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1 1 of 20 12/1/2013 1:02 PM The willingness to work a certain amount of time at a given wage rate is known as Labor supply. Labor Derived supply. Derived Labor supply is the willingness and ability to work specific amounts of time at alternative wage rates in a given time period, ceteris paribus. Difficulty: 1 Easy If we move to the right along the upward-sloping labor supply curve, we observe that the cost of labor Increases due to the increasing opportunity cost. Increases due to the decreasing opportunity cost. Decreases due to the increasing opportunity cost. Decreases due to the decreasing opportunity cost. The upward slope of an individual's labor supply curve is a reflection of the increasing opportunity cost of labor as leisure time declines.

2 2 of 20 12/1/2013 1:02 PM The substitution effect of wages states that a decreased wage rate Encourages people to consume less leisure. Will shift the labor supply curve rightward. Will lead to a movement up along the existing supply curve. Encourages people to work less hours. The substitution effect of wages occurs when an increased wage rate encourages people to work more hours (to substitute labor for leisure) and vice versa. Difficulty: 1 Easy The determinants of the market supply of labor include all of the following except Taxes. The market wage rate. Income and wealth. Prices of consumer goods. The determinants of labor supply include tastes (for leisure, income, and work), income and wealth, expectations (for income or consumption), prices of consumer goods, and taxes. If payroll taxes are increased, there will be a Leftward shift of the labor supply curve. Rightward shift of the labor supply curve. Movement up the labor supply curve to the right. Movement down the labor supply curve to the left. An increase in payroll taxes decreases the incentives to work more hours and will cause the labor supply curve to shift to the left.

3 3 of 20 12/1/2013 1:02 PM If leisure activities become more attractive, there will be a Rightward shift of the labor supply curve. Leftward shift of the labor supply curve. Movement up the labor supply curve to the right. Movement down the labor supply curve to the left. The increased diversity and attractiveness of leisure activities have changed over time and have caused the supply of labor to decrease. If there is an increase in the number of workers who want to work as accountants, there will be a Leftward shift of the labor supply curve. Rightward shift of the labor supply curve. Movement up the labor supply curve to the right. Movement down the labor supply curve to the left. More individuals preferring a specific labor market cause a rightward shift in the labor supply curve. If the wage rate increases, there will be a Leftward shift of the labor supply curve. Rightward shift of the labor supply curve. Movement up the labor supply curve to the right. Movement down the labor supply curve to the left. Wage rates are the variable on the y-axis; therefore a change in wage rates causes a movement up the labor supply curve.

4 4 of 20 12/1/2013 1:02 PM The elasticity of labor supply does not depend on The demand for labor. The prices of consumer goods. Income and wealth. Expectations for income or consumption. The determinants of elasticity of labor supply include tastes (for leisure, income, and work), income and wealth, expectations (for income or consumption), prices of consumer goods, taxes, and time. Bill hates to work. He receives a great deal of enjoyment from leisure time. Bill's elasticity of labor supply is High. Low, perhaps even negative. 1. Highly negative. Bill will have an inelastic supply of labor curve because he hates to work and loves leisure and therefore has a very high opportunity cost for each additional hour worked. If the elasticity of labor is 0.60, a 15 percent increase in the wage rate will induce a 9.0 percent decrease in the quantity of labor supplied. 9.0 percent increase in the quantity of labor supplied. 4.0 percent decrease in the quantity of labor supplied. 4.0 percent increase in the quantity of labor supplied. Elasticity of labor supply is the percentage change in the quantity of labor supplied divided by the percentage change in the wage rate. Therefore, the percentage change in the quantity supplied will be equal to the elasticity of labor (0.60) times the percentage change in the wage rate (15), which is 9.0 percent.

5 5 of 20 12/1/2013 1:02 PM If Sara's elasticity of labor supply is 1.5 and she increases her supply of labor by 5 percent, then the wage rate must have Increased by 3.3 percent. Increased by 3.0 percent. Increased by 7.5 percent. Decreased by 7.5 percent. Elasticity of labor supply is the percentage change in the quantity of labor supplied divided by the percentage change in the wage rate. Therefore, the percentage change in the quantity supplied will be equal to the percentage change in the quantity supplied (5) divided by the elasticity (1.5), which is 3.3 percent.

