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Economic Problems

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True‐False: Indicate whether each of the following statements is true (agrees with economic theory), false (contradicts economic theory) or is uncertain and explain your answer.

1. A firm earning zero economic profit is paying each factor’s owner the market value of that factor’s marginal product.

2. Input substitution increases the factor price elasticity of demand.

3. If individual workers substitute leisure for income at higher wage rates, the market supply curve of is negatively sloped.

4. Factor A is a major input in the production of commodity B. A price ceiling on A below its equilibrium price will increase the price of commodity B.

5. Industry A uses more capital per worker than does industry B. Therefore, wage rates in industry A must be higher than in industry B.

6. The marginal productivity theory of distribution implies that under universally competitive conditions, the distribution of income is fair.

7. Labor’s marginal revenue product curve in an imperfectly competitive factor market is a mutatis mutandis demand curve.

8. A competitive firm uses two inputs, labor (L) and capital (K). A decrease in the wage rate will lead to a reduction in the quantity of capital employed in the long run.

9. The ratio of wages in competitive occupation Ato wage rates in competitive occupation B is 2. After a payroll tax of 10% in both industries, the ratio of the equilibrium wage rates will increase.

10. Community A has a preferred set of government services relative to community B. Both communities finance their local government services with property taxes. Since property tax rates will be higher in Community A, that community will have lower property values, ceteris paribus.

Calculate: Answer each of the following questions, showing your work.
11. The reservation wage for plumbers is given by wr = $200 + 2L, and the

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