Compensation 12th Edition Milkovich Test Bank

Compensation 12th Edition Milkovich
Test Bank
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Chapter 07
Defining Competitiveness
Multiple Choice Questions
1. Which of the following statements is true of pay level?
A. Pay level is the same across all organizations for the same job.
B. The higher the pay level relative to what competitors pay, the lower the relative costs to provide similar
products or services.
C. Pay level is directly proportional to labor costs.
D. Pay level is independent of the number of employees in an organization.
2. _____ refers to the average of the array of rates inside an organization.
A. Revenue margin
B. Remuneration
C. Compensation
D. Pay level
3. Pay level decisions have a significant impact on expenses. Other things being equal, the higher the pay
level, the higher the:
A. profit margins.
B. labor costs.
C. return on investments.
D. revenues.
4. Which of the following is NOT a reason a company might pay base wages above market?
A. To increase employee productivity

B. To increase turnover rates
C. To increase wage satisfaction
D. To attract more job applicants
7-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5. Which of the following is an example of a quoted-price market?
A. Streetcash, a website that allows buyers to negotiate product prices with the sellers
B. Vidwom, a website that allows buyers to bid for items sold by other users
C. Gramspot, a website where cars are auctioned by sellers for charity
D. Nile, a website that allows sellers to sell their products for a fixed price
6. Which of the following is an example of a bourse market?
A. Neurofort, a website that sells surgical equipment in bulk at fixed prices

B. Hardknox, a hardware store that sells all its products at 10 percent above the maximum retail price
C. Needlefarm, a store that sells premium furniture at discounted rates
D. Flatcake, a website that allows buyers to negotiate the prices with the sellers of handmade goods
7. _____ is an example of a bourse.
A. The stated starting wage of a job in an ad

B. The total compensation for a top athlete
C. The price of a product on Amazon
D. The price of a box of cereal at a grocery store
8. Which of the following is an example of the demand side of labor?
A. Level of pay applicants will accept

B. Qualifications of applicants
C. Pay level offered by an employer
D. Locations of potential employees
9. The market pay rate is the:
A. minimum wage rate set by the Department of Labor.

B. pay rate at which applicants will deny a job offer.
C. difference between use value and surplus value.
D. point at which supply and demand lines cross.
7-2
10. _____ is the additional output associated with the employment of one additional person, with other
production factors held constant.
A. Productivity
B. The marginal product of labor
C. Incremental productivity
D. The marginal revenue of labor
11. A small lawn care company has two mowers and four employees. If it hires another employee and the
factors of production remain the same, how will the productivity of the fifth employee compare to that of
the current four employees?
A. The productivity will reduce.

B. The productivity will increase.
C. The productivity will remain the same.
D. There is not enough information to determine productivity.
12. Employers continue to hire until the marginal revenue of the last hire equals his or her wage rate. This is
based on the first labor market theory assumption that:
A. markets are competitive.

B. pay rates reflect all costs of employment.
C. employers seek to maximize profits.
D. workers are homogeneous and interchangeable.
13. In a hiring situation, considering that other potential costs will not change in the short run, the level of
demand that maximizes profits is that level at which the _____ of the last hire is equal to the _____ for that
hire.
A. demand factor; supply factor

B. marginal output; market price
C. incremental output; marginal output
D. marginal revenue; wage rate
14. The assumption of the upward sloping supply curve that offers of higher pay will increase supply will most
likely NOT hold when _____.
A. absenteeism is high
B. turnover is low
C. unemployment is low
D. unemployment is high
7-3
15. If Company A raises its pay rate by one dollar per hour to hire additional workers and competitors
immediately match the increase, what will be the most likely result?
A. The labor costs for Company A will increase, but it will be unable to hire additional workers.
B. Company A will hire the needed workers at a higher wage rate.
C. Competitors of Company A will lose employees to Company A.
D. Company A will hire higher quality workers.
16. Druk Inc. is a consulting firm with 10 employees. Each new client generates $10,000 in revenue. If the
company hires another employee who brings in five new clients and all other factors of production are
constant, which of the following statements is true?
A. Druk will break even if it hires a twelfth employee for a wage of $50,000.
B. Druk needs to pay $10,000 as wage to the eleventh employee to break even.
C. Druk will break even if it hires a thirteenth employee for a wage of $10,000.
D. Druk needs to pay $50,000 as wage to the eleventh employee to break even.
17. A study of graduating college students found they sought jobs with all of the following pay characteristics
EXCEPT _____.
A. individual-based pay
B. variable pay
C. flexible benefits
D. job-based pay
18. The _____ theory is the most influential in explaining pay-level differences.
A. human capital
B. marginal productivity
C. efficiency-wage
D. signaling
19. _____ puts a lid on the maximum pay level an employer can set.
A. Government legislation
B. The product market
C. The labor market
D. Labor market competition
7-4
20. Wages tend to be the lowest in which of the following industries?
A. Education and health care

B. Technology-intensive industries
C. Professional services
D. Pharmaceuticals
21. Which of the following is NOT true of the relationship between employer size and its ability to pay?
A. Talented individuals have a lower marginal value in a larger organization.

