Labor Eco exam 1

In the long run, a decrease in the competitive wage will be associated with which of the following?

A substitution and scale effect

Substitution effect

An effect caused by a rise in price that induces a consumer to buy more of a relatively lower-priced good and less of a higher-priced one.

An increase in non-labor income while holding the wage rate constant results in

An upward shift of the budget line while maintaining the same slope

Why is the short-run labor demand curve less elastic relative to the long-run labor demand curve?

Because firms are better able to substitute capital for labor in the long run compared to the short run.

21. If unskilled labor and capital are substitutes: A. Demand for unskilled labor increases when the price of capital increases. B. The cross-price elasticity between unskilled labor and capital is positive. C. The price of unskilled labor decreases when the price of capital increases. D. Both (A) and (B). E. Both (B) and (C).

D

If labor is supplied perfectly inelastically, then the imposition of a payroll tax will do all of the following except: A. reduce the wage rate by exactly the amount of the tax. B. leave employment levels unchanged. C. leave firm profits unchanged. D. reduce total output. E. generate tax revenue paid to the government

D

Which of the following is not an accurate summary of the equilibrium associated with a single competitive labor market? A. Total economic surplus is maximized. B. Firms receive surplus equal to the area above the wage rate and below the demand for labor. C. Workers receive surplus equal to the area below the wage rate and above the supply of labor. D. All workers are paid the same market-clearing wage. E. Total firm surplus equals total worker surplus.

E

Which of the following is not an accurate summary of the equilibrium associated with a single competitive labor market? A. Total economic surplus is maximized. B. Firms receive surplus equal to the area above the wage rate and below the demand for labor. C. Workers receive surplus equal to the area below the wage rate and above the supply of labor. D. All workers are paid the same market-clearing wage. E. Total firm surplus equals total worker surplus. ANSWER: E

E

What's the effect of a decrease in non-labor income (v) on hours of work, reservation wage and probability of entering the labor force?

Hours of work: A decrease in v is a pure income effect. The worker cannot afford the same hours of leisure and consumption as before. So he reduces leisure and increases hours of work. Reservation wage: Decreases after a decrease in v. The worker reduces his threshold wage to enter into the labor force, and tries to compensate for the non-labor income loss. Probability of entering the labor force: Following the decrease in the reservation wage, the probability to work increases since now the worker is willing to accept lower wages.

The Earned Income Tax Credit will probably ________ the labor force participation of low-wage workers and ________ the labor market hours of those with earning in the range that the tax credit is being phased out

Increase: Decrease

Supposing that immigrant labor is complementary to native labor in the production process, a more open immigration policy will likely result in all but which of the following?

Stiff competition between natives and immigrants workers will result in lower wages being paid to native workers

If the price ratio of inputs (w/r) increases, how does a perfectly competitive firm's labor demand respond?

Substitution effect: if w/r increases, labor is more expensive relative to capital. So the firm reduces Labor and substitutes it with Capital. Through the substitution effect, labor demand decreases. Scale effect: This is ambiguous. The change in the ratio may be due to an increase in w, or a decrease in r or both. So we do not know whether the total cost increased or decreased. And we cannot claim anything about what happens to the scale of production. Labor demand may or may not increase due to the scale effect here.

When the government imposes a payroll tax on workers

The effects are identical to the effects had the government imposed the tax on employers.

If the price ratio of inputs (w/r) increases, how does a perfectly competitive firm respond?

The firm demands less labor due to the substitution effect. The firm demands more capital due to the substitution effect.

The assumption that a firm operates in a competitive labor market means that

The firm faces a constant wage, regardless of how much labor it employs

How does a profit-maximizing firm that is operating in a competitive labor market respond to an increase in the hourly wage rate?

The firm will produce less output due to the scale effect

Hours worked will fall when the wage increases if:

The income effect dominates the substitution effect

At which point should a firm stop hiring workers?

When the firm's marginal revenue from hiring an additional worker equals the cost of hiring that worker

Labor demand is more elastic the greater the elasticity of substitution between labor and capital because

a firm is less willing to pay higher labor costs if it is easy for the firm to substitute capital for labor

The imposition of a minimum wage on a competitive labor market will likely

create unemployment as some people enter the labor market while some firms reduce the quantity of labor they are willing to employ due to the increased wage

Compared to the labor market outcome when there are no payroll taxes, imposing a payroll tax on labor will typically

result in firms paying a higher wage. result in workers receiving a lower wage. decrease overall employment. increase dead weight loss

Labor demand is more elastic the greater the elasticity of demand for the firm's output because

the firm would see its quantity demanded fall substantially if the firm tried to pass increased labor costs through to the consumer by increasing the price of the output good

On the portion of a worker's labor supply curve that is backward-bending,

the income effect outweighs the substitution effect