A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. In this model, if the firm's cost of monitoring effort falls,
A)the efficiency wage will fall.
B)the number of shirking workers will fall.
C)firm profits will fall.
D)the firm will increase its number of factory managers.
E)the pool of involuntarily unemployed workers will increase.

Question

Quizplus · Accepted Answer

According to the standard efficiency wage model, a firm pays higher wages to incentivize workers to work harder and increase their efficiency. This results in higher profits for the firm but also leads to a pool of involuntarily unemployed workers. If the cost of monitoring effort falls, it becomes easier for the firm to detect shirking behavior among workers. As a result, the incentive to pay higher efficiency wages decreases, and the firm may switch to a lower wage rate. Thus, the efficiency wage will fall.

A Standard Efficiency Wage Model Pays Workers Higher Wages in Order