B. Talented people can influence more people and decisions.
C. Influence of talented people leads to more profits.
D. Talented people prefer to work in larger organizations.
22. Evidence shows that in manufacturing, _____ is positively correlated with hourly wage level.
A. turnover
B. productivity
C. job description
D. total cost
23. All of the following are important factors in defining a market for compensation purposes EXCEPT:
A. the skill or knowledge required.

B. geography.
C. the ability to pay.
D. product and/or labor market competitors.
24. In which of the following conditions would product market competitors' data be given more weight than
data from labor market competitors?
A. Labor costs are a small share of total costs.

B. Employee skills are generic across all product markets.
C. Product demand is responsive to price changes.
D. The supply of labor is not responsive to changes in pay.
7-5
25. The pay policy that is most closely associated with the decreased ability to attract employees is a(n) _____
policy.
A. lead
B. match
C. lag
D. employer of choice
26. The pay-level policy that is most likely to reduce pay dissatisfaction is a(n) _____.
A. lead policy
B. employer of choice policy
C. lag policy
D. match policy
27. The most common pay policy is a(n) _____.
A. lead policy
B. lag policy
C. hybrid policy
D. match policy
28. All of the following are advantages of a lead pay-level policy EXCEPT _____.
A. reduced vacancy rates

B. higher turnover rates
C. reduced absenteeism
D. better-quality employees
29. Among pay-mix alternatives, the percentage of base pay is highest in _____.
A. work-life balance policy

B. security or commitment policy
C. performance-driven policy
D. market match policy
7-6
30. The pay-mix policy alternative in which the percentage of benefits is likely to be the highest is known as
_____.
A. work/life balance policy

B. security policy
True / False Questions
31. In determining the compensation strategy, a major strategic decision is whether to mirror what competitors
are paying.
True False
32. Both pay level and pay mix decisions focus on two objectives: (1) control costs and increase revenues and
(2) attract and retain employees.
True False
33. A manager of a company could be a factor affecting the company's external competitiveness.
True False
34. Stores that label each item's price or ads that list a job opening's starting wage are examples of bourses.
True False
35. Graduating students usually find themselves in a quoted-labor market.
True False
36. In a labor market, the demand side focuses on the actions of the employers.
True False
37. In a labor market, the market rate is where the lines for labor demand and labor supply cross.
True False
7-7
38. According to efficiency-wage theory, paying higher wages than competitors can lower labor costs due to
more efficient workers.
True False
39. An employer offering lower base pay with high bonuses is a likely signal that it is seeking risk-taking
employees.
True False
40. The most influential theory explaining pay-level differences is marginal revenue productivity.
True False
41. Human capital theory assumes that people are paid at the value of their marginal product.
True False
42. The product market sets the floor on the minimum wage required to attract sufficient numbers of
employees.
True False
43. Employers tend to overestimate the importance of pay to employees and underestimate the role of
relationships with the supervisor.
True False
44. Employers in highly competitive markets are more able to raise prices without loss of revenues.
True False
45. Segmenting sources of labor is a means of reducing labor costs.
True False
46. Wages in labor-intensive industries are generally higher than in technology-intensive industries.
True False
47. Talented individuals have a higher marginal value in larger organizations.
True False
48. The three factors usually used to determine the relevant labor markets are the occupation, geography, and
competitors.
True False
7-8
49. Combat pay premiums paid to military personnel to offset some of the risk of being fired upon is an
example of a lead pay-level policy.
True False
50. Research shows that a lead pay strategy reduces turnover.
True False
Short Answer Questions
51. Explain external competitiveness.
52. What are the factors that influence decisions on pay level and pay mix?
7-9
53. What are the basic assumptions of labor market theories?
54. What is the significance of marginal revenue?
55. According to efficiency-wage theory, how do increased wages increase efficiency and lower labor costs?
7-10
Chapter 07 Defining Competitiveness Answer Key
Multiple Choice Questions
1. Which of the following statements is true of pay level?
A. Pay level is the same across all organizations for the same job.
B. The higher the pay level relative to what competitors pay, the lower the relative costs to provide
similar products or services.
C. Pay level is directly proportional to labor costs.
D. Pay level is independent of the number of employees in an organization.
Accessibility: Keyboard Navigation

Difficulty: 2 Medium
Topic: Compensation Strategy: External Competitiveness
2. _____ refers to the average of the array of rates inside an organization.
A. Revenue margin
B. Remuneration
C. Compensation
D. Pay level

Difficulty: 1 Easy
3. Pay level decisions have a significant impact on expenses. Other things being equal, the higher the pay
level, the higher the:
A. profit margins.
B. labor costs.
C. return on investments.
D. revenues.

