Deck 26: The Long Run Demand for Labor and Adjustment Costs

Question 1

If capital and labor are gross substitutes in production,

A) then the scale effect dominates.
B) then the substitution effect dominates.
C) then the scale and substitution effects are of equal magnitude.
D) then capital and labor must be used in a one to one ratio.
E) then capital and labor cannot be used at the same time

Answer 1

B

Question 2

Which of the following increases the power of unions?

A) Deregulation of an industry,removing a firm's monopoly power.
B) An increase in the tariff on foreign inputs.
C) An elastic demand curve.
D) An increase in the price elasticity of demand for the industry's product.
E) The firm not agreeing to a set number of union workers that it must employ (manning levels)

Answer 2

B

Question 3

What is the firm's long run optimal capital stock?

A) 0
B) 1
C) 2
D) 3
E) 8

Answer 3

D

Question 4

When the price of labor increases,

A) a firm will increase the amount of capital used in the short run because it is cheaper.
B) a firm will increase the amount of capital used in the long run because it is cheaper.
C) a firm will decrease the amount of capital used in the long run because it is more costly.
D) a firm will not change the amount of capital used in the long run because an increase in the price of labor does not affect capital.
E) it is ambiguous how the firm will adjust the level of capital in the long run.

Question 5

Suppose the firm wants to manufacture an additional 500 units of output and can use either capital or labor.Each additional unit of capital costs $50,while each additional worker demands a wage of $10 an hour.Capital will generate 25 units of output,while a worker will generate 2 units of output per hour.What will the firm do?

A) The firm will employ 250 workers.
B) The firm will purchase 20 units of capital.
C) The firm will purchase 30 units of capital.
D) The firm will employ 20 workers.
E) The firm will employ 250 workers and 20 units of capital.

Question 6

Suppose the price of capital increases to $11.Which of the following will occur?

A) The amount of capital used will increase to 6.
B) The amount of labor used will remain the same.
C) The level of output will increase to 36.
D) The amount of labor used will increase to 1 unit.
E) The level of output will remain the same.

Question 7

If two inputs are gross substitutes,their substitution elasticity will be

A) zero.
B) positive.
C) negative.
D) - 1.
E) 1.

Question 8

Suppose a firm uses three inputs in production,capital,labor,and land.If the price of labor increases,the firm adjusts by decreasing the amount of labor used,increasing the amount of capital used and decreasing the amount of land used.What does this imply about the relationship between the three inputs?

A) Land and labor are net substitutes while labor and capital are net complements.
B) Land and labor are net complements while labor and capital are net substitutes.
C) Land and labor are gross substitutes while labor and capital are gross complements.
D) Land and labor are gross complements while labor and capital are gross substitutes.
E) none of the above

Question 9

What is the firm's long run optimal employment level?

A) 0 workers
B) 4 workers
C) 5 workers
D) 10 workers
E) 20 workers

Question 10

Suppose the own wage elasticity of labor is 0.75%.What does this imply?

A) The supply of labor is elastic.
B) The supply of labor is inelastic.
C) The demand for labor is elastic.
D) The demand for labor is inelastic.
E) The demand for labor is unitary elastic.

Question 11

Suppose a 2% increase in wages decreases the demand for labor by 1%.What is the own wage elasticity?

A) - 0.5%
B) -1%
C) -1.5%
D) -2%
E) -3%

Question 12

If capital and labor are gross complements in production,

A) then the scale effect dominates.
B) then the substitution effect dominates.
C) then the scale and substitution effects are of equal magnitude.
D) then capital and labor must be used in a one to one ratio.
E) then capital and labor cannot be used at the same time.

Question 13

A result of the Le Châtelier Brown principle is

A) an increase in the price of capital has a larger effect in the short run than the long run.
B) an increase in the price of capital has a larger effect in the long run than the short run.
C) an increase in the price of labor has a larger effect in the short run than the long run.
D) an increase in the price of labor has a larger effect in the long run than the short run.
E) an increase in the price of labor has a large effect in the short run but no effect in the long run.

Question 14

Suppose the substitution elasticity between capital and labor is -2.6%.What does this imply about the demand for labor?

A) The long run demand for labor is relatively inelastic.
B) The long run demand for labor is relatively elastic.
C) The short run demand for labor is relatively inelastic.
D) The long run supply of labor is relatively inelastic.
E) The long run supply of labor is relatively elastic.

Question 15

Suppose the own wage elasticity of labor is 0.75%.What does this imply?

A) The supply of labor is elastic.
B) The supply of labor is inelastic.
C) The demand for labor is elastic.
D) The demand for labor is inelastic.
E) The demand for labor is unitary elastic.

