor people unable to pay for basic necessities like shelter, food, medical care.

Answer 43

An efficient market outcome is not necessarily fair or equitable. May include poor people unable to pay for basic necessities like shelter, food, medical care.

Question 44

Governments can reduce poverty and inequality using tax–and-transfer systems to take from rich and give to poor (like Robin Hood).

Answer 44

— Costs and benefits of policies to help the poor apply to different people. How you feel about Robin Hood’s motto depends on whether you are being taken from or given to.