Page 889 - Krugmans Economics for AP Text Book_Neat

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SOLUTIONS TO AP REVIEW QUESTIONS

Module 68 what it would have been without the policy. And this
will hurt all sectors of the economy that depend on
Check Your Understanding human capital. The sectors of the economy that might
benefit are firms that compete with colleges in the hir-
1. a. This type of advertising is likely to be useful because it ing of would-be college professors. For example,
provides new information on an important product.
b. This type of advertising is likely to be wasteful because accounting firms will find it easier to hire people who
would otherwise have been professors of accounting,
it is focused on promoting Bayer aspirin over a rival’s
aspirin despite the two products being medically and publishers will find it easier to hire people who
would otherwise have been professors of English (easier
indistinguishable.
c. This is useful because the longevity of a business gives a in the sense that the firms can recruit would-be profes-
sors with a lower wage than before). In addition, work-
potential customer information about its quality.
2. A successful brand name indicates a desirable attribute, ers who already have college degrees will benefit; they
will command higher wages as the supply of college-
such as quality, to a potential buyer. So, other things educated workers falls.
equal—such as price—a firm with a successful brand 2. a. The demand curve for labor shifts to the right.
name will achieve higher sales than a rival with a com-
parable product but without a successful brand name. b. The demand curve for labor shifts to the left.
This is likely to deter new firms from entering an Tackle the Test:
industry in which an existing firm has a successful
brand name. Multiple-Choice Questions
Tackle the Test: 1. b
Multiple-Choice Questions 2. e
1. e 3. d
2. d 4. b
3. a 5. a
4. e Tackle the Test:
5. d Free-Response Questions
Tackle the Test:
Free-Response Questions 2. a. Wage
rate
2. Product differentiation is efficient when it conveys useful
information to consumers and the marginal benefit of
the product differentiation exceeds the marginal cost. It
is not efficient from a societal standpoint if it does not
convey useful information or other benefits worth more
than the resources devoted to it. This is likely to be the
case, for example, if it misleads consumers or creates
Original Labor
undesirable market power. Demand
Module 69 New Labor
Demand
Check Your Understanding Quantity of labor
1. Many college professors will depart for other lines of
work if the government imposes a wage that is lower
than the market wage. Fewer professors will result in b. Wage
fewer courses taught and therefore fewer college rate
degrees produced. It will adversely affect sectors of the
economy that depend directly on colleges, such as the
local shopkeepers who sell goods and services to stu-
dents and faculty, college textbook publishers, and so
on. It will also adversely affect firms that use the “out-
put” produced by colleges: new college graduates. Firms
that need to hire new employees with college degrees
New Labor
will be hurt as a smaller supply results in a higher mar- Demand
ket wage for college graduates. Ultimately, the reduced
Original Labor
supply of college-educated workers will result in a lower Demand
level of human capital in the entire economy relative to Quantity of labor