Page 736 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Multiple-Choice Questions
1. The implicit cost of capital that you own is 4. A firm will continue to employ more land until its value of the
a. the rental rate. marginal product of land is
b. greater than the rental rate. a. zero.
c. the original purchase price of the capital. b. maximized.
d. greater than the original purchase price of the capital. c. equal to the rental rate.
e. zero because you already own it. d. equal to the wage rate.
e. equal to the value of the marginal product of labor and
2. Which of the following is true in relation to a very steep supply
capital.
curve for land?
I. It is relatively elastic. 5. According to the marginal productivity theory of income
II. The quantity of land is very responsive to price changes. distribution,
III. Finding new supplies of land is relatively expensive and a. each unit of a factor will be paid the value of its marginal
difficult. product.
a. I only b. as more of a factor is used, its marginal productivity
b. II only increases.
c. III only c. factors that receive higher payments are less productive.
d. I and II only d. capital should receive the highest portion of factor income.
e. I, II, and III e. each factor is paid the equilibrium value of its marginal
product.
3. The explicit cost of land you don’t own is equal to the
a. rental rate.
b. interest rate.
c. profit received from using that land.
d. market wage rate.
e. marginal product of land.

Tackle the Test: Free-Response Questions

1. Refer to the table below. Assume that the price of the product is
Answer (5 points)
$10 and the rental rate for capital is $100 per unit.
Quantity of capital (units) Quantity of output 1 point: VMP = 25 × $10 = $250
0 0
1 point: Yes
1 30
2 55 1 point: Because the VMP of $250 is greater than the rental rate of $100
3 70 1 point: 3
4 78
5 85 1 point: Because the VMP exceeds the rental rate for the first 3 units
6 89
a. What is the VMP of the 2 nd unit of capital? 2. Draw a correctly labeled graph showing how the market rental
b. Will the firm employ the 2 nd unit of capital? Explain. rate and quantity of land are determined in the land market. On
c. How many units of capital will the firm hire? Explain. your graph, be sure to include each of the following: the supply
and demand curves for land, the equilibrium rental rate, the
equilibrium quantity of land employed, and correct labels on
the axes.

694 section 13 Factor Markets