Exam 3

Question 1

Labor Market Factors of Production

Answer 1

Land: any natural resource
Labor: the effort that humans contribute
Capital: machinery, tools, & buildings
Entrepreneurship: combines land, labor, and capital

Question 2

Earning Discrimination Poverty (income inequality)

Answer 2

compares the share of the total income (or
wealth) in society that different groups receive

Question 3

Poverty trap

Answer 3

Gov. helps aid the impoverished but as they earn more, they help less

Question 4

Consumer Theory

Answer 4

the study of how people choose to spend their money based on PREFERENCE and BUDGET CONSTRAINT

Question 5

Utility Theory

Answer 5

In economics, utility theory tries to explain the behavior of individual consumers in an economy. Utility theory argues that each person, given a list of options, can rank those options in a precise order of preference. Each person has different choices which are set, not changing over time.

Question 6

Indifference Curve

Answer 6

chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied—hence indifferent—

Question 7

Marginal Utility

Answer 7

• the added satisfaction a consumer gets from having one more unit of a good or service
• used by economists to determine how much of an item consumers are willing to purchase

Question 8

Derived Demand

Answer 8

key reason is that the demand for labor is based on the demand for the good or service that is produced

Question 9

Value of Marginal Product of Labor (VMPL)

Answer 9

• the value generated by each additional unit of labor employed
• VMPL = (Price - non-labor cost per item) X MPL

Question 10

Benefits Principle

Answer 10

principle based on the notion that those who benefit more from government expenditure or spending should pay more taxes than those that do not

Question 11

Poverty Line (and how it’s found)

Answer 11

• defines the income one needs for a basic standard of living
• people that fall below the standard of income

Question 12

In-Kind Transfers

Answer 12

simply means that you move your assets from one brokerage account to another brokerage account as-is (like bonds or stocks)

Question 13

Substitution Affect

Answer 13

occurs when price changes and consumers have the incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price

Question 14

Income Effect

Answer 14

that a higher price means, in effect, the buying power of income has been reduced (even though actual income has not changed), which leads to buying less of the good (when the good is normal)

Question 15

Compensating Differential

Answer 15

jobs with undesirable characteristics will compensate with higher wages compared to the popular, more desirable jobs, who provide lower wages to its workers

Question 16

Diminishing Marginal Product of Labor

Answer 16

general rule that as a firm employs more labor, eventually the amount of
additional output produced declines

Question 17

Labor Demand Shifts?

Answer 17

• number of workers increased shifts right
• the more required education, the lower the supply
• gov policies affecting supply of labor

Question 18

Slope of Budget Constraint?

Answer 18

• find price of item and multiply by its quantity
• set quantity 1 over quantity 2 and make the fraction negative

Question 19

How to Calculate Marginal Tax Rate

Answer 19

• divide the total amount owed in taxes by the total amount of taxable income
• total tax / taxable income
• find taxable income by subtracting income from the standard exemp.

Question 20

Competitive firms that MAXIMIZE profit will hire workers until the value of the marginal product of labor (VMPL) EQUALS

Answer 20

the wage

Question 21

MRS & Indifference Curve

Answer 21

• MRS is the slope of the indifference curve at any single point along the curve
• the rate at which a person is willing to trade one good for another so that utility will remain the same
• the slope of the indifference curve changes because the marginal rate of substitution as a result of diminishing marginal utility of both goods

Question 22

Average Tax Rate?

Answer 22

tax liability divided by gross income

Question 23

When do workers work more?

Answer 23

when the wage is higher

Question 24

Proportional tax

Answer 24

tax rate % are flat (same % regardless of income)

Question 25

Regressive Tax

Answer 25

tax rate that takes a larger % of income from low-income groups than from high-income groups.

Question 26

Lump-sum tax

Answer 26

tax rate shifts depending on income in order to tax all levels of income the same amount of money

Question 27

Progressive Tax

Answer 27

tax rate increases along with total income (higher the wage, higher the tax rate)

Question 28

Human Capital?

Answer 28

• first determinant of labor productivity
• the accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses
• typically the higher the average level of education in an economy, the higher the accumulated human capital and labor productivity

Question 29

SOLVING BUDGET CONSTRAINT:
If the price of x is $___, then what is the price of y?

Answer 29

multiply the x value by $, and divide by only the y value (do not multiply y by the value unless question is vice versa)

Question 30

Marginal Utility

Answer 30

divide budget by base price of item (gives units per dollar)

Question 31

List the 4 properties of the indifference curve?

Answer 31

• curves can never cross
• curves always slope downwards
• higher utility preferred
• curves are convex or bowed inwards

Question 32

HOW TO MAKE A BUDGET CONSTRAINT
(given income, Px, and Py)

Answer 32

1. determine points on graph (divide income by Px [x, 0])
2. connect the dots, AKA draw budget line
3. find slope ( -y/x)
   slope is negative always since the constraint is going down, we just make the y value negative to interpret the behavior
   (slope determines the rate at which consumers can trade one good for another)

Question 33

Productivity?

Answer 33

VMPL ^ so Labor demanded ^ (vice versa for bad productivity)