Labor Econ Exam 1

assumptions of marginal productivity theory of labor demand

1) employers maximize products 2) production function - assume L and K are homogenous 3) hourly wage is the only cost of labor 4) firm's labor market and the firm's product market are both competitive - price taker and wage taker(K fixed, L varies) 5) short run situation

To be counted as one of the official unemployed, one needs to be: a. 16 or older and not seeking employment. b. Under 16 and a full-time student. c. 16 or older and incarcerated in a corrections facility. d. 16 or older and actively seeking employment.

a. 16 or older and actively seeking employment

Some economists are against minimum wage laws because: a. Minimum wage laws may block transactions that parties might be willing to make at a lower wage. b. Minimum wage laws will inevitably result in excess demand for labor at the newly-established minimum wage. c. Economists argue that "money cannot buy happiness, so paying these people more will not necessarily increase their utility." d. Economists are notorious for having disregard for the poor.

a. Minimum wage laws may block transactions that parties might be willing to make at a lower wage.

rWhat is the most all-pervasive assumption underlying economic theory? a. Scarcity. b. That individuals' tastes and preferences are unchanging. c. That workers are necessarily exploited in a capitalist system. d. Equilibrium.

a. Scarcity.

When the price of capital increases, a firm will_____ a. employ more, less, or the same amount of labor. b. employ more labor because labor has become relatively cheaper. c. employ the same amount of labor. d. employ less labor due to the increase in costs.

a. employ more, less, or the same amount of labor.

Diminishing marginal returns occur because_____ a. hiring more employees means that each has less capital with which to work. b. hiring more employees means that they will subdivide tasks and therefore become more efficient. c. it is more difficult to manage a firm as the size of the workforce and capital stock both grow. d. the best employees will always be hired first.

a. hiring more employees means that each has less capital with which to work.

The firm's labor demand curve in the short run_____ a. is the downward sloping segment of the marginal product of labor schedule. b. is upward sloping. c. is horizontal. d. is the downward sloping segment of the marginal revenue schedule.

a. is the downward sloping segment of the marginal product of labor schedule.

In the long run a profit-maximizing firm will select capital and labor so that_____ a. the wage divided by the marginal product of labor equals the rental cost of a unit of capital divided by the marginal product of capital. b. labor equals capital. c. the wage equals the rental cost of a unit of capital. d. the marginal product of labor equals the marginal product of capital.

a. the wage divided by the marginal product of labor equals the rental cost of a unit of capital divided by the marginal product of capital.

If two inputs are complements in production_____ a. then the inputs are gross complements. b. then the inputs are gross substitutes. c. then the inputs can not be used at the same time. d. then the inputs can be either gross complements or gross substitutes.

a. then the inputs are gross complements.

wage taker

accept the going wage to pay workers

marginal revenue of labor (MRl)

additional revenue you get from hiring one more worker

labor demand

all about what the firm is doing (how many workers? wages? fringe benefits? etc)

K

amount of capital

Which of the following persons is not considered a part of the labor force?_____ a. A 19-year-old part-time dishwasher. b. A 59-year-old former nuclear physicist, who, after being dismissed from his prior job, got so fed up with not being able to find a job worthy of him that he quit looking for work three years ago. c. A recently-divorced 30-year-old housewife who is actively seeking her first job. d. A 45-year-old secretary who got discharged Friday morning and went looking for new work that afternoon.

b. A 59-year-old former nuclear physicist, who, after being dismissed from his prior job, got so fed up with not being able to find a job worthy of him that he quit looking for work three years ago.

When a formal set of rules and procedures guides and constrains the employment relationship within a firm, what type of labor market is said to exist? a. A national labor market. b. An internal labor market. c. A nonpecuniary labor market. d. An external labor market.

b. An internal labor market.

An employer who is a monopolist in the product market will probably_____ a. hire more employees than a perfect competitor would. b. hire fewer employees than a perfect competitor would. c. hire fewer workers at a lower wage than a perfect competitor would. d. hire the same number of employees as a perfect competitor, due to competitiveness in the labor market.

b. hire fewer employees than a perfect competitor would.

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

b. the additional output produced by the last employee hired.

When deciding the salary of a sports star,_____ a. the team must consider how much money the sports star should earn. b. the team must consider how much the sports star will cause revenues to increase. c. the team estimates the sports star's marginal product; because this is a guess, sports stars are generally underpaid. d. the team will hire the sports star if doing so will increase the team's revenues.

b. the team must consider how much the sports star will cause revenues to increase.

If an increase in the minimum wage leads to higher aggregate earnings by the workers affected, then the own-wage elasticity of demand is_____ a. more information is needed. b. uncertain. c. inelastic. d. of unit elasticity. e. elastic.

c. inelastic.

If the firm hires to a point where the marginal expense of labor is greater than the marginal revenue product of labor, then_____ a. profits are maximized. b. total cost must be greater than total revenue. c. profits could be increased by reducing employment. d. profits could be increased by increasing employment.

c. profits could be increased by reducing employment.

C

cost of capital

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

d. changes from elastic to inelastic.

The own-wage elasticity of demand measures_____ a. percentage change in wages divided by percentage change in quantity of labor demanded. b. change in wages divided by change in quantity of labor demanded. c. change in quantity of labor demanded divided by change in wages. d. percentage change in quantity of labor demanded divided by percentage change in wages.

d. percentage change in quantity of labor demanded divided by percentage change in wages.

