Question 1

Consider two situations: In situation A the production of widgets is monopolized by a single firm.In situation B the production of widgets is perfectly competitive.In both situations the supply of labor to widget makers is infinitely elastic at a wage of w.In this case,the product

A)will be the same in the two cases.
B)will be higher in case B than in case A.
C)will be higher in case A than in case B.
D)From the information given it is not possible to make a definite statement about the marginal value product of labor.

C

Accepted Answer

C

Question 2

A price discriminating monopsonist could increase its profits by&#10;A)paying the minimum wages possible.&#10;B)hiring as little capital as possible.&#10;C)paying lower wages to workers with inelastic supply of labor curves than to workers with elastic curves.&#10;D)paying lower wages to workers with elastic supply of labor curves than to workers with inelastic curves.

Accepted Answer

A price discriminating monopsonist can increase profits by paying lower wages to workers with inelastic supply of labor curves than to workers with elastic curves. This is because workers with inelastic labor supply are less responsive to wage changes, meaning the monopsonist can pay them less without significantly affecting their willingness to work.

Question 3

The slope of an individual's &#34;consumption?leisure&#34; budget constraint is&#10;A)24 hours minus the number of leisure hours.&#10;B)total consumption divided by the wage rate.&#10;C)the real wage rate.&#10;D)the negative of the real wage rate.

Accepted Answer

The slope of the budget constraint is the negative of the ratio of price of leisure and the price of consumption. In this case, the price of leisure is the wage rate, which represents the opportunity cost of not working. The price of consumption is simply the market price of goods and services. Therefore, the slope is negative of the ratio of these prices, which is the negative of the real wage rate.

Question 4

If an individual's supply of labor curve is &#34;backward bending,&#34; then&#10;A)the substitution effect always dominates the income effect.&#10;B)the income effect always dominates the substitution effect.&#10;C)the substitution effect dominates at low real wage levels and the income effect dominates at high real wage levels.&#10;D)the income effect dominates at low real wage levels and the substitution effect dominates at high real wage levels.

Accepted Answer

In a backward bending supply curve of labor, the substitution effect dominates at low levels of wage rates because as the wage rate increases, the opportunity cost of leisure also goes up, causing individuals to substitute leisure with work. However, at higher levels of wage rates, the income effect takes over as an increase in wage rate increases the individual's income, and they may start to decrease their supply of labor as they opt for more leisure time. Hence, the substitution effect dominates in the first segment of the curve, whereas the income effect dominates in the second segment, making the answer C the correct choice.

Question 5

The opportunity cost of leisure is approximated by&#10;A)the price of leisure activities (such as theater tickets).&#10;B)an individual's hourly real wage rate.&#10;C)commuting expense.&#10;D)an individual's total income.

Accepted Answer

Opportunity cost is defined as the value of the next best alternative that must be given up in order to pursue a certain action. In the case of leisure time, the opportunity cost is the amount of money that an individual could have earned if they had chosen to work instead of engaging in leisure activities. Therefore, the hourly real wage rate is the best approximation of the opportunity cost of leisure.

Question 6

&#34;Compensating wage differentials&#34; arise because&#10;A)workers possess different skills.&#10;B)workers prefer some jobs to others.&#10;C)firms pay higher wages for workers with higher marginal productivities.&#10;D)firms discriminate in hiring.

Accepted Answer

Compensating wage differentials occur because workers prefer some jobs more than others. These preferences can be due to various reasons such as job safety, work-life balance, job security, and other non-wage job attributes. As a result, workers might be willing to accept lower wages for jobs they prefer over jobs with similar responsibilities but lacking the attributes they value. Conversely, workers in jobs with less desirable attributes may demand higher wages to compensate them for the unpleasant aspects of their work.

Question 7

Which of the following strategies that a union might pursue would result in the lowest wage rate for its members?&#10;A)Maximizing the total wage bill.&#10;B)Maximizing employment of its members.&#10;C)Restricting union membership severely.&#10;D)Maximizing the total economic rent obtained by its members.

Accepted Answer

Maximizing employment of its members could lead to a lower wage rate because increasing the supply of labor within the union's field could reduce the wage rate due to basic supply and demand principles. Other strategies aim at restricting supply or maximizing income, which would tend to increase wages.

Question 8

A monopsonist that faces a labor supply curve of the form l = 4w and has a constant marginal revenue product of 50 per unit of l,will opt for the following,w,l combination&#10;A)w = 10 l = 40.&#10;B)w = 25 l = 100.&#10;C)w = 50 l = 200.&#10;D)w = 100 l = 400.