Difficulty: 1 Easy
7-11
4. Which of the following is NOT a reason a company might pay base wages above market?
A. To increase employee productivity

B. To increase turnover rates
C. To increase wage satisfaction
D. To attract more job applicants

5. Which of the following is an example of a quoted-price market?
A. Streetcash, a website that allows buyers to negotiate product prices with the sellers
B. Vidwom, a website that allows buyers to bid for items sold by other users
C. Gramspot, a website where cars are auctioned by sellers for charity
D. Nile, a website that allows sellers to sell their products for a fixed price

Difficulty: 3 Hard
Topic: Labor Market Factors
6. Which of the following is an example of a bourse market?
A. Neurofort, a website that sells surgical equipment in bulk at fixed prices

B. Hardknox, a hardware store that sells all its products at 10 percent above the maximum retail price
C. Needlefarm, a store that sells premium furniture at discounted rates
D. Flatcake, a website that allows buyers to negotiate the prices with the sellers of handmade goods

Difficulty: 3 Hard
7. _____ is an example of a bourse.
A. The stated starting wage of a job in an ad

B. The total compensation for a top athlete
C. The price of a product on Amazon
D. The price of a box of cereal at a grocery store

7-12
8. Which of the following is an example of the demand side of labor?
A. Level of pay applicants will accept

B. Qualifications of applicants
C. Pay level offered by an employer
D. Locations of potential employees

9. The market pay rate is the:
A. minimum wage rate set by the Department of Labor.

B. pay rate at which applicants will deny a job offer.
C. difference between use value and surplus value.
D. point at which supply and demand lines cross.

10. _____ is the additional output associated with the employment of one additional person, with other
production factors held constant.
A. Productivity
B. The marginal product of labor
C. Incremental productivity
D. The marginal revenue of labor

11. A small lawn care company has two mowers and four employees. If it hires another employee and the
factors of production remain the same, how will the productivity of the fifth employee compare to that
of the current four employees?
A. The productivity will reduce.

B. The productivity will increase.
C. The productivity will remain the same.
D. There is not enough information to determine productivity.

Difficulty: 3 Hard
7-13
12. Employers continue to hire until the marginal revenue of the last hire equals his or her wage rate. This is
based on the first labor market theory assumption that:
A. markets are competitive.

B. pay rates reflect all costs of employment.
C. employers seek to maximize profits.
D. workers are homogeneous and interchangeable.

13. In a hiring situation, considering that other potential costs will not change in the short run, the level of
demand that maximizes profits is that level at which the _____ of the last hire is equal to the _____ for
that hire.
A. demand factor; supply factor

B. marginal output; market price
C. incremental output; marginal output
D. marginal revenue; wage rate

14. The assumption of the upward sloping supply curve that offers of higher pay will increase supply will
most likely NOT hold when _____.
A. absenteeism is high
B. turnover is low
C. unemployment is low
D. unemployment is high

7-14
15. If Company A raises its pay rate by one dollar per hour to hire additional workers and competitors
immediately match the increase, what will be the most likely result?
A. The labor costs for Company A will increase, but it will be unable to hire additional workers.
B. Company A will hire the needed workers at a higher wage rate.
C. Competitors of Company A will lose employees to Company A.
D. Company A will hire higher quality workers.

Difficulty: 3 Hard
16. Druk Inc. is a consulting firm with 10 employees. Each new client generates $10,000 in revenue. If the
company hires another employee who brings in five new clients and all other factors of production are
constant, which of the following statements is true?
A. Druk will break even if it hires a twelfth employee for a wage of $50,000.
B. Druk needs to pay $10,000 as wage to the eleventh employee to break even.
C. Druk will break even if it hires a thirteenth employee for a wage of $10,000.
D. Druk needs to pay $50,000 as wage to the eleventh employee to break even.

Difficulty: 3 Hard
17. A study of graduating college students found they sought jobs with all of the following pay
characteristics EXCEPT _____.
A. individual-based pay
B. variable pay
C. flexible benefits
D. job-based pay

Difficulty: 1 Easy
Topic: Modifications to the Demand Side
18. The _____ theory is the most influential in explaining pay-level differences.
A. human capital
B. marginal productivity
C. efficiency-wage
D. signaling
7-15
Difficulty: 1 Easy
Topic: Modifications to the Supply Side (Only Two More Theories to Go)
19. _____ puts a lid on the maximum pay level an employer can set.
A. Government legislation
B. The product market
C. The labor market
D. Labor market competition

Difficulty: 1 Easy
Topic: Product Market Factors and Ability to Pay
20. Wages tend to be the lowest in which of the following industries?
A. Education and health care

B. Technology-intensive industries
C. Professional services
D. Pharmaceuticals

Difficulty: 1 Easy
Topic: Organization Factors
21. Which of the following is NOT true of the relationship between employer size and its ability to pay?
A. Talented individuals have a lower marginal value in a larger organization.

B. Talented people can influence more people and decisions.
C. Influence of talented people leads to more profits.
D. Talented people prefer to work in larger organizations.

22. Evidence shows that in manufacturing, _____ is positively correlated with hourly wage level.
A. turnover
B. productivity
C. job description
D. total cost

Difficulty: 1 Easy
7-16
23. All of the following are important factors in defining a market for compensation purposes EXCEPT:
A. the skill or knowledge required.

B. geography.
C. the ability to pay.
D. product and/or labor market competitors.

Topic: Relevant Markets
24. In which of the following conditions would product market competitors' data be given more weight than
data from labor market competitors?
A. Labor costs are a small share of total costs.

B. Employee skills are generic across all product markets.
C. Product demand is responsive to price changes.
D. The supply of labor is not responsive to changes in pay.

25. The pay policy that is most closely associated with the decreased ability to attract employees is a(n)
_____ policy.
A. lead
B. match
C. lag
D. employer of choice

Topic: Competitive Pay Policy Alternatives
26. The pay-level policy that is most likely to reduce pay dissatisfaction is a(n) _____.
A. lead policy
B. employer of choice policy
C. lag policy
D. match policy

Difficulty: 1 Easy
7-17
27. The most common pay policy is a(n) _____.
A. lead policy
B. lag policy
C. hybrid policy
D. match policy

Difficulty: 1 Easy
28. All of the following are advantages of a lead pay-level policy EXCEPT _____.
A. reduced vacancy rates

B. higher turnover rates
C. reduced absenteeism
D. better-quality employees

Difficulty: 1 Easy
29. Among pay-mix alternatives, the percentage of base pay is highest in _____.
A. work-life balance policy

B. security or commitment policy

Difficulty: 1 Easy
30. The pay-mix policy alternative in which the percentage of benefits is likely to be the highest is known
as _____.
A. work/life balance policy

B. security policy

Difficulty: 1 Easy
7-18
True / False Questions
31. In determining the compensation strategy, a major strategic decision is whether to mirror what
competitors are paying.
TRUE

Difficulty: 1 Easy
32. Both pay level and pay mix decisions focus on two objectives: (1) control costs and increase revenues
and (2) attract and retain employees.
TRUE

Difficulty: 1 Easy
33. A manager of a company could be a factor affecting the company's external competitiveness.
TRUE

Difficulty: 1 Easy
Topic: What Shapes External Competitiveness?
34. Stores that label each item's price or ads that list a job opening's starting wage are examples of bourses.
FALSE

Difficulty: 1 Easy
35. Graduating students usually find themselves in a quoted-labor market.
TRUE

Difficulty: 1 Easy
36. In a labor market, the demand side focuses on the actions of the employers.
TRUE
7-19
Difficulty: 1 Easy
37. In a labor market, the market rate is where the lines for labor demand and labor supply cross.
TRUE

Difficulty: 1 Easy
38. According to efficiency-wage theory, paying higher wages than competitors can lower labor costs due
to more efficient workers.
TRUE

Difficulty: 1 Easy
39. An employer offering lower base pay with high bonuses is a likely signal that it is seeking risk-taking
employees.
TRUE

Difficulty: 1 Easy
40. The most influential theory explaining pay-level differences is marginal revenue productivity.
FALSE

Difficulty: 1 Easy
41. Human capital theory assumes that people are paid at the value of their marginal product.
TRUE

Difficulty: 1 Easy
42. The product market sets the floor on the minimum wage required to attract sufficient numbers of
employees.
FALSE

Difficulty: 1 Easy
7-20
43. Employers tend to overestimate the importance of pay to employees and underestimate the role of
relationships with the supervisor.
FALSE

Difficulty: 1 Easy
44. Employers in highly competitive markets are more able to raise prices without loss of revenues.
FALSE

Difficulty: 1 Easy
45. Segmenting sources of labor is a means of reducing labor costs.
TRUE

Difficulty: 1 Easy
46. Wages in labor-intensive industries are generally higher than in technology-intensive industries.
FALSE

Difficulty: 1 Easy
47. Talented individuals have a higher marginal value in larger organizations.
TRUE

Difficulty: 1 Easy
48. The three factors usually used to determine the relevant labor markets are the occupation, geography,
and competitors.
TRUE

Difficulty: 1 Easy
7-21
49. Combat pay premiums paid to military personnel to offset some of the risk of being fired upon is an
example of a lead pay-level policy.
TRUE

Difficulty: 1 Easy
50. Research shows that a lead pay strategy reduces turnover.
TRUE

Difficulty: 1 Easy
Short Answer Questions
51. Explain external competitiveness.
External competitiveness refers to the pay relationships among organizations—the organization's pay
relative to its competitors. It is expressed in practice by (1) setting a pay level that is above, below, or
equal to that of competitors; and (2) determining the pay mix relative to those of competitors.
52. What are the factors that influence decisions on pay level and pay mix?
The factors include (1) competition in the labor market for people with various skills; (2) competition in
the product and service markets, which affects the financial condition of the organization; and (3)
characteristics unique to each organization and its employees. These factors act in concert to influence
pay-level and pay-mix decisions.
Topic: What Shapes External Competitiveness?
7-22
53. What are the basic assumptions of labor market theories?
Theories of labor markets usually begin with four basic assumptions:
• Employers always seek to maximize profits.

• People are homogeneous and therefore interchangeable.
• The pay rates reflect all costs associated with employment.
• The markets faced by employers are competitive.
54. What is the significance of marginal revenue?
Marginal revenue is the money generated by the sale of marginal product, the additional output from the
employment of one additional person. An employer will continue to hire until the marginal revenue
generated by the last hire is equal to the costs associated with employing that person. Because other
potential costs will not change in the short run, the level of demand that maximizes profits is that level
at which the marginal revenue of the last hire is equal to the wage rate for that hire.
55. According to efficiency-wage theory, how do increased wages increase efficiency and lower labor
costs?
According to efficiency-wage theory, high wages may increase efficiency and actually lower labor costs
if they:
• Attract higher-quality applicants.

• Lower turnover.
• Increase worker effort.
• Reduce "shirking" (what economists say when they mean "screwing around").
• Reduce the need to supervise employees (academics say "monitoring").
7-23

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Multiple Choice Questions

1. Which of the following statements is true of pay level?

2. _____ refers to the average of the array of rates inside an organization.

A. To increase employee productivity

6. Which of the following is an example of a bourse market?

A. Neurofort, a website that sells surgical equipment in bulk at fixed prices

7. _____ is an example of a bourse.

A. The stated starting wage of a job in an ad

8. Which of the following is an example of the demand side of labor?

A. Level of pay applicants will accept

9. The market pay rate is the:

A. minimum wage rate set by the Department of Labor.

A. The productivity will reduce.

A. markets are competitive.

A. demand factor; supply factor

A. Education and health care

A. Talented individuals have a lower marginal value in a larger organization.

A. the skill or knowledge required.

A. Labor costs are a small share of total costs.

27. The most common pay policy is a(n) _____.

A. reduced vacancy rates

A. work-life balance policy

A. work/life balance policy

True / False Questions

35. Graduating students usually find themselves in a quoted-labor market.

45. Segmenting sources of labor is a means of reducing labor costs.

47. Talented individuals have a higher marginal value in larger organizations.

50. Research shows that a lead pay strategy reduces turnover.

Short Answer Questions

51. Explain external competitiveness.

54. What is the significance of marginal revenue?

Multiple Choice Questions

1. Which of the following statements is true of pay level?

Accessibility: Keyboard Navigation

2. _____ refers to the average of the array of rates inside an organization.

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

A. To increase employee productivity

Accessibility: Keyboard Navigation

5. Which of the following is an example of a quoted-price market?

Accessibility: Keyboard Navigation

6. Which of the following is an example of a bourse market?

A. Neurofort, a website that sells surgical equipment in bulk at fixed prices

Accessibility: Keyboard Navigation

7. _____ is an example of a bourse.

A. The stated starting wage of a job in an ad

Accessibility: Keyboard Navigation

A. Level of pay applicants will accept

Accessibility: Keyboard Navigation

9. The market pay rate is the:

A. minimum wage rate set by the Department of Labor.

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

A. The productivity will reduce.

Accessibility: Keyboard Navigation

A. markets are competitive.

Accessibility: Keyboard Navigation

A. demand factor; supply factor

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation