ECON 315 EXAM 1

Equity vs. Efficiency

The fair distribution of economic benefits vs. the ratio of the output to the input of any system (every one gets a fair amount of pizza vs. the biggest people who need the most food get the most)

Earnings + benefits =

Total compensation

total wage bill

Total labor costs incurred by the firm TWB = W x L

A worker's total compensation consists of a) earnings plus in-kind benefits plus deferred benefits b) wages c) earnings d)earnings plus in-kind benefits

a) earnings plus in-kind benefits plus deferred benefits

The declining marginal product of labor a) is needed if competitive firms are to stop hiring workers at some point. b) implies workers get more productive as more of them are hired. c) mainly exists because workers get tired after many hours of work. d) allows firms to make the most profit.

a) is needed if competitive firms are to stop hiring workers at some point.

The marginal product of labor tells us a) the additional output produced by the last employee hired. b) the average output produced by each employee. c) which employee is the most productive. d) how much money the firm can make from hiring each employee.

a) the additional output produced by the last employee hired.

scale effect

as the wage rate increases firms face higher costs and reduce both output and employment

substitution effect

as the wage rate increases firs substitute workers for capital

If the quantity of steel workers demanded falls from 30,000 to 20,000 when the equilibrium wage increases from $9.00 per hour to $11.00 per hour, then the own-wage elasticity of demand (using the mid-point method) for these workers is a) -0.4 b) -2.0 c) -5.0 d) -0.5 e) -0.2

b) -2.0

If the own-wage elasticity of demand (using the midpoint method) for professors is -0.5, then an increase in the wage of professors from $45,000 to $55,000 will cause the quantity demanded to fall by a) 2% b) 10% c) 5% d) 20%

b) 10%

If the salaries of accountants increase and other conditions remain the same, then a) the labor demand curve for accountants will shift to the right b) a firm will move to the left along its labor demand curve for accountants c) a firm will move to the right along its labor demand curve for accountants d) the labor demand curve for accountants will shift to the left

b) a firm will move to the left along its labor demand curve for accountants

The short-run own-wage labor demand elasticity a) includes both scale and substitution effects. b) includes only part of the scale effect. c) includes only part of the substitution effect. d) includes all the scale effect.

b) includes only part of the scale effect.

If more people enter the labor market for architects, then a) both the wage rate and the employment level will increase b) the wage rate will decrease and the employment level will increase. c) the wage rate will increase and the employment level will decrease d) both the wage rate and the employment level will decrease

b) the wage rate will decrease and the employment level will increase.

Voluntary transactions occur when...

both parties gain

In the short run, a) employment levels cannot change. b) wage rates and product prices cannot change. c) a firm cannot add on to an assembly line or introduce new machines to the production process. d) a firm cannot hire new workers.

c) a firm cannot add on to an assembly line or introduce new machines to the production process.

Moving from the upper to the lower portion of a straight labor demand curve, the elasticity a) changes from inelastic to elastic. b) could change from inelastic to elastic, or from elastic to inelastic. c) changes from elastic to inelastic. d) stays the same.

c) changes from elastic to inelastic.

Which of the following is not an assumption required for a constant marginal price of labor? a) zero mobility cost b) large numbers c) zero worker indifference d) zero search frictions

c) zero worker indifference

The labor market does NOT a) coordinate employment decisions. b) respond to price signals c) allocate workers to jobs d) ensure that all workers are hired

d) ensure that all workers are hired

Other things equal, the own-wage elasticity of demand for a category of labor is higher when a) the price elasticity of demand for the product being produced is low. b) the supply of other factors of production is highly inelastic. c) the cost of employing the category of labor is a small share of the total costs of production. d) other factors of production can be easily substituted for the category of labor.

d) other factors of production can be easily substituted for the category of labor.

