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| | Let’s try one more real CLEP question, this time relating to labor: | | Let’s try one more real CLEP question, this time relating to labor: |
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| − | <>Assume that both input and product markets are competitive. If capital is fixed and the product price increases, in the short run firms will increase production by increasing: | + | <>Assume a perfectly competitive market for both inputs and output. If capital is fixed and the price for the output increases, then a firm in the short run will increase its production by which of the following ways: |
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| − | (A) capital until marginal revenue equals the product price | + | :(A) increase capital until P=MR |
| | + | :(B) increase labor until the value of the marginal product for workers equals the wage rate |
| | + | :(C) increase capital until its average product equals the price of the additional capital |
| | + | :(D) increase labor until its marginal product equals the wage rate |
| | + | :(E) increase labor until the ratio of the price of the output to labor's marginal product equals the wage rate |
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| − | (B) capital until the average product of capital equals the price of capital | + | This type of question benefits from being reread. “Capital is fixed,” according to the question. So capital cannot be increased. Answers (A) and (C) can be eliminated that easily. Sounds too obvious, but many students miss this. They fail to read and understand the question. |
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| − | (C) labor until the value of the marginal product of labor equals the wage rate | + | Only labor can be increased, which is possible under answers (B), (D) and (E). We've improved our odds of success to a 33% chance. Those are good odds on a difficult question like this. But we can improve our chances even more. |
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| − | (D) labor until the marginal product of labor equals the wage rate | + | (B) and (D) look similar so let’s turn to (E) first. At first glance, it seems awkward and contrived. If in a hurry, you may want to limit the overly complex answers first. When have we ever divided price by marginal product? Never. |
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| − | (E) labor until the ratio of product price to the marginal product of labor equals the wage rate
| + | <>The “marginal product of labor” is the additional units (“product”) produced due to an additional unit of labor. Remember “MP”? The term does not include “revenue” or “price”, so it only gives you the quantity. We need to multiply that quantity by product price to obtain revenue, what the firm owner cares the most about. Choice (E) makes no sense by dividing terms that should be multiplied together. We can eliminate it. |
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| − | Whew! This looks far too difficult! Should we just give up right now?
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| − | Read the question again, and a third time. “Capital is fixed,” according to the question. So capital cannot be increased. Answers (A) and (B) can be eliminated that easily. Sounds too obvious, but many students miss this. They fail to read and understand the question.
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| − | Only labor can be increased, which is possible under answers (C), (D) and (E). We could just guess at this point, with a 33% chance of being correct. Those are good odds on a difficult question like this. But we can improve our chances even more.
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| − | (C) and (D) look similar so let’s turn to (E) first. It says to increase “labor until the ratio of product price to the marginal product of labor equals the wage rate.” At first glance, it seems awkward and contrived. If in a hurry, you may want to limit this immediately. When do we ever divide “product price” by “marginal product”? That’s dividing P by marginal Q, which isn’t done.
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| − | The “marginal product of labor” is the additional units (“product”) produced due to an additional unit of labor. Remember “MP”? The term does not include “revenue” or “price”, so it only gives you the quantity. We need to multiply that quantity by product price to obtain revenue, what the firm owner cares the most about. Choice (E) makes no sense by dividing terms that should be multiplied together. We can eliminate it. | |
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| | Back to (C) and (D). The only difference between the two is the term “value of” in (C). Should we go for it? Think about what “marginal product” is. It is a quantity, not a dollar amount. Yet we are comparing it to “wage rate,” which would be in dollars. We need to insert “value of” to convert a quantity into equivalent dollars. (C) is the correct choice. | | Back to (C) and (D). The only difference between the two is the term “value of” in (C). Should we go for it? Think about what “marginal product” is. It is a quantity, not a dollar amount. Yet we are comparing it to “wage rate,” which would be in dollars. We need to insert “value of” to convert a quantity into equivalent dollars. (C) is the correct choice. |
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| − | Remember that on these exams you don’t have to be correct every time. Batters who achieve hits only one-third of the time are elected to the Baseball Hall of Fame. You want to strive to do a bit better on these exams, but you don’t have be successful on every single question. You simply want to maximize your average.
| + | The key to good test-taking, particularly on economics exams, is to read the question very carefully and then improve your odds by eliminating wrong answers before selecting the right one. |
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| | == Final Comments == | | == Final Comments == |