6 6 of 20 12/1/2013 1:02 PM In Figure 30.1, the movement from point G to point F along the labor supply curve S 1 is a result of The income effect of higher wages. The substitution effect of a higher wage rate. Increased job satisfaction. A lower wage rate. A movement down along the labor supply curve is caused by a wage decrease. Difficulty: 3 Hard

7 7 of 20 12/1/2013 1:02 PM A firm's demand for labor is referred to as a derived demand because It is derived from the MPP of labor. It is derived from the demand for the product that the labor is producing. The quantity of goods and services labor can purchase is derived from the wages labor receives from the firm. It is derived from the supply of labor. The demand for labor and other factors of production depends on the demand for final goods and services produced by these factors. Students who major in computer science are paid a lot more when they graduate than those who major in philosophy because The derived demand for computer science majors is less than the derived demand for philosophy majors. The marginal revenue product for computer science majors is less than the marginal revenue product for philosophy majors. The search for the meaning of life is a growth industry. Information technology is a growth industry. The demand for labor and other factors of production depends on the demand for final goods and services produced by these factors. Therefore, if the demand for the final goods and services increases, the demand for labor will also increase. Difficulty: 3 Hard

8 8 of 20 12/1/2013 1:02 PM If a chair can be sold for $20 and it takes a worker two hours to make a chair, the marginal revenue product of this worker is $5 per hour. $10 per hour. $20 per hour. $2 per hour. Marginal physical product (MPP) is equal to the change in total output associated with one additional unit of input. Therefore if one output unit is produced in two hours, the MPP is MRP is equal to price ($20) times MPP (0.5), so the MRP is $10. Because of the law of diminishing returns, as additional workers are hired, total output Rises at a constant rate at all output levels. Rises at a diminishing rate initially and eventually falls. Falls at a diminishing rate at all output levels. Falls at an increasing rate at all output levels. As long as marginal product is positive, total output will increase and workers may get hired. However, the rate of increase will fall once diminishing marginal returns set in. As marginal physical product diminishes, marginal revenue product Also diminishes. Is not affected. Rises at a diminishing rate and eventually falls. Rises. As the marginal output from each added worker declines, the marginal revenue product will decline because MRP is equal to MPP times price.

9 9 of 20 12/1/2013 1:02 PM If the MPP of an additional unit of labor is 4 units per hour, product price is constant at $5 per unit, and the wage rate is $19 per hour, then The additional unit of labor should be employed. The additional unit of labor should not be employed because it costs more than it is worth. The employer should lower wages and accept less employment of labor. Product price must be reduced if profits are to be made. MRP is equal to MPP (4) times price (5), which is $20. Because the MRP is greater than the wage rate of $19, the firm should hire the additional unit of labor. Difficulty: 3 Hard If the MPP of an additional unit of labor is 3 units per hour, product price is constant at $8 per unit, and the wage rate is $26 per hour, then The additional unit of labor should be employed. The additional unit of labor should not be employed because it costs more than it is worth. The employer should lower wages and accept less employment of labor. Product price must be reduced if profits are to be made. MRP is equal to MPP (3) times price (8), which is $24. Because the MRP is less than the wage rate of $26, the firm should not hire the additional unit of labor because it will cost more than the value the worker adds. Difficulty: 3 Hard

10 10 of 20 12/1/2013 1:02 PM Assume that the product price is $4 per unit and that the hourly wage for workers is $12. Neither price nor wage changes with output. In Table 30.1, the marginal revenue product of the second worker hired is $4 per hour. $6 per hour. $24 per hour. $40 per hour. The marginal revenue product (MRP) is the change in total revenue associated with one additional unit of input. Therefore the second worker adds $24 ($40 - $16). An alternative way to calculate MRP is the MPP times the price, in this case $4 6 = $24.

11 11 of 20 12/1/2013 1:02 PM Assume that the product price is $4 per unit and that the hourly wage for workers is $12. Neither price nor wage changes with output. In Table 30.1, the contribution to total revenue of the fourth worker hired is $76 per hour. $16 per hour. $4 per hour. $12 per hour. The marginal revenue product (MRP) is the change in total revenue associated with one additional unit of input. Therefore the fourth worker adds $16 ($76 - $60). An alternative way to calculate MRP is the MPP times the price, in this case $4 4 = $16. If the number of employers for a particular type of labor increases, which of the following shifts should occur in the labor market for the particular type of labor? Demand for labor should shift to the left. Supply of labor should shift to the left. Demand for labor should shift to the right. Supply of labor should shift to the right. As the number of employers increases, the demand for labor will shift to the right because there will be a greater need for workers.

12 12 of 20 12/1/2013 1:02 PM All of the following are true at the equilibrium wage in a competitive market except MRP equals the wage rate. The ratio of the MPP to the factor's price is the same for all factors. The market demand curve for labor intersects the market supply curve of labor. MRP is less than MPP. MRP is less than MPP because MRP is the product of MPP and price. When people are standing in line for jobs and there are more applicants than jobs, then the labor market is characterized by a Shortage of jobs from the point of view of the buyer in the labor market. Surplus of jobs from the point of view of the seller in the labor market. Surplus of labor. Shortage of labor. When the quantity supplied exceeds the quantity demanded, a surplus will result, which is also known as a surplus of supply, in this case labor. Difficulty: 3 Hard For a minimum wage to have any impact on a labor market, it must be set at a level Higher than the equilibrium wage. Higher than MPP. Higher than MRP. Consistent with economic growth. If a price floor, a minimum established price, is below the equilibrium, the market will reach equilibrium and there will be no pressure for prices to decrease beyond that point.

13 13 of 20 12/1/2013 1:02 PM When the minimum wage is raised in a competitive market, ceteris paribus, All workers are better off. All workers are worse off. Some workers are better off and some are worse off. Workers are not affected by a minimum wage increase, only by decreases. If the minimum wage is above the equilibrium wage, then a surplus of workers can result. The quantity demanded at that wage is higher than the quantity supplied of labor, and the result is that some workers are unable to find a job. Workers who are able to get a job at the minimum wage benefit. Ceteris paribus, all of the following result when the minimum wage is raised in a competitive market, except Some workers lose their jobs. There are fewer workers available to work. Workers with a marginal revenue product below the minimum wage are worse off. There are fewer jobs available. If the minimum wage exceeds the equilibrium wage, a labor surplus will result: more workers will be willing to work at that wage rate than employers will be willing to hire. Some workers will end up with higher wages, but others will end up unemployed. Democrats argue that labor demand is, so jobs will be lost when the minimum wage is raised. inelastic; few inelastic; many elastic; few elastic; many If employers are not very responsive to changes in wages, the number of jobs lost because of a hike in the minimum wage will be low.

14 14 of 20 12/1/2013 1:02 PM Cost efficiency refers to the Amount of output associated with an additional dollar spent on input. Effectiveness of labor in reducing production costs. MPP of labor divided by the product price. Ability to produce at a level of output where the wage rate is equal to or less than the MRP. Cost efficiency is the amount of output associated with an additional dollar spent on input: the MPP of an input divided by its price (cost). Difficulty: 1 Easy Learning Objective: How wage floors alter labor market outcomes. The cost efficiency of labor is equal to the Marginal cost of output. MPP of labor times the wage rate. MPP of labor divided by the wage rate. MRP of labor divided by the unit price of labor. The ratio of marginal product to cost expresses the cost efficiency of an input. Difficulty: 1 Easy Learning Objective: How wage floors alter labor market outcomes. If the cost efficiency of labor equals 2, then Labor costs 100 percent more than the revenue it generates. The wage rate is 100 percent more than the product price. Each extra dollar spent on wages returns 2 units of additional output. The product price is 200 percent of the wage rate. The ratio of marginal product to cost expresses the cost efficiency of an input. Therefore a cost efficiency of labor equal to 2 means for $1, a firm can get 2 units of output. Learning Objective: How wage floors alter labor market outcomes.