Accepted Answer

To maximize profits, a monopsonist chooses the quantity of labor at which the marginal cost of labor equals the marginal revenue product of labor. In this case, the marginal revenue product is constant at $50, and the marginal cost of labor is the wage rate paid to each worker. The supply curve for labor is given by l = 4w, which means that the wage rate is equal to one-fourth of the quantity of labor supplied.

Setting the wage rate equal to the marginal revenue product, we have:

50 = 4w/4
w = 50

Substituting this wage rate into the labor supply curve gives us:

l = 4(50)
l = 200

Therefore, the monopsonist will opt for a combination of w = 50 and l = 200 to maximize profits. The only choice that matches this combination is B.

Question 9

Adoption of a guaranteed annual income with benefits (B)given by B = 20,000 -.5 (earnings)
Would be expected to reduce work effort by low wage workers because

A)the income effect would outweigh the substitution effect of the plan.
B)the substitution effect would outweigh the income effect of the plan.
C)both substitution and income effects would operate to reduce work effort.
D)the plan would make working financially unattractive.

Accepted Answer

The guaranteed annual income plan reduces work effort through both the income effect (workers feel wealthier and may choose leisure over work) and the substitution effect (the effective wage rate decreases as part of earnings is subtracted from the benefit, making leisure relatively more attractive).

Question 10

If an individual is maximizing his or her utility,his or her marginal rate of substitution of leisure hours for consumption will be&#10;A)equal to one divided by his or her wage rate.&#10;B)greater than one divided by his or her wage rate.&#10;C)equal to his or her wage rate.&#10;D)less than his or her wage rate.

Accepted Answer

The answer of If an individual is maximizing his or...

Question 11

Which of the following best explains why the elasticity of supply of labor for an individual with a Cobb-Douglas utility function (for consumption and leisure)is zero?&#10;A)Income and substitution effects are precisely offsetting.&#10;B)The elasticity of substitution of leisure for consumption is zero.&#10;C)Leisure is an inferior good.&#10;D)Consumption is subject to diminishing marginal utility.

Accepted Answer

The answer of Which of the following best explains why...

Question 12

For a monopsonistic hirer of labor the gap between labor's marginal revenue product and its wage rate will be greater&#10;A)the more elastic the supply curve for labor.&#10;B)the more inelastic the supply curve for labor.&#10;C)the more elastic the firm's demand for labor.&#10;D)the more inelastic the firm's demand for labor.

Accepted Answer

The answer of For a monopsonistic hirer of labor the...

Question 13

If an individual's supply of labor curve is positively sloped throughout,then&#10;A)the substitution effect always dominates the income effect.&#10;B)the income effect always dominates the substitution effect.&#10;C)the substitution effect dominates at low real wage levels and the income effect dominates at high real wage levels.&#10;D)the income effect dominates at low real wage levels and the substitution effect dominates at high real wage levels.

Accepted Answer

The answer of If an individual's supply of labor curve...

Question 14

A monopolist union that desired to maximize its total wage bill (w . l)would offer that quantity of labor for which&#10;A)labor's marginal productivity is zero.&#10;B)labor's wage falls to zero.&#10;C)the quantity of labor hired is as great as possible given the firm's demand curve.&#10;D)the marginal revenue from providing one more worker to the market is zero.

Accepted Answer

The answer of A monopolist union that desired to maximize...

Question 15

When an individual's wage rises,the income effect tends to&#10;A)increase hours worked.&#10;B)decrease hours worked.&#10;C)leave hours worked unchanged.&#10;D)it is impossible to predict what will happen to hours worked.

Accepted Answer

The answer of When an individual's wage rises,the income effect...

Question 16

When an individual's wage rises,the substitution effect tends to&#10;A)increase hours worked.&#10;B)decrease hours worked.&#10;C)leave hours worked unchanged.&#10;D)it is impossible to predict what will happen to hours worked.

Accepted Answer

The answer of When an individual's wage rises,the substitution effect...

Question 17

If a firm is a monopsonistic hirer of labor&#10;A)its marginal expense for labor is greater than the market wage.&#10;B)its marginal expense for labor is equal to the market wage.&#10;C)its marginal expense for labor is less than the market wage.&#10;D)it is a price taker in the labor market.

Accepted Answer

The answer of If a firm is a monopsonistic hirer...

Question 18

The fact that more women have chosen to work as real wages rise is evidence that,for them&#10;A)leisure is an inferior good.&#10;B)income and substitution effects of higher real wages work in the same direction.&#10;C)income and substitution effects of higher real wages may work in opposite directions.&#10;D)income and substitution effects may work in opposite directions but that the substitution effect is stronger.

Accepted Answer

The answer of The fact that more women have chosen...

Deck 14: Labor Markets