Page 890 - Krugmans Economics for AP Text Book_Neat

S-44 SOLUTIONS TO AP REVIEW QUESTIONS

c. Wage Module 71
rate
Check Your Understanding

1. a. Clive is made worse off if, before the new law, he had
preferred to work more than 35 hours per week. As a
result of the law, he can no longer choose his preferred
time allocation; he now consumes fewer goods and more
leisure than he would like.
New Labor b. Clive’s utility is unaffected by the law if, before the
Demand
law, he had preferred to work 35 or fewer hours per
Original Labor week. The law has not changed his preferred time
Demand
allocation.
Quantity of labor c. Clive can never be made better off by a law that restricts
the number of hours he can work. He can only be made
Module 70 2. worse off (case a) or equally as well off (case b).
Check your Understanding The substitution effect would induce Clive to work fewer
hours and consume more leisure after his wage rate
falls—the fall in the wage rate means the price of an hour
1. a. This would increase the supply of land, shifting the sup-
ply curve to the right and leading to a new equilibrium at of leisure falls, leading Clive to consume more leisure.
a lower rental rate and a higher quantity. But a fall in his wage rate also generates a fall in Clive’s
b. This would increase the marginal product of land and income. The income effect of this is to induce Clive to
thus the value of the marginal product of land. The VMP consume less leisure and therefore work more hours,
curve for land would shift to the right, leading to a new since he is now poorer and leisure is a normal good. If
equilibrium at a higher rental rate and a higher quantity. the income effect dominates the substitution effect, Clive
2. When firms from different industries compete for the same will in the end work more hours than before.
land, an inter-industry land market develops and, other Tackle the Test:
things being equal, each unit of land used by the various Multiple-Choice Questions
industries will rent for the same equilibrium rental rate, R. 1.
According to the marginal productivity theory of income d
distribution, VMP for land = R for the last unit of land rent- 2. a
ed. Because each industry rents until VMP for land = R, the 3. e
last unit of land rented in each of these different industries
will have the same value of the marginal product of land. 4. c
Tackle the Test: 5. d
Multiple-Choice Questions Tackle the Test:
1. a Free-Response Questions
2. c 2. Wage Market labor
rate
3. a supply curve
4. c
5. e
Tackle the Test: E 1
Free-Response Questions W*
2. Rental E 2
rate W 2
S Land
Market labor
demand curve = MRPL 1
MRPL 2
R* Land
L 2 L* Quantity of labor
(workers)

Module 72
D Land = VMP Land
Check Your Understanding
1. Yes, the firm is employing the cost-minimizing combina-
Quantity of land tion of inputs because the marginal product per dollar is
Q* Land