ECON 2000 Chapter 16
A Firm's Hiring Decision
- A firm that's a perfect competitor in the labor market can hire all the labor it wants at the prevailing market wage - The grower will continue hiring pickers until the MRP has declined to the level of the market wage rate
TABLE: How many hairstylists should a profit-maximizing salon hire? A. 3 B. 4 C. 2 D. 1
A. 3
The labor supply curve starts to bend backwards once the A. Income effect exceeds the substitution effect B. Marginal revenue product of labor equals the marginal utility of leisure C. Substitution effect exceeds the income effect D. Total utility of leisure outweighs the total utility of labor
A. Income effect exceeds the substitution effect
Jackson hates to work. He receives a great deal of enjoyment from leisure time. Jackson's elasticity of labor supply is A. Low, perhaps even negative B. 1 C. High D. Highly negative
A. Low, perhaps even negative
The substitution effect of wages states that a decreased wage rate A. encourages people to work less hours B. will lead to a movement up along the existing supply curve C. Will shift the labor supply curve rightward D. Encourages people to consume less leisure
A. encourages people to work less hours
The backward bending supply curve
- looks like a backwards C - Increases in wage rates make additional hours of work more valuable but also less necessary - higher wage rates increase the quantity of labor supplied as long as substitution effects outweigh income effects - At the point where income effects begin to outweigh substitution effects, the labor supply curve starts to bend backward
Income effect of higher wages
An increased wage rate allows a person to reduce hours worked without losing income
Substitution effect of higher wages
An increased wage rate encourages people to work more hours (to substitute labor for leisure)
TABLE: What is the cost efficiency of the second unit of labor A. 16 unites per $1 of cost B. 26 units per $1 of cost C. 4 units per $1 of cost D. 64 units per $1 of cost
C. 4 units per $1 of cost
As we work fewer hours and our leisure time increases, the opportunity cost of labor A. Rises and MU of income falls B. Falls and MU of income falls C. Falls and MU of income rises D. Rises and MU of income rises
C. Falls and MU of income rises
Campbell loves to work. He does not receive any enjoyment from leisure time. The last dollar that he earns each year means just as much to him as the first dollar. Which of the following best describes the shape of Campbell's labor supply curve? A. Downward sloping to the right B. Upward sloping to the right C. Horizontal D. Vertical
C. Horizontal
Cost efficiency
The amount of output associated with an additional dollar spent on input; the MPP of an input divided by its price
Marginal Physical Product (MPP)
The change in total output associated with one additional unit of input
Marginal Revenue Product (MRP)
The change in total revenue associated with one additional unit of input
Elasticity of Labor Supply
The percentage change in the quantity of labor supplied divided by the percentage change in wage rate - % change in quantity of labor supplied / % change wage rate
Demand for labor
The quantities of labor employers are willing and able to hire at alternative wage rates in a given time period
Cost efficiency formula
CE = MPP of an input / cost of an input
How to calculate MRP
MRP = MPP x price
Market supply of labor
The total quantity of labor that workers are willing and able to supply at alternative wage rates in a given time period
Equilibrium Wage
The wage rate at which the quantity of labor supplied in a given time period equals the quantity of labor demanded
Labor Supply
The willingness and ability to work specific amounts of time at alternative wage rates in a given time period