Economic rent is a) the income a worker receives from his or her labor. b) a worker's wage rate. c) the value of a worker's labor services. d) the amount by which a worker's wage exceeds his or her reservation wage.

d) the amount by which a worker's wage exceeds his or her reservation wage.

For two substitutes in production, if the substitution effect dominates, a) then the inputs are gross complements. b) then the inputs could be either gross complements or gross substitutes. c) then the inputs cannot be used at the same time. d) then the inputs are gross substitutes.

d) then the inputs are gross substitutes.

demand for labor is...

derived ( the demand for labor is derived from the demand for the product the labor produces)

Labor Market Flows

employed > unemployed (fired) > employed (hired) > leave labor force (retired) > new people join

Efficiency gains hurt ____?

equity

increased demand for truck drivers is a result of increased demand for transporting goods

example of derived demand

substitution effect (price of capital decreases)

firms will hire less workers and use more capital as capital is relatively cheeper than labor

scale effect (price of capital decreases)

firms will increase output and employment as they face lower costs of production, also they buy more capital

the labor supply curve of a perfectly competitive firm is

flat because firms pay a market wage for labor (firms are wage takers)

Types of unemployment

frictional, structural, cyclical

when wages go up, economic rent...

goes up (wage changes are shifts along demand curve)

Profit Maximizing Hiring Rule Scenarios

income from additional unit > cost => hire income from additional unit < cost => reduce use of input income = cost => no changes needed (pareto efficient)

how do unions decrease elasticity of demand

increase wages decrease quantity of labor demanded

spillover effect

it is possible for min wage in one sector will affect another sector (might reduce wages in other sectors)

if government subsidizes wages...

labor demand increases (shift right)

labor force participation rate

labor force/working age population

If wages fall in the long run... (substitution effect)

labor is relatively cheaper than capital, to balance equimarginal equation firms use more labor and less capital

tranaction barriers

laws in place to limit work from not getting to equilibrium

economic rent

money earned above reservation wage

creative destruction

new technology that replaces old tech tends to shift labor demand left

What happens to the equilibrium wage when the market moves right?

no wage change, demand increases for firm

Unemployment rate formula

number of unemployed/labor force

public goods

often have free-riders who do not pay for benefits

Mandatory Transactions occur when...

one or more parties lose

flaws with U3 unemployment

only accounts people not employed and in the labor force, not discouraged and underemployed workers

Unemployment occurs when

people are willing and are able to work, but cannot find jobs

midpoint formula

percent change in quantity=Q2−Q1(Q2+Q1)÷2×100

price distortions

prices can be distorted by taxes, subsidies or laws

Degrees of elasticity

responsive (IEdI > 1) unit (IEdI = 1) unresponsive (IEdI < 1)

short run production function

shows the output produced with a given amount of employment when capital and technology are fixed

normative statement

statement which describes how the world should be. based on underlying value, opinion or judgement

The drug sniffing dogs are an example of what type of unemployment?

structurally unemployed, skills no longer required

marginal product of labor

the change in output from hiring one additional unit of labor

Marginal Revenue Product

the change in total revenue associated with one additional unit of input

If wages fall in the long run... (scale effect)

the cost of production falls, increases profit maximizing output, hire more workers to produce at higher output

nominal wage

the dollar amount of the wage paid

marginal wage cost

the extra cost of hiring an additional worker

supply elasticity of other inputs

the greater the elasticity of supply of other inputs for labor, the greater the elasticity of labor demand

substitutability of other inputs

the greater the substitutability of other inputs for labor, the greater the elasticity of labor demand

elasticity of product demanded

the higher product elasticity is, the higher labor demand elasticity will be

ratio of labor costs to total cost

the larger the scale of labor costs, the greater the elasticity of labor demand

reservation wage

the lowest wage a worker would accept for a given job

labor force

the total number of workers, including both the employed and the unemployed

Externalities

the transaction harms or benefits of a third party that wasn't taken into account

real wage

the wage measured in dollars of constant purchasing power; the wage measured in terms of the quantity of goods and services it will buy

labor supply

the willingness and ability to work specific amounts of time at alternative wage rates in a given time period

