Labour Market Economics Canadian 8th Edition By Benjamin – Test Bank

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Reference 05-01:
The figures below give the production schedule and the product demand schedule for a firm, which has to decide how ma
workers to hire.
Workers
hired
Total
Physical
Product
Price of
output
0 0 $10
1 10 $10
2 18 $10
3 25 $10
4 30 $10
5 34 $10
6 37 $10
1) If the wage = $40 for the time period in question, then the number of workers hired is:
A) 5 B) 3 C) 6 D) 4 E) 2
Answer: A
2) Assume that at the wage rate of $10 per hour, a firm is hiring 100 hours of labour per week. If the
wage elasticity of demand is -1.2, how many hours of labour will the firm shed if the wage increases
by $2 per hour?
A) 20 hours per week
B) 36 hours per week
C) 5 hours per week
D) 12 hours per week
E) 24 hours per week
Answer: E
3) Consider the model for the derivation of demand for labour in a long-run context. At equilibrium,
which of the following statements is false?
A) If labour is twice as expensive per unit than capital, then the marginal product of labour is
twice as large as the marginal product of capital.
B) If the firm were to alter its input combination by hiring more or less of a factor, its profits
would fall.
C) The slope of the isoquant is equal to the slope of the isocost line.
D) At the optimal level of output, labour is cheaper than capital.
E) A profit-maximizing firm will choose the cheapest capital—labour combination that yields the
optimal output.
Answer: D
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4) The primary reason why workers in the fast-food industry are paid less is that:
A) The demand for the product that they produce is quite elastic, making the demand for labour
wage elastic.
B) It is easy to substitute capital for labour in the industry, making the demand for labour wage
elastic.
C) These workers are seldom unionized.
D) These workers collect economic rents.
E) Labour costs comprise a large share of the employer’s expenses, making the demand for labour
wage inelastic.
Answer: A
5) If the employer is a monopolist in the output market:
A) The firm’s demand curve for labour is identical to the case where the firm is a competitor in the
output market.
B) The demand for labour is less elastic than it would be if the firm operated in a competitive
input market.
C) There is monopsony in the input market.
D) The demand for labour is less elastic than it would be if the firm operated in a competitive
output market.
E) None of the above choices are correct.
Answer: D
6) The empirical evidence that exists concerning the magnitude of the wage elasticity of labour
demand indicates that it tends to be:
A) negative and inelastic.
B) negative and elastic.
C) negative and unitary elastic.
D) nositive and inelastic.
E) None of the above choices are correct.
Answer: A
7) What is the behavioural force that underlies the demand curve for labour?
A) Utility maximizing behaviour on the part of workers
B) Revenue maximizing behaviour on the part of firms
C) Profit maximizing behaviour on the part of firms
D) Market share maximizing behavior on the part of firms
E) Rate of return maximizing behavior on the part of investors
Answer: C
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8) Which of the following statements is false?
A) The quantity demanded for school teachers is equal to the quantity supplied in equilibrium.
B) The demand for school teachers is likely to be quite wage elastic.
C) The demand for school teachers is downward sloping because it is profitable for schools to hire
more teachers when wages fall.
D) The demand for school teachers is likely to rise when the government decides to cut funding to
schools.
E) The demand for school teachers is likely to fall when the government decides to cut funding to
schools.
Answer: D
9) For labour demand choices, the long run is defined as:
A) the time period over which all costs are fixed.
B) the period of time over which variable factors cannot vary.
C) the period of time over which fixed factors cannot vary.
D) the period of time over which variable factors can vary.
E) the period of time over which all inputs can vary.
Answer: E
10) For a firm that is a competitor in the output market, the demand for labour does not depend on:
A) the price of capital.
B) the marginal product of labour.
C) the market demand for the final product.
D) the structure of the labour market.
E) the price of the output.
Answer: C
11) All of the following statements regarding the marginal product of labour are true except:
A) It is zero at the maximum value of total product.
B) It initially increases with the quantity of labour employed because of specialization.
C) It is the increment to revenue obtained by hiring one more unit of a variable factor.
D) It diminishes after the inflection point on the total product curve.
E) It eventually diminishes because the capital stock is fixed.
Answer: A
12) In the area of diminishing returns in production:
A) The marginal product of labour increases at a decreasing rate.
B) The marginal product of labour decreases eventually.
C) Total output declines with each additional unit of labour input.
D) The marginal product of labour first increases, then reaches a maximum level, and then
decreases.
E) The marginal product of labour first decreases, then reaches a minimum level, and then
increases.
Answer: B
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13) In the short run, the demand for labour for a competitive firm is:
A) perfectly elastic at the market wage.
B) the marginal product of labour curve.
C) perfectly inelastic at the market wage.
D) the downward sloping portion of the value of the marginal product curve.
E) the value of the marginal product curve.
Answer: D
14) Consider a firm that seeks to minimize the cost of producing a given level of output. Which of the
following statements is true?
A) In equilibrium, the wage rate equals the slope of the isoquant.
B) In equilibrium, it will produce on the inelastic portion of its long-run labour demand curve.
C) In equilibrium, the rate of return on capital equals the slope of the isoquant.
D) In equilibrium, the rate of return on capital equals the wage rate.
E) In equilibrium, the ratio of input prices equals the marginal rate of technical substitution.
Answer: E
15) In the long run, which of the following statements is false?
A) MPL = MPK.
B) MPL / MPK = w / r.
C) VMPL / VMPK = w / r.
D) W = VMPL and r = VMPK.
E) Profits are maximized.
Answer: A
16) The scale effect of a wage change implies that:
A) The firm reduces its output in response to the wage increase.
B) In order to increase output, a firm will use more labour even if the wage increases.
C) Along with the substitution effect, the demand for labour is downward sloping.
D) The demand for labour may be upward sloping if labour is an inferior input.
E) Firms substitute toward the input that has become relatively cheaper.
Answer: A
17) The determinants of the wage elasticity of demand for labour include all of the following except:
A) the elasticity of supply of substitute inputs.
B) the availability of substitute inputs.
C) the elasticity of demand for output.
D) the ratio of labour cost to total cost.
E) All of the choices are determinants of the wage elasticity of demand
Answer: E
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18) Consider a firm that seeks to minimize the cost of producing a given level of output. How will it
respond to an increase in the wage rate?
A) It will substitute capital for labour
B) It will increase production
C) It will hire more workers
D) It will decide based on whether labour is an inferior factor of production or a normal one
E) It will not react at all
Answer: C
19) The slope of an isoquant reflects:
A) the marginal productivity of labour.
B) the marginal cost of labour.
C) the marginal productivity of capital.
D) the wage elasticity of the demand for labour.
E) the marginal rate of technical substitution between inputs.
Answer: E
20) Along an isocost curve, which of the following remains constant?
A) The quantity of labour
B) The wage elasticity of demand for labour
C) The level of production
D) The quantity of capital
E) The market prices of inputs
Answer: E
21) A perfectly competitive labour market would be characterized by:
A) wage-setting firms.
B) infinitely elastic labour demand curves.
C) the presence of labour unions.
D) the presence of monopsony power.
E) wage-taking firms.
Answer: E
22) Which of the following statements regarding a firm’s production function is true?
A) The average product of labour curve intersects the marginal product of labour curve at its
highest point.
B) The marginal product of labour curve intersects the average product of labour curve at its
lowest point.
C) The marginal product of labour curve must not intersect the average product of labour curve.
D) The average product of labour curve intersects the marginal product of labour curve at its
lowest point.
E) The marginal product of labour curve intersects the average product of labour curve at its
highest point.
Answer: E
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23) In the context of outsourcing, consider the case where domestic labour and foreign labour are almost
perfect complements. If there is an increase in the wage paid to domestic labour, then which of the
following statements is true?
A) There will be a small substitution effect toward domestic labour, but the scale effect will work
in favour of domestic labour.
B) There will be a small substitution effect and a larger scale effect away from domestic labour.
C) There will be a small substitution effect away from domestic labour, but the scale effect will
work toward domestic labour.
D) There will be a large substitution effect and a smaller scale effect away from domestic labour.
E) There will be no substitution effect but only scale effect.
Answer: B
24) In order to obtain the substitution effect of a wage change:
A) One traces the change in output as firms respond to it.
B) One traces the change of the quantity demanded of labour through a parallel shift in the isocost
line.
C) One moves either up or down the labour demand curve.
D) One needs to first know the wage elasticity of demand for labour.
E) One traces the change in the quantity demanded of labour by moving along an isoquant curve
as the prices change.
Answer: E
25) In order to obtain the scale effect of a wage change:
A) One moves either up or down the labour demand curve.
B) One needs to first know the wage elasticity of demand for labour.
C) One traces the change of the quantity demanded of labour through a parallel shift in the isocost
line.
D) One traces the change in output as firms respond to it.
E) One traces the change in the quantity demanded of labour by moving along an isoquant curve
as the prices change.
Answer: C
26) It is not necessarily the case that Canadian workers are doomed to hold “bad” jobs as all of the
“good” jobs are outsourced to countries with cheap labour. Which of the following related
statements is false?
A) Canadian employers always have an incentive to seek out the lowest-cost labour and send the
work there.
B) Outsourcing typically lowers the costs of production, which can lower the prices that Canadian
consumers pay for certain goods, thereby permitting an increase in spending on other goods.
C) One has to consider the unit labour costs in the two countries.
D) While Canadian labour is often expensive compared to foreign labour, it is often much more
productive.
E) It is not clear that Canadian and foreign labour are substitutes in production.
Answer: A
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27) Regarding an increase in wage, which of the following is INCORRECT?
A) In a perfectly competitive industry, the wage increases shift up the firm’s marginal and average
cost curves.
B) The wage increases will reduce output, therefore total costs will be reduced as well.
C) In a perfectly competitive industry, the wage increases will reduce output, which raises the
market price of the product.
D) In a monopoly, the wage increases will raise the product price and reduce output.
E) In the case of wage increases, the scale effect and the substitution effect work in the same
direction to reduce labour demand.
Answer: B
28) Which of the following is correct regarding the elasticity of labour demand?
A) If the share of the labour costs in total costs is large, the derived demand for labour will be
inelastic.
B) If the product demand is elastic, the derived demand for labour will be inelastic.
C) If capital and labour are easily substitutable, the derived demand for labour will be inelastic.
D) If the supply of substitute inputs is inelastic, the derived demand for labour will be inelastic.
E) None of the choices are correct.
Answer: D
29) Which of following is correct regarding the impact of globalization on the Canadian market?
A) Due to global competition, due to the change of product price, productivity of Canadian labour
will decrease.
B) The labour demand in the Canadian market will increase.
C) If Canadian labour and foreign labour are close substitutes, cheaper foreign labour will lead to
scale effects, which may increase the demand for Canadian labour and foreign labour.
D) If Canadian labour and foreign labour are complements, cheaper foreign labour will lead to
scale effects, which may increase the demand for Canadian labour and foreign labour.
E) The labour demand in the Canadian market will decrease.
Answer: D
30) Which of the following facts are correct regarding international comparison of labour costs and
productivity?
A) Canada’s unit labour costs are much lower since 1990s due to the increase of productivity.
B) Canada has relatively low productivity growth since 1990s compared to many other European
countries.
C) Canada’s compensation costs are relatively high compared to other European countries.
D) Canada has relatively higher productivity growth since 1990s compared to many other
European countries.
E) Canada’s unit labour costs are lower than that of the United States.
Answer: B
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
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31) • Outline step by step the derivation of the short run labour demand curve. Do not confuse this with the
model for long run labour demand involving isoquants and the isocost curves. You do not have to give a graph.
The first step is a description of the behavioural assumption. Restrict your analysis to an intuitive but
methodical discussion. Include in your analysis an explanation of why it is called the derived demand for
labour.
• Explain the different implications for labour demand between the case in which the output market is
monopolized and the case in which it is perfectly competitive.
• Hicks’ laws refer to the factors which affect the elasticity of labour demand. Explain the role of each of
the following variables, and provide an explanation:
a) the availability of substitute inputs
b) the elasticity of demand for output
c) the ratio of labour cost to total cost.
Answer: Labour demand curve explains the relationship between market wage rate and the demand of
labour by profit-maximizing firms. It is a derived demand because the demand of labour
depends on the demand of the product that the firm produces. In the short run, firms cannot
adjust all of the factors of production used and labour may be the only variable factor. In the
short run, the firm will choose how many workers to hire in order to produce the profit
maximizing amount of product. In this case, if the market wage rate is given, the higher the
wage, the higher the cost of production, a firm will choose to hire fewer workers in order to
maximizing its profits. Therefore market wage rate and labour demand is negatively related.
Generally speaking, the profit maximizing firm chooses to produce where marginal revenue equals to
marginal cost of the product. Therefore, the demand schedule of a profit-maximizing firm that is a
wage-taker in the labour market is where the marginal revenue product of labour equals the wage rate.
Marginal revenue product can be decomposed into marginal revenue of the product (additional
revenue which a firm can gain by selling additional unit of the product) and marginal product
of labour (additional products which a firm can produce by hiring one more unit of labour). If
the product market is perfectly competitive, a firm is a price taker. In this case, product demand
is given by price equalizes marginal revenue of the product; therefore the labour demand is given by
price times the marginal product of labour, which gives the market value of the marginal product of
labour.
If a firm is a monopoly in the product market, then the firm is a price-setter on the product market. In
this case, the firm faces a downward slopping product demand curve, in order to sell
additional unit of output, the monopolist has to lower the price for its product. Assuming that
it cannot differentiate its homogeneous product to consumers, the monopolist will also have to
lower the price on all units of its output. As a result, its marginal revenue will fall faster than
its price, reflecting the fact that the price decline applies to intramarginal units of output. The
marginal revenue curve for the monopolist will lie below and to the left of the demand curve.
By equating marginal revenue with marginal cost so as to maximizing profits, the monopolist
will produce less output and charge a higher price. Therefore in the labour market, the monopolist
will also hire less workers given the market wage rate. Its marginal revenue product is the product of
marginal revenue and the marginal product of labour and in this case, marginal revenue is not equal to
the price of the product.
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The elasticity of labour demand explains the responsiveness of labour demand to the change of
market wage rate. It can be measured by the percentage change of labour demand over the
percentage change of market wage rate. Because labour demand is a derived demand, the
factors that affect output demand elasticity will affect labour demand elasticity as well. For
example, if the demand for output is more elastic, the demand for labour is also more elastic.
if labour and other input factors are easily substitutable, as wage rate increases, firms can
easily replace labour with other input (such as workers vs. automation), therefore labour
demand is subject to higher elasticity. Lastly, the ratio of labour cost to total cost may also
affect labour demand elasticity. If labour cost is a large proportion of the total cost, such as
house painting services, the change of the wage rate will not affect the demand of labour as
much. Therefore given all things are equal, higher the labour cost, lower the elasticity of the
labour demand.
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Answer Key
Testname: UNTITLED72
1) A
2) E
3) D
4) A
5) D
6) A
7) C
8) D
9) E
10) C
11) A
12) B
13) D
14) E
15) A
16) A
17) E
18) C
19) E
20) E
21) E
22) E
23) B
24) E
25) C
26) A
27) B
28) D
29) D
30) B
31) Labour demand curve explains the relationship between market wage rate and the demand of labour by
profit-maximizing firms. It is a derived demand because the demand of labour depends on the demand of
the product that the firm produces. In the short run, firms cannot adjust all of the factors of production
used and labour may be the only variable factor. In the short run, the firm will choose how many workers
to hire in order to produce the profit maximizing amount of product. In this case, if the market wage rate is
given, the higher the wage, the higher the cost of production, a firm will choose to hire fewer workers in
order to maximizing its profits. Therefore market wage rate and labour demand is negatively related.
Generally speaking, the profit maximizing firm chooses to produce where marginal revenue equals to marginal cost
of the product. Therefore, the demand schedule of a profit-maximizing firm that is a wage-taker in the labour marke
is where the marginal revenue product of labour equals the wage rate. Marginal revenue product can be
decomposed into marginal revenue of the product (additional revenue which a firm can gain by selling
additional unit of the product) and marginal product of labour (additional products which a firm can
produce by hiring one more unit of labour). If the product market is perfectly competitive, a firm is a price
taker. In this case, product demand is given by price equalizes marginal revenue of the product; therefore the labour
demand is given by price times the marginal product of labour, which gives the market value of the marginal produ
of labour.
10
Answer Key
Testname: UNTITLED72
If a firm is a monopoly in the product market, then the firm is a price-setter on the product market. In this case, the
firm faces a downward slopping product demand curve, in order to sell additional unit of output, the
monopolist has to lower the price for its product. Assuming that it cannot differentiate its homogeneous
product to consumers, the monopolist will also have to lower the price on all units of its output. As a
result, its marginal revenue will fall faster than its price, reflecting the fact that the price decline applies to
intramarginal units of output. The marginal revenue curve for the monopolist will lie below and to the left
of the demand curve. By equating marginal revenue with marginal cost so as to maximizing profits, the
monopolist will produce less output and charge a higher price. Therefore in the labour market, the monopolist
will also hire less workers given the market wage rate. Its marginal revenue product is the product of marginal
revenue and the marginal product of labour and in this case, marginal revenue is not equal to the price of the produc
The elasticity of labour demand explains the responsiveness of labour demand to the change of market wage
rate. It can be measured by the percentage change of labour demand over the percentage change of market
wage rate. Because labour demand is a derived demand, the factors that affect output demand elasticity
will affect labour demand elasticity as well. For example, if the demand for output is more elastic, the
demand for labour is also more elastic. if labour and other input factors are easily substitutable, as wage
rate increases, firms can easily replace labour with other input (such as workers vs. automation), therefore
labour demand is subject to higher elasticity. Lastly, the ratio of labour cost to total cost may also affect
labour demand elasticity. If labour cost is a large proportion of the total cost, such as house painting
services, the change of the wage rate will not affect the demand of labour as much. Therefore given all
things are equal, higher the labour cost, lower the elasticity of the labour demand.
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