Question 16

Which of the following is a condition that will result in the demand for labor being inelastic?

A) The task can be performed easily using capital or labor.
B) The demand for the good is elastic.
C) Capital is a small share of the firm's total costs.
D) Labor is a small share of the firm's total costs.
E) The supply of capital is inelastic.

Question 17

When wages increase,

A) the scale and substitution effects counteract each other and the firm's demand for labor remains the same.
B) the scale and substitution effects move in the same direction and the firm's demand for labor decreases.
C) the scale and substitution effects move in the same direction and the firm's demand for labor increases.
D) the scale and substitution effects move in opposite directions and the firm's demand for labor decreases.
E) the scale and substitution effects move in opposite directions and the firm's demand for labor increases.

Question 18

What are the firm's profits?

A) $1
B) $2
C) $3
D) $4
E) More than $11

Question 19

Which of the following increases the power of unions?

A) Deregulation of an industry,removing a firm's monopoly power.
B) An increase in the tariff on foreign inputs.
C) An elastic demand curve.
D) An increase in the price elasticity of demand for the industry's product.
E) The firm not agreeing to a set number of union workers that it must employ (manning levels)

Question 20

In the long run,when the price of labor increases,

A) the demand for labor will decrease and demand for capital will decrease.
B) the demand for labor will decrease and demand for capital will increase.
C) the demand for labor will decrease and demand for capital will either decrease or increase.
D) the demand for labor will increase and demand for capital will increase.
E) the demand for labor will increase and demand for capital will either decrease or increase.

Question 21

The wage in the market is $500,and the firing cost of each worker is $300.What is the cost to the firm of replacing one worker with another?

A) $200
B) $300
C) $500
D) $800
E) $1100

Question 22

Suppose the substitution elasticity between capital and labor is ?2- 2.6%.What does this imply about the demand for labor?

A) The long run demand for labor is relatively inelastic.
B) The long run demand for labor is relatively elastic.
C) The short run demand for labor is relatively inelastic.
D) The long run supply of labor is relatively inelastic.
E) The long run supply of labor is relatively elastic.

Question 23

If a firm incurs high fixed costs to adjust employment but there is almost no effect on the MRP of labor,the firm faces

A) a positive labor demand elasticity.
B) linear adjustment costs.
C) concave adjustment costs.
D) convex adjustment costs.
E) lumpy adjustment costs.

Question 24

If a firm incurs the same cost to hire each worker,the firm faces

A) a positive labor demand elasticity.
B) linear adjustment costs.
C) concave adjustment costs.
D) convex adjustment costs.
E) lumpy adjustment costs.

Question 25

Adjustment costs:

A) are costs incurred by a firm when it has to advertise to hire more workers.
B) are costs incurred by a firm when it decides it needs to layoff workers.
C) result in less employment volatility.
D) result in a firm optimally choosing to reach the cost minimizing level of employment.
E) All of the above are true statements about adjustment costs.

Question 26

Suppose capital and labor are gross complements.If the supply of capital is relatively inelastic,then the labor demand elasticity will be

A) high.
B) low.
C) zero.
D) one.
E) positive.

Question 27

Which of the following is a true statement about isoquants?

A) Each isoquant corresponds to the same level of capital.
B) Each isoquant corresponds to the same level of labor.
C) Each isoquant corresponds to the same level of output.
D) Isoquants are positively sloped to re?0??4?ect the substitutability between capital and labor.
E) Isoquants can cross.

Question 28

Suppose the supply of capital is relatively inelastic.If capital and labor are gross complements,the labor demand elasticity will be ,but if capital and labor are gross substitutes,the labor demand elasticity will be .

A) high,high
B) low,low
C) low,high
D) high,low
E) zero,zero

Question 29

Suppose the current level inputs is 20 units of capital and 10 units of labor.What is the marginal rate of technical substitution (MRTS)?

A) 1
B) 2
C) 3
D) 4
E) 5

Question 30

If two inputs are gross substitutes,their substitution elasticity will be

A) zero.
B) positive.
C) negative.
D) ?2- 1.
E) 1.

Question 31

If it is costly for a firm to adjust its employment level rapidly,the firm faces

A) a positive labor demand elasticity.
B) linear adjustment costs.
C) concave adjustment costs.
D) convex adjustment costs.
E) lumpy adjustment costs.

Question 32

Which combination of wages and rental rates would fulfill the "equal-bang-for-the-buck" condition?

A) rental rate = $2,wage = $3
B) rental rate = $3,wage = $2
C) rental rate = $1,wage = $1
D) rental rate = $4,wage = $1
E) rental rate = $1,wage = $4

Question 33

What are the firm's total costs?

A) $30
B) $50
C) $60
D) $80
E) $90