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TBChap 003
TBChap 003
Labor Demand
3.
The law of diminishing returns, as it applies to labor, means that
A.
the marginal product of labor eventually declines.
B.
the marginal product of labor will eventually be a horizontal line at zero.
C.
the average product of labor increases at a decreasing rate.
D.
the average product of labor starts to decline before the marginal product of labor.
E.
total output eventually decreases.
3-1
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
4. At what point should a firm stop hiring workers?
5. What is the most accurate description of the value of a worker to the firm?
A. The wage.
B. The firm's total output when holding capital fixed.
C. The firm's average product when holding capital fixