Chapter 3

because of diminishing marginal productivity... the labor demand curve is

negatively sloped

if there is a minimum wage rate that is below the market wage, is there involuntary unemployment?

no, it has no effect.

firms hire labor at the point where the

nominal wage rate equals the marginal revenue product of labor

the real wage

nominal wage/price level

marginally attached workers

not looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months.

employment ratio

number of employed/entire adult population

frictional unemployment arises when

output and employment are below full-employment levels.

cyclical unemployment arises when

output and employment are below full-employment levels. It is caused by business cycle fluctuations.

the marginal product of capital is the increase in

output from one-unit increase in capital

oakum's law relates _____ to _____

output; employment

how to solve for how much of unemployment is unskilled labor?

plug the new w into labor supply and labor demand and subtract to find the difference.

how to solve for the quantity of employment?

plug w into labor demanded

how to solve for equilibrium quantity of employment?

plug w into labor supply

the income effect of a higher real wage on the quantity of labor supply is the

tendency of workers to supply less labor in response to becoming wealthier

investment in plutonium futures pays off big, netting a profit of 300 thousand. How will this affect the supply of labor?

higher wealth reduces labor supply

What shifts aggregate supply?

-shift right: increase in working age population and participation rate -shift left: increase in wealth and expected future real wage

to get full employment output according to Okun's law

1-(2(actual UR - natural UR))* output

Oakum's Law Formula

2(unemployment rate - natural unemployment) = (potential GDP - actual GDP)/potential GDP *100% OR (full employment output growth - output growth)/2

a supply shock that reduces total factor productivity directly affects which term in the production function?

A

you should lay off workers if the

MPL < real wage

Suppose oil prices fall temporarily, as oil becomes more plentiful. What impact is this likely to have on the production function, the marginal products of labor and capital, labor demand, employment, and the real wage?

More output can now be produced by the same amounts of capital and labor, since oil is more abundant and cheaper. The production function shifts upward, with the marginal products of labor and capital rising. Since the marginal product of labor is higher, so is labor demand. As a result of the shift to the right in the labor demand curve, employment rises, as does the real wage.

an increase in the number of workers hired by a firm could result from

a decrease in the real wage

according to okun's law, an increase in the unemployment rate will cause _______ in the level of employment and ______ in the level of output.

a decrease; an increase

which of the following events would lead to an increase in the marginal product of labor for every quantity of labor?

a favorable supply shock such as a fall in the price of oil

the production function

a mathematical expression relating the amount of output produced to quantities of capital and labor utilized. Y= AF(K,N) A: total factor productivity K: capital stock N: # of workers employed

an increase in real wage rate will cause

a movement along the labor demand curve

As a result of the superb economics essay that you wrote during this quarter, you won the Adam Smith prize of $100. The receipt of these funds would be an example of

a pure income effect

An invention that speeds up the Internet is an example of

a supply shock

a decrease in the number of workers hired by a firm could result from

an increase in real wage

A tremendous flood along the Mississippi River destroys thousands of factories, reducing the nation's capital stock by 5%. What happens to current employment and the real wage rate?

both employment and the real wage rate would decrease

the growth rate form of Okun's law

change Y/Y = 3 - 2 change U change Y/Y: the growth rate of output 3: the growth rate of full-employment output change U: change in the unemployment rate

the marginal product of labor...

decreases as the number of workers already employed increases.

A bird flu epidemic causes many people to flee the country, but does not affect labor demand significantly because almost all the goods produced within the country are exported. What happens to current employment and the real wage rate?

employment would decrease and the real wage would increase

a sharp increase in stock prices makes people much wealthier. If the main effect of this increased wealth is felt on labor supply, what happens to current employment and the real wage rate?

employment would decrease and the real wage would increase

how to solve for market clearing real wage rate?

equate the demand and supply of labor(w=MPN) solve for how N=w and then set what N equals to the quantity of labor supplied to get wage.

the type of unemployment for which the net economic costs are most likely to be small is

frictional unemployment

Using Oakum's law to predict output growth rate over the past year

if unemployment decreases by 2%, output must be 4% faster. So add $5 by the growth rate of full-employment output to get the output growth rate. (One percent increase in unemployment rate leads to a 2 percent decrease in output. )

one reason that firms hire labor at the point where w = MPN is

if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers.

discouraged workers

individuals who would like to work but have given up looking for a job

two main characteristics of the production function

it slopes upward from left to right, and the slope becomes flatter as the input increases

economists often treat the economy's capital stock as fixed because

it takes a long time for new investment and the scrapping of old capital to affect the overall quantity of capital

participation rate

labor force/adult population

Research on labor supply generally shows that

labor supply rises in response to a temporary increase in the real wage, but falls in response to a permanent increase in the real wage

a permanent increase in the real wage rate has a _______ income effect on labor supply than a temp increase in the real wage, so labor supply is _______ with a permanent wage increase than for a temporary wage increase.

larger; less

a decrease in real wage would result in

movement along the labor demand curve, causing an increase in the number of workers hired by the firm.

what shifts aggregate demand?

right: increase in productivity and capital stock

an adverse supply shock would

shift the production function down and decrease marginal products at every level of employment

a favorable supply shock would

shift the production function up and increase marginal products at every level of employment

If a country's working-age population declines and its wealth increases, then the labor supply curve

shifts to the left

if a country's working age population increases and its wealth increases, then the labor supply curve

shifts to the left if the effect of the change in wealth is bigger than the effect of the change in the working-age population

changes in capital stock occur ____, and changes in the amount of labor that firms employ occur______.

slowly, quickly

a person is more likely to increase labor supply in response to an increase in the real wage, the ______ is the income effect and the ______ is the substitution effect.

smaller; larger

what two factors should you equate in deciding how many workers to employ?

the MP of labor and the real wage rate

Over the past 100 years, what has happened to the avg workweek in the US manufacturing industry? Why? What are the implication for the size of the income and substitution effects?

the avg workweek in manufacturing has declined from 56 hrs to 40 hrs. This is because of the higher real wage - suggest that the income effect of a permanently higher real wage dominates the substitution effect, as workers choose to have more leisure and to work fewer hours per week.

full-employment level of employment

the equilibrium level of employment, achieved after wages and prices fully adjust

If a firm announces a reorganization plan, in which she will get a big promotion and raise in six months. How will this affect the supply of labor?

the higher future real wage reduces current labor supply.

unemployment rate/ratio

the number of unemployed/labor force

if the marginal product of capital doesn't change as the amount of capital increases, graphically...

the relationship between output and capital shows a straight line with constant upward slope.

the aggregate supply of labor

the sum of the labor supplied by everyone in the economy

substitution effect

the tendency of workers to supply more labor in response to a larger reward for working

the labor force participation rate is the percentage of the adult population that is

working or actively looking for work