15 15 of 20 12/1/2013 1:02 PM The efficiency decision involves choosing the input combination or process that Produces the greatest output. Results in the lowest output per dollar of input. Results in the least cost for a given output. Has the lowest ratio of MPP to input. A producer wants to produce a given rate of output for the least cost. Choosing the least expensive production process is the efficiency decision. Learning Objective: How wage floors alter labor market outcomes. Assume that the product price is $4 per unit and that the hourly wage for workers is $12. Neither price nor wage changes with output. In Table 30.3, the marginal revenue product of the second worker hired is $4 per hour. $6 per hour. $24 per hour. $40 per hour. The marginal revenue product (MRP) is the change in total revenue associated with one additional unit of input. Therefore the second worker adds $24 ($40 - $16). An alternative way to calculate MRP is the MPP times the price, in this case $4 6 = $24. Learning Objective: How wage floors alter labor market outcomes.

16 16 of 20 12/1/2013 1:02 PM Assume that the product price is $4 per unit and that the hourly wage for workers is $12. Neither price nor wage changes with output. In Table 30.3, the contribution to total revenue of the fourth worker hired is $76 per hour. $16 per hour. $4 per hour. $12 per hour. The marginal revenue product (MRP) is the change in total revenue associated with one additional unit of input. Therefore the fourth worker adds $16 ($76 - $60). An alternative way to calculate MRP is the MPP times the price, in this case $4 4 = $16. Learning Objective: How wage floors alter labor market outcomes.

17 17 of 20 12/1/2013 1:02 PM Table 30.4 shows how many hairstyling appointments a hair salon can schedule per week based on the number of stylists. In the spaces provided, compute the marginal physical product (MPP) of the hairstylists, total revenue, and the marginal revenue product of the stylists, assuming that a hairstylist charges $60 per appointment. In Table 30.4 suppose a hairstylist is paid $700 per week. How many hairstylists should a profit-maximizing salon hire? The firm should hire two workers because the second worker is the one for whom MRP ($1,200) is greater than the hourly wage ($700). If the firm hired the third worker for $700, he or she would add only $600 in value, which would take away from the firm's profit. Difficulty: 3 Hard Learning Objective: How wage floors alter labor market outcomes.

18 18 of 20 12/1/2013 1:02 PM Table 30.4 shows how many hairstyling appointments a hair salon can schedule per week based on the number of stylists. In the spaces provided, compute the marginal physical product (MPP) of the hairstylists, total revenue, and the marginal revenue product of the stylists, assuming that a hairstylist charges $60 per appointment. In Table 30.4, as more stylists are hired, There are diminishing returns. There are economies of scale. There are diseconomies of scale. MRP increases. The law of diminishing returns says that the marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs. The MPP declines with each worker hired. Difficulty: 3 Hard Learning Objective: How wage floors alter labor market outcomes.

19 19 of 20 12/1/2013 1:02 PM Assume that in Table 30.5 the cost of labor is $4 per unit and the cost of capital is $6 per unit. In Table 30.5, what is the cost efficiency of the second unit of labor? 64 units per $1 of cost. 16 units per $1 of cost. 26 units per $1 of cost. 4 units per $1 of cost. Cost efficiency is the amount of output associated with an additional dollar spent on input the MPP of an input divided by its price (cost). So the cost efficiency of the second unit of labor is equal to 16 divided by $4, which is 4 units for $1. Learning Objective: How wage floors alter labor market outcomes. The opportunity wage is often a better measure of executive pay than MPP because executives do not have an MPP. MRP because of the difficulty in quantifying executive output. Derived demand because the elasticity of supply for an individual is greater than 1.0. Opportunity costs of executive leisure. One of the difficulties in determining the appropriate level of CEO pay is the elusiveness of marginal revenue product. It's easy to measure the MRP of a strawberry picker or even a salesclerk. But a corporate CEO's contributions are less well defined. Therefore, the opportunity wage is often a better measure of executive pay.

20 20 of 20 12/1/2013 1:02 PM One In the News article is titled "Challenging Work and Corporate Responsibility Will Lure MBA Grads." In the headline, which of the following determinants of labor supply is most explicitly mentioned? Tastes. Taxes. Prices of consumer goods. Expectations regarding prices of consumer goods. The quantity of labor supplied depends on the intrinsic satisfaction of working (tastes) and the wages paid.

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