CHAPTER 14 MICRO QUIZ
Answer the next question on the basis of the following diagram: Refer to the diagram. The competitive wage and monopsony wage, respectively, are: A) W2 and W1 B) W1 and W4 C) W1 and W5 D) W2 and W4
A In a competitive market, the wage is determined by the intersection of market supply and market demand: Q3 workers are hired at a wage of W2. A monopsony maximizes profits by equating the marginal resource cost (MRC in the diagram) with marginal revenue product (D in the diagram), so hires Q2 workers. In order to attract Q2 workers it need only pay a wage of W1.
A firm may choose to pay its employees an annual bonus based on team output in order to: A) overcome the principal-agent problem B) increase worker turnover C) reduce the opportunity cost of shirking D) shift their labor demand curve to the left
A A team bonus may motivate team members to work harder. This better aligns the workers' interests with that of the firms, partially overcoming the principal-agent problem.
Suppose a large employer hires 80% of the labor force in a small Tennessee coal mining town. Virtually all of these workers belong to the United Mine Workers union. Economists would describe this market as: A) bilateral monopoly B) dual monopsony C) segregated oligopoly D) discriminating monopoly
A Bilateral monopoly is the name given to a market consisting of a monopolist confronting a unionized labor force.
Under what circumstances might an increase in the minimum wage increase employment in a low-wage market? A) The firm has substantial monopsony power B) The firm has substantial monopoly power C) Substitute resources are widely available D) Labor and product markets are purely competitive
A By standardizing the wage for all low-wage workers, the minimum wage may actually reduce the marginal cost of labor, thereby increasing employment.
Jalicia receives $3 for each garment she sews. This payment is a(n): A) royalty B) bonus C) commission D) piece rate
D A piece rate is payment in proportion to the amount of personal output.
Refer to the diagram. If an inclusive union were to bargain with this employer: A) the wage could not increase above $B B) employment would fall to F C) the wage would rise to $C D) employment may increase to as much as G
D In the absence of the union, the firm would hire F workers at a wage of $A. If the union negotiated wage a wage of $B, this wage would become the firm's marginal resource cost rather than the MRC curve shown in the diagram. The firm would respond by hiring G workers. (Wages above $B would cause the firm to reduce employment from G, moving up the demand curve; a lower wage would also lead to less employment, as not enough workers would be available to meet demand at the negotiated wage.)
Suppose all workers are identical, but there are fewer prospects for advancement at X than at Y. In all other aspects, the firms offer the same job characteristics. We would expect: A) starting wages at X to exceed those at Y B) starting wages at Y to exceed those at X C) wages of similarly aged workers will always be less at X than at Y D) no difference in wages at X and Y
A To compensate workers for their loss of wage advancement, Firm X would have to pay its workers a higher starting wage.
QL...TP.....TR$ 1..........5.....15 2.........9.....27 3.......12.....36 4.......14.....42 5.......15.....45 Refer to the table. Based on the information given, this firm is a: A) pure competitor B) pure monopolist C) discriminating monopolist D) oligopolist
A Total revenue is a constant multiple of total product, suggesting that price must be constant as output increases. Such "price-taking" is a characteristic of pure competition.
Which two models are most similar in their effects on labor markets? A) bilateral monopoly and exclusive unionism B) occupational licensure and exclusive unionism C) oligopoly and inclusive unionism D) monopsony and inclusive unionism
B By raising the cost of entering an occupation, licensure has the effect of restricting the supply of labor to a market, driving up the wage rate. This is similar to the exclusive unionism model.
If a firm is a price taker in the labor market: A) it is also a price taker in the product market B) marginal resource cost is equal to the wage rate C) marginal cost is equal to product price D) the firm's labor supply curve is upward sloping
B Price-taking in the labor market means that the firm can hire as many or as few workers as it desires as long as it pays the market wage. Each additional worker must be paid the market wage, which is then the firm's marginal resource cost.
PROD P$....TP....LABOR....WAGE$ 10....................10.............1...............8 .9....................19.............2..............10 .8....................27............3..............12 .7....................34............4.............14 .6....................40............5.............16 Refer to the table. The first three columns contain data on the firm's labor productivity and product demand, while the last two columns constitute the firm's labor supply schedule. If the firm maximizes profits, what will be the selling price of the product? A) $6 B) $7 C) $8 D) $9
B First, find marginal revenue product by calculating total revenue associated with each employment level and computing the amount added by each worker. For example, third worker generates $216 in revenue (27 times $8) while the fourth generates 34 times $7 = $238. The marginal revenue product of the fourth worker is then the difference, or $22. Next find marginal resource cost by computing total labor cost associated with each employment level and finding the amount added by each worker. For example, three workers cost $36 (3 times $12) and four workers cost 4 times $14 = $56. Marginal resource cost is the difference, or $20. The marginal revenue product of the fourth worker exceeds her marginal resource cost, adding $2 to profit. By similar reasoning, the fifth worker reduces profits by $22 and would not be hired. Finally, since 4 workers are hired, total product is 34 and product price is $7.
PROD P$....TP....LABOR....WAGE$ 10....................10.............1...............8 .9....................19.............2..............10 .8....................27............3..............12 .7....................34............4.............14 .6....................40............5.............16 Refer to the table. The first three columns contain data on the firm's labor productivity and product demand, while the last two columns constitute the firm's labor supply schedule. The data suggest this firm: A) sells its output in a purely competitive market B) is a monopsonist C) faces a perfectly elastic labor supply curve D) obtains its labor in a purely competitive labor market
B The data indicate the firm must raise the wage rate to attract additional workers, a characteristic of a firm with
The fundamental trade-off faced by unions is that an increase in the wage often results in: A) increased inflation B) lower employment of union labor C) reduced future bargaining power D) reductions in the demand for their employer's product or service
B The demand for labor is downward sloping, so any increase in the wage is likely to result in either loss of jobs or slower growth in employment. (Recall that a wage increase raises the firm's cost and will increase product price, causing a drop in quantity of the product demanded but not a reduction in demand.)
Which best exemplifies the principal-agent problem as it arises in the employer-employee relationship? A) Only the most educated workers are selected to receive on-the-job training B) To obtain frequent flier miles, a worker books his next business trip on United Airlines, even though Southwest Airlines would cost his employer less money C) A firm negotiates with the union to cut wages in response to falling product demand D) A worker enrolls in her firm's employee stock ownership plan as a way to boost her annual compensation
B The principal-agent problem arises in this context when the agenda of the employer (the principal) differs from that of the worker (the agent.) In this example, the firm wishes to keep costs low and the employee wishes to obtain frequent flier miles.
PROD P$....TP....LABOR....WAGE$ 10....................10.............1...............8 .9....................19.............2..............10 .8....................27............3..............12 .7....................34............4.............14 .6....................40............5.............16 .Refer to the table, in which the first two columns constitute the firm's supply of labor and the last three columns contain productivity and product demand data. This firm is: A) both a monopsonist and a monopolist B) a monopsonist selling its output in a purely competitive market C) a monopolist hiring its labor from a purely competitive market D) hiring its labor and selling its output in purely competitive markets
B The wage must increase if the firm wishes to hire additional labor, suggesting it is a monopsonist. The constant selling price of the firm's output indicates that the firm sells in a competitive market, however.
Which of the following best exemplifies the creation of human capital? A) Ford Motor Company increases its wages in an attempt to hire better quality workers B) A carpenter buys a new and improved set of tools C) A nurse attends a continuing education seminar D) A homemaker reenters the labor force following the entry of her last child into school
C An investment in human capital is an expenditure on education that improves the skills and productivity of the worker.
Differences in education lead to wage differentials arising from: A) the demand side of labor markets only B) the supply side of labor markets only C) both the demand side and supply side of labor markets D) neither the demand side nor the supply side of labor markets
C Because education is costly to obtain, workers must be compensated to obtain it—a supply side determinant. Educated workers are also likely to be more productive, which increases the demand for them relative to less-educated workers.
In which of the following situation is the resulting change in employment ambiguous? A) An inclusive union successfully negotiates an increase in the wage rate with several employers in the same industry B) An exclusive union successfully restricts the supply of labor C) An inclusive union is formed to bargain with a monopsonistic employer D) An inclusive union successfully lobbies the government to decrease the price of a complementary input
C Compared to a firm in a competitive labor market, a monopsonistic firm hires fewer workers at a lower wage. An inclusive union may increase employment at such a firm by reducing the marginal wage cost (even though the average wage cost is higher.) However, if the wage increase is very large, employment may decrease instead.
PROD P$....TP....LABOR....WAGE$ 10....................10.............1...............8 .9....................19.............2..............10 .8....................27............3..............12 .7....................34............4.............14 .6....................40............5.............16 Refer to the table, in which the first two columns constitute the firm's supply of labor and the last three columns contain productivity and product demand data. The profit maximizing wage rate for this firm is: A) $10 B) $11 C) $12 D) $13
C First, compute the marginal wage cost of each worker by calculating the increase in total wage cost at each step. The marginal wage costs for the first through fifth workers are, respectively: $10, $12, $14, $16, and $18. Next, compute marginal revenue product as price ($5) times marginal product. These values are: $25, $20, $15, $10, and $5. Note that hiring the third worker adds $15 to revenue but adds only $14 to total cost, while the fourth worker adds more to cost than to revenue: $16 compared to $10. Three workers is most profitable; the wage required to attract three workers is $12.
A firm hiring from a purely competitive labor market sells its output for $5 and pays a wage of $12. Its marginal resource cost is: A) $5 B) $7 C) $12 D) $60
C For a competitive firm, marginal resource cost is equal to the wage rate.
Because employers tend to provide more on-the-job training to more educated workers: A) more educated workers tend to retire at earlier ages B) investment in formal education is reduced C) earnings of highly educated workers rise more rapidly than those of less-educated workers D) human capital investment declines with age
C For the highly educated, the increased investment in human capital beyond formal schooling results in faster earnings and income growth over their lives.
A firm can hire 10 workers at a wage rate of $12 per hour but must pay $13 to all of its employees to attract an 11th worker. The marginal wage cost of the 11th worker is: A) $13 B) $20 C) $23 D) $143
C Initially, the firm's wage bill is 10 times $12 = $120. Hiring the 11th worker causes the firm's labor cost to rise to 11 times $13 = $143, or $23 more. Alternatively, hiring the 11th worker costs $13 plus a $1 raise given to each of the initial 10 workers, for a total of $23 extra.
Consider a single firm hiring labor from a purely competitive labor market. If the supply of labor increases in the market, the firm's labor: A) demand will increase and it will hire more workers B) demand will decrease and it will hire fewer workers C) supply will shift downward and it will hire more workers D) supply will shift upwards and it will hire fewer workers
C The firm's labor supply curve is perfectly elastic at the market wage. An increase in market labor supply will decrease the equilibrium wage, shifting the firm's labor supply curve downward. Responding to the lower wage, the firm expands its hiring, moving downward along its labor demand curve.
Use the following monopsonist's labor supply schedule to answer the next question. WORKERS:.......WAGE 5...........................$10 6..............................11 7.............................13 8.............................15 Refer to the schedule. The monopsonist's marginal resource cost of the 7th worker is: A) $13 B) $19 C) $25 D) $34
C The firm's total wage bill with 6 workers is $66 (6 times $11) and rises to $91 (7 times 13) with the addition of the 7th worker. Marginal resource cost is the difference between these two values. Alternatively, marginal resource cost is the wage paid to the 7th worker ($13) plus the $2 raise paid to each of the first six workers for a total of $25.
Which of the following would most likely attempt to raise wages by restricting the supply of labor? A) The United Mine Workers B) The American Federation of State, County, and Municipal Workers C) The International Brotherhood of Electrical Workers D) The Teamsters
C This tactic is used by exclusive, or craft, unions such as the electrical workers. The other groups are representative of the inclusive union model.
A union could increase the wages and employment of its workers by successfully lobbying government to: A) raise tariffs on goods and services complementary to those produced by the union B) raise taxes on inputs that are complementary to the union C) subsidize the production of goods and services complementary to those produced by the union D) increase the licensing requirements of those who wish to join the union
C To increase both wages and employment, the union must increase the demand for its workers' services. One way to do this is to increase the demand for the union firm's product, which it can accomplish by lowering the price of a complementary good or service.
A nonunion monopsonist pays a wage that is: A) equal to MRC but less than MRP B) equal to MRP but less than MRC C) less than MRP but greater than MRC D) less than both MRP and MRC
D A firm achieves maximum profits when hiring labor such that marginal resource cost is equal to marginal revenue product. For a nonunion monopsonist, MRP exceeds the wage.
Many economists do not support an increase in the minimum wage, arguing that such an increase would likely: A) reduce the demand for skilled labor B) create a labor shortage C) increase the size of the government's deficit D) increase unemployment of low-wage workers
D An increase in the minimum wage will push many employers up their labor demand curves, causing them to reduce employment. Others may even go out of business entirely.
For a monopsonist, marginal resource cost: A) is constant and equal to the market wage B) is less than marginal revenue product at the optimum employment level C) is the difference between marginal revenue product and the wage rate D) equals the wage rate paid to the last worker plus the wage increases paid to all other workers
D For a monopsonist, the wage must increase to attract an additional worker. Marginal resource cost measures the increase in total cost from hiring this worker.
A possible explanation for wage differentials is that the workforce is comprised of noncompeting groups, which means that: A) employers discriminate against certain groups of workers B) workers are geographically immobile C) workers are compensated for differences in job characteristics D) workers in one group do not qualify for occupations held by workers in other groups
D Workers differ by ability, education, and training so that workers in one group can not readily compete in job markets for other groups. This lack of competition can lead to differences in wages.
