LE Chapter 4

If the wage of teenagers falls 5% and the employment of adults rises by 1%, the cross-wage elasticity between adults and teenagers is a. −0.2. b. +0.2. c. −4. d. −5.

A. 1/-5 = -0.2

If the cross-wage elasticity between adult and teenage labor is negative, a. adults and teens are gross complements. b. adults and teens are gross substitutes. c. the substitution effect associated with a rise in the price of teenage labor will dominate the scale effect. d. both b and c.

A. If the cross-wage elasticity is negative, a rise in the price of teenage labor should reduce adult employment. Since teenage labor will also be reduced, teenagers and adults are gross complements.

If the wage paid to automobile workers goes up by 3.5% and the own-wage elasticity of demand for automobile workers is -0.5, the percentage change in the quantity of workers demanded must be a. −1.5%. b. −1.75%. c. −3%. d. −7%.

B. (- .5)(3.5)= -1.75.

If the wage paid to automobile workers goes up by 3.5% and the quantity of workers demanded goes down by 5.25%, the own-wage elasticity of demand for these workers is a. −0.67. b. −1.5. c. −1.75. d. −5.25.

B. -5.25/3.5 = -1.5

Technological change that results in a reduction in the price of capital (or equivalently, the availability of a new type of capital) is more likely to stimulate demand for a particular type of labor if a. capital costs accounts for a small share of total costs. b. the demand for the final product is elastic. c. the supply of labor is inelastic. d. all of the above.

B. A reduction in the price of capital stimulates the demand for labor only if there is a largescale effect associated with the price decrease. A more elastic product demand contributes to a large-scale effect.

The possibility that an increase in the minimum wage could create an intersectoral shift in product demand implies that the employment effects of the minimum wage are best measured a. by looking at the employment changes of individual firms. b. by looking at the employment changes of large groupings of firms from many different industries. c. by looking at only those firms that comply with the minimum wage law. d. by using the monopsony model of the labor market.

B. Because the share of total costs attributable to low-wage workers varies across firms, increases in the minimum wage affect some firms more than others, and this can lead to significant changes in the relative prices of the goods sold by these firms. These relative price changes can in turn cause changes in consumer buying patterns (intersectoral shifts in demand) and result in some firms actually seeing an increase in the demand for their product. The scale effect of this demand increase can lead to employment increases for some firms even though their costs are higher. Consequently, looking at the employment effects on individual firms may give a misleading impression of the overall employment effects of the minimum wage. For this reason, it is better to look at the employment effects on broader groupings of firms serving many different industries (e.g., the retail sector of the economy).

Refer to Figure 4-3. The firm's total expenditures on labor (the total income received by labor) equals the wage multiplied by the number of workers employed. What is the change in the firm's total expenditures on labor as W rises from $7 to $8? a. +$5 b. −$15 c. +$15 d. −$22.5

B. Expenditures on labor fall from $175 to $160, a change of −$15. If demand is elastic, expenditures on labor always fall as the wage rises.

Refer to Figure 4-3. The own-wage elasticity of labor demand associated with a wage increase from $7 to $8 would be a. -0.5. b. -0.71. c. -1.4. d. -2.

C. (-5)7/25=-1.4

As the price of teenage labor rises, adults and teens are more likely to be gross complements if a. it is easy to substitute adults for teens. b. the supply of adult labor is elastic. c. teen labor accounts for a large share of total costs. d. the demand for the product workers are producing is inelastic.

C. Adults and teenagers will be gross complements if the scale effect associated with the rise in teenage labor dominates the substitution effect. Answers a and b make for a large substitution effect, while d makes for a small-scale effect. When the cost of teenage labor accounts for a large share of total costs, a rise in teen wages will lead to a large increase in the marginal cost of production. The larger the increase in marginal cost, the larger the reduction in output and the more employment in both categories of labor will fall.

Technological progress of all kinds tends to lead over time to a. declining real wages. b. persistent unemployment. c. scale effects that enlarge and change the mix of output and employment. d. all of the above.

C. While some industries and jobs are eliminated through technological change, the efficiency and competition it promotes tends to open up new consumption and employment possibilities. The increased productivity and technological change have helped to bring about higher real wages.

A firm's demand curve for labor is thought to be more elastic in the long run than in the short run because a. the firm can not substitute capital for labor in the short run. b. consumers may not be able to easily find substitutes for the firm's product in the short run. c. the producers of capital equipment might face skilled-labor and capacity constraints in the short run. d. all of the above.

D. According to the Hicks-Marshall laws, demand is less elastic when it is difficult to substitute capital for labor (answer a), product demand is less elastic (answer b), and the supply of capital is inelastic (answer c).

In a competitive labor market where everyone is covered by the minimum wage, if employment increases when the minimum wage increases, one can conclude a. all other factors affecting employment were not held constant. b. employment would have been even higher in the absence of the minimum wage increase. c. labor and capital are gross complements. d. both a and b.

D. As long as the labor demand curve is downward sloping, an increase in the minimum wage should move the firm up the demand curve, resulting in a lower employment level. The only way the actual level of employment can increase is if the curve also shifts out at the same time the movement along the curve is taking place. In this case, the employment increase would have been even larger had the minimum wage not been imposed.

Technological change that results in the introduction of new and improved products typically results in a. labor demand becoming more elastic. b. job losses for those producing outdated products. c. increases in employment in those sectors producing the new products. d. all of the above.

D. In addition to the demand shifts, technological change makes for a more elastic labor demand because product demand will become more elastic as the number of substitution possibilities for consumers increase.

The own-wage elasticity of demand is thought to be higher at the firm level than at the industry level because a. labor's share of total cost will be higher at the industry level than at the firm level. b. the supply of capital is more inelastic at the industry level. c. all the firms acting together have monopoly power. d. the demand curve facing an individual firm under competition is highly elastic.

D. The demand curve facing an individual firm will always be more elastic than the market demand curve since from the point of view of any individual firm, consumers have many substitution possibilities. If consumers do not like the prices at one airline, they can often choose another. But from the point of view of the market as a whole, the only alternatives to air travel are the train, bus, or automobile, each considerably more time consuming for long trips.

A union bargaining for wage increases will be in a stronger position if the demand for labor is inelastic, since increases in the wage will not bring about significant reductions in employment and the total income received by members will rise. According to the Hicks-Marshall laws, which factor will be a contributor to union success? a. Elastic product demand. b. The production process is very labor intensive. c. Supply of capital is very elastic. d. Labor and capital are used in fixed proportions.

D. When labor and capital are used in fixed proportions, they can not be substituted for one another. Holding all else constant, the smaller the substitution effect of a wage change, the more inelastic the demand for labor.