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 can not be used at the same time. d. then the inputs are gross substitutes.

d. then the inputs are gross substitutes.

is there something that could make the demand for labor increase despite the wage?

demand for product increases, demand for labor increases as a result (scale effect)

MRl>MCl

expect firm to continue hiring (E increases)

price taker

have to consider price in the market to determine what can sell the product for; accept price in the market place

MRl<MCl

losing money, profits go down, E decreases

MRl=MCl

point of profit maximization

Profit for the firm (π) =

revenues - costs

marginal cost of labor (MCl)

the cost of hiring one more worker

why is the demand for labor downward sloping?

the scale effect and substitution effect

wage bill =

wage x # of workers (W x E) - how much you're going to be paying your workers

substitutes in production

when labor and capital can be substituted for each other

law of diminishing marginal returns

when you have a fixed factor of production (land, machines, etc) when you add more and more of the variable factor, those marginal returns (or productivity) will start to diminish (it will increase at a decreasing rate)

π =

(P x Q) - (W x L) - (C x K)

nominal wage

- W - the cost of a unit of labor

real wage

- W/P - the wage adjusted for inflation and or the price of the product

elasticity

- a measure of the responsiveness of one variable to another variable - ex: amount of rain ponchos sold at Disney increases as the amount of rain increases (very responsive)

marginal productivity theory of labor demand

- central theory of how economists have approached labor demand - can be used to examine any factor of production

own wage elasticity of labor demand

- how employment of a type of labor changes in response to changes in its wage - nii = %changeEi / %changeWi or nii = ((E2-E1)/(E2+E1)) / ((W2-W1)/(W2+W1))

Analyze the impact of the following changes on wages and employment in a given occupation: decrease in the danger of the occupation

- increase attractiveness of occupation - shifts supply curve to the right - causes employment to rise and wages to fall

inelastic

- less responsive - wage goes up a lot, small decrease in employment - better situation for workers

MCl

- marginal cost of labor - the additional costs a firm incurs when they add one more worker

MR

- marginal revenue - the additional revenue a for, receives when they sell one more unit of their product

MRP

- marginal revenue product - same as MRl - the additional revenue a firm receives when that firm adds one more worker

product market

- market for what people are buying and selling - P on y axis, Q on X axis - looking for S and D for product

labor marketing

- marketing for labor - W on y axis, E on X axis - looking for S and D for workers and what they'll get paid

Analyze the impact of the following changes on wages and employment in a given occupation: Increased wages in alternative occupations

- more attractive than they were before - causes the supply curve to shift to the left - causes employment in this market to fall and wages to rise

elastic

- more responsive - wage up a little, big decrease in employment

gross complements

- scale effect > substitution effect - labor use decreases - sign of cross elasticity is negative

Analyze the impact of the following changes on wages and employment in a given occupation: increase in product demand

- shift the demand for labor curve to the right - causes both wages and employment to increase

gross substitues

- substitution effect > scale effect - labor use increases - sign of cross elasticity is positive

marginal product of labor (MPl)

- the additional output that is produced when you add one more unit of labor - calculated by subtracting current output from previous output

scale effect

- the more you produce the more workers you need - looking at scale of output (producing more or less) - all ab how much producing

substitution effect

- when wages increase, you want to change the mix of how you produce the product - mix can be changed from more labor intensive to more capital intensive

real wage profit maximization point

MPl = W/P

Assume that the war in Iraq increased the desired size of the US military, and assume that potential recruits were reduced by the prospect of facing dangerous, unpleasant wartime conditions. First, analyze how the war affected the supply curve and the demand curve for military personnel. Second, use your analysis to predict how the war affected the wages and the employment level of military personnel.

Demand for military personnel increases while supply decreases. This would lead to an increase in wages and an ambiguous change in employment.

what happens to the quantity of labor demanded if the wage rate goes up (If W increases --> L?)?

If W Increases.... - costs increase - prices increase - sell less - produce less - labor decreases

nominal wage profit maximization point

MRPl=W

Assume that wages for keyboarders (data entry clerks) are lower in India than in the United States. Does this mean that keyboarding jobs in the United States will be lost to India? Explain.

Indian data entry clerks will be substituted for American ones only if the ratio of their wage to their marginal productivity is lower. Thus, it is not wage alone that affects the incentives to substitute; marginal productivity is also critical.

when is the own wage elasticity inelastic?

IniiI < 1

when is the own wage elasticity elastic?

IniiI >1

labor demand curve is the downward sloping portion of the ____ curve

MPl

revenue =

P x Q

production functions

Q=f(L,K)

Ecuador is the world's leading exporter of bananas, which are grown and harvested by a large labor force that includes many children. Assume Ecuador now outlaws the use of child labor on banana plantations. Using economic theory in its "positive" mode, analyze what would happen to employment and wages in the banana farming industry in Ecuador. Use demand and supply curves in your analysis.

The labor supply curve to banana producers would clearly shift to the left as children were removed from the labor market. This would raise the wages paid by growers and reduce employment in the sector.

cost =

W x L

Suppose that prisons historically have required inmates to perform, without pay, various cleaning and food preparation jobs within the prison. Now suppose that prisoners are offered paid work in factory jobs within the prison walls, and that the cleaning and food preparation tasks are now performed by non-prisoners hired to do them. Would you expect to see any differences in the technologies used to perform these tasks? Explain.

When inmates were required to work without pay, their wage was essentially zero—and we would expect that prisons to have adopted labor-intensive technologies (using the argument inherent in Equation 3.8c). When wages rise, the cost of expanding output using labor becomes greater, and we expect prisons to adopt the use of more capital in the production process.