Question 1

Consider the accompanying figure representing the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour.  As a result of the imposition of the minimum wage, total economic surplus falls by ________ per day
A)$6,000
B)$8,000
C)$12,000
D)$24,000

Accepted Answer

The loss in total economic surplus is given by: ½ × 4,000 × $6 = $12,000 per day.

Question 2

Consider the accompanying figure representing the labor market below.  The imposition of a $12 per hour minimum wage causes total economic surplus in this labor market to ________ by ________.
A)rise; $800
B)fall; $800
C)rise; $400
D)fall; $1,600

Accepted Answer

Total economic surplus falls by ½ × 200 × $8 = $800.

Question 3

For people with very low incomes, the Earned Income Tax Credit operates like a(n):
A)tax on wages.
B)lump sum transfer.
C)wage subsidy.
D)in-kind transfer.

Accepted Answer

For very low-wage workers, the EITC functions as a wage subsidy.

Question 4

The earned income tax credit (or EITC):
A)reduces the tax rate on investment income.
B)provides tax credits to firms who hire low-income workers.
C)reduces the sales tax paid by low-income workers.
D)gives low-income workers credits on their federal income taxes.

Accepted Answer

The EITC is a policy under which low-income workers receive credits on their federal income tax.

Question 5

Consider the accompanying figure representing the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour.  Prior to the imposition of the minimum wage, worker surplus is ________ per day, and after the imposition of the minimum wage, worker surplus is ________ per day.
A)$9,000; $1,000
B)$9,000; $5,000
C)$18,000; $2,000
D)$18,000; $14,000

Accepted Answer

Prior to the imposition of the minimum wage, worker surplus is given by the area above the supply curve below the equilibrium wage, or ½ × 6,000 × $6 = $18,000 per day. After the imposition of the minimum wage, worker surplus is given by the area above the supply curve below the minimum wage up to the new employment level, or (½ × 2,000 × $2)+ (2,000 × $6)= $14,000 per day.

Question 6

Consider the accompanying figure representing the labor market below.  If a minimum wage of $12 per hour is imposed in this labor market, then:
A)200 workers will lose their jobs.
B)400 workers will earn $12 an hour.
C)total earnings will rise.
D)worker surplus will fall.

Accepted Answer

Prior to the imposition of the minimum wage, employment is 400 workers per hour. At a wage of $12 per hour, employment is only 200 workers per hour.

Question 7

Consider the accompanying figure representing the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour.  Prior to the imposition of the minimum wage, employer surplus is ________ per day, and after the imposition of the minimum wage, employer surplus is ________ per day.
A)$9,000; $1,000
B)$9,000; $5,000
C)$18,000; $2,000
D)$18,000; $14,000

Accepted Answer

Prior to the imposition of the minimum wage, employer surplus is given by the area below the demand curve above the equilibrium wage of $6.00 per hour, or ½ × 6,000 × $3 = $9,000 per day. After the imposition of the minimum wage, employer surplus is given by the area below the demand curve above the minimum wage of $8.00 per hour, or ½ × 2,000 × $1 = $1,000 per day.

Question 8

Consider the accompanying figure representing the labor markets shown below.  If the government imposes a minimum wage above $6 per hour, then total earnings will ________.
A)rise
B)fall
C)stay the same
D)initially rise and then fall

Accepted Answer

Since the equilibrium wage is on the elastic portion of the labor demand curve, we know that total earnings will fall.

Question 9

Suppose the elasticity of labor demand is less than 1 in absolute value. Imposing a minimum wage above the equilibrium wage will:
A)increase the earnings of every worker.
B)result in full employment.
C)increase the earnings of workers as a group.
D)make few workers better off.

Accepted Answer

If the demand for labor is inelastic, then a 1 percent increase in the wage rate will result in a less than 1 percent decrease in employment, so the earnings of workers as a group will rise.

Question 10

If the elasticity of labor demand is greater than one, then imposing a minimum wage above the equilibrium wage will cause:
A)the firms' total wage bill to fall.
B)employment to rise.
C)the firms' total wage bill to rise.
D)no adverse employment effects.

Accepted Answer

If the demand for labor is elastic, then a 1 percent increase in the wage rate will result in a more than 1 percent decrease in employment, so firms' total wage bill will fall.

Question 11

Consider the accompanying figure representing the labor market below.  In the absence of any government intervention, the equilibrium wage is ________ per hour, and the equilibrium employment level is ________ workers per hour.
A)$12; 600
B)$12; 200
C)$8; 400
D)$4; 200

Accepted Answer

The labor demand curve and labor supply curve intersect at a wage of $8 per hour and an employment level of 400 workers per hour.

Question 12

Imposing a minimum wage above the equilibrium wage:
A)makes all workers better off.
B)lowers labor costs.
C)increases the size of the total wage bill.
D)makes some workers worse off.

Accepted Answer

Imposing a minimum wage above the equilibrium wage will lower employment, making some workers worse off.

Question 13

According to the textbook, the best possible solution to the problem of poverty is:
A)a combination of a negative income tax and public employment.
B)to maintain the current system.
C)a negative income tax with the tax credit equal to the poverty threshold.
D)the complete elimination of all efforts to assist the poor.

Accepted Answer

A negative income tax would provide financial assistance and public employment would provide work incentives.

Question 14

Unlike the minimum wage, the Earned Income Tax Credit does not:
A)cause low-wage workers to be laid off.
B)cost the government money.
C)improve the economic well-being of the working poor.
D)increase total economic surplus.

Accepted Answer

Unlike the minimum wage, the EITC does not directly affect the wage employers pay workers. As a result, the quantity of labor demanded is unaffected.

Question 15

Consider the accompanying figure representing the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour.  Employment will fall by ________ person-hours per day as a result of the minimum wage.
A)2,000
B)4,000
C)6,000
D)8,000

Accepted Answer

At the initial equilibrium wage of $6.00 per hour, employment is 6,000 person-hours per day. After the imposition of the minimum wage, employment will fall to 2,000 person-hours per day.

Question 16

Consider the accompanying figure representing the labor market below.  If a minimum wage of $12 per hour is imposed in this labor market then worker surplus will ________ and employer surplus will ________.
A)rise; fall
B)fall; fall
C)stay the same; fall
D)rise; stay the same

Accepted Answer

Prior to the imposition of the minimum wage, worker surplus is ½ × 400 × $8 = $1,600, and after the imposition of the minimum wage worker surplus rises to (½ × 200 × $4)+ (200 × $8)= $2,000. Prior to the imposition of the minimum wage, employer surplus is ½ × 400 × $8 = $1,600, and after the imposition of the minimum wage, employer surplus falls to ½ × 200 × $4 = $400.

Question 17

In terms of improving the standard of living of the poor, one drawback on the earned income tax credit (EITC)is that:
A)it provides workers with in-kind transfers.
B)it's only available to individuals whose incomes are above a certain threshold.
C)it provides no benefits to people who are unemployed.
D)it gives firms a strong incentive to lay off low-wage workers.

Accepted Answer

The EITC is a policy under which low-income workers receive credits on their federal income tax. Only workers who are employed are eligible to receive the EITC.

Question 18

Consider the accompanying figure representing the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour.  After the imposition of the minimum wage, employment will equal ________ person-hours per day.
A)2,000
B)4,000
C)6,000
D)8,000

Accepted Answer

At a wage of $8.00 per hour, the quantity of labor demanded will be 2,000 person-hours per day.

Quiz 13: Labor Markets, Poverty, and Income Distribution

Consider the accompanying figure representing the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour. As a result of the imposition of the minimum wage, total economic surplus falls by ________ per day

Consider the accompanying figure representing the labor market below. The imposition of a $12 per hour minimum wage causes total economic surplus in this labor market to by .

For people with very low incomes, the Earned Income Tax Credit operates like a(n) :

The earned income tax credit (or EITC) :

Consider the accompanying figure representing the labor market below. If a minimum wage of $12 per hour is imposed in this labor market, then:

Consider the accompanying figure representing the labor markets shown below. If the government imposes a minimum wage above $6 per hour, then total earnings will ________.

Suppose the elasticity of labor demand is less than 1 in absolute value. Imposing a minimum wage above the equilibrium wage will:

If the elasticity of labor demand is greater than one, then imposing a minimum wage above the equilibrium wage will cause:

Consider the accompanying figure representing the labor market below. In the absence of any government intervention, the equilibrium wage is per hour, and the equilibrium employment level is workers per hour.

Imposing a minimum wage above the equilibrium wage:

According to the textbook, the best possible solution to the problem of poverty is:

Unlike the minimum wage, the Earned Income Tax Credit does not:

Consider the accompanying figure representing the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour. Employment will fall by ________ person-hours per day as a result of the minimum wage.

Consider the accompanying figure representing the labor market below. If a minimum wage of $12 per hour is imposed in this labor market then worker surplus will and employer surplus will .

In terms of improving the standard of living of the poor, one drawback on the earned income tax credit (EITC) is that:

Consider the accompanying figure representing the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour. After the imposition of the minimum wage, employment will equal ________ person-hours per day.