Frictional unemployment

unemployment that occurs when people take time to find a job

Structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available

Cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

price distortion

when info signals are weakened when prices are not set by the market but are set by individual companies, the government though subsidies, taxes, legislation, monopolies

Pareto Efficiency

when transactions make no parties worse off

ignorance

workers are not always aware of the job characteristics before begining them

when firms pay under the equilibrium wage

workers want less jobs as firms are underpaying for labor, firms have trouble keeping workers and have to raise wage to attract workers

when firms pay over the equilibrium wage

workers want more jobs as firms are paying more than necessary for labor

Factor market (resource market)

A market which factors of production are bought and sold

wages

An amount of money paid to an employee at a specified rate per hour worked

Labor Demand Shifters

(1) Price of the good that the firm is producing, (2) technology of the firm, (3) Relative prices of labor and capital

Real wage rate formula

(nominal wage rate/CPI) x 100

T/F) Wage = Earnings = Compensation = Income

*FALSE*

T/F) In competitive markets (long run) only MPk x P = r

*FALSE* MPl x P = w must also be true

T/F) in elastic markets the TWB goes down when wages increase

*FALSE* TWB goes up

T/F) TPsr=f(L,K)

*FALSE* capital is fixed in the short run

T/F) substitution effect is only in the short run.

*FALSE* only in the LR

T/F) 58% of income comes from factor markets

*TRUE*

T/F) Ed = %change Qd Labor/%change w

*TRUE*

T/F) MPL=%change TP/%change L

*TRUE*

T/F) TPlr=f(L,K)

*TRUE*

T/F) TWB is unaffected by wages in unit elastic markets

*TRUE*

T/F) in inelastic markets the TWB goes up when wages increase

*TRUE*

T/F) scale effect is in the short and long run.

*TRUE*

T/F) MRP=MR*MP

*TRUE* eventually translates to, change TR/ change L

T/F) if Ejk is positive inputs are gross substitutes

*TRUE* if negative, gross compliments

T/F) Unions get biggest wage for workers in inelastic markets

*TRUE* unions want to lower the elasticity of demand

Requirements of Pareto improving

1) all parties gain 2) some gain, but no one loses 3) some gain and some lose but the gainers fully compensate the losers

Shifters of Labor Supply

1) changes in population 2) wages in other industries 3) non-wage aspects (promotion opportunity)

determinants of Own-wage price elasticity

1) elasticity of product demanded 2) ratio of labor costs to total cost 3) substitutability of other inputs 4) supply elasticity of other inputs

why don't firms want to pay reservation wages

1) hard to gather info 2) employees could learn from each other 3) resentment 4) costly to firm workers do not make economic rent

5 market failures

1) ignorance 2) transaction barriers 3) externalities 4) price distortions 5) public goods

Arguments for minimum wage

1) increased economic activity 2) reduce poverty (higher wage) 3) reduce govt spending 4) reduce income inequality

arguments against minimum wage

1) reduce output 2) increase poverty (more unemployed) 3) increase unemployment 4) won't change real wages 5)price increases

assumptions of positive analysis

1) scarcity 2) rationality

long run profit maximizing condition

MPl/w = MPk/r

Profit Maximizing Hiring Rule

MRP=MWC

Own-Wage Elasticity of Demand

Refers to the responsiveness (sensitivity) of employment to a change in the wage rate

cross-wage elasticity of demand

Refers to the responsiveness of employment of one input to a change in the price (wage rate) of a different input

wage rate x hours worked =

Earnings

Cross-Wage Elasticity equation

Ejk = %ΔLj / %ΔwK

Total Compensation + Unearned income

Income

if scale effect dominates...

L and K are gross compliments

If substitution effect dominates...

L and K are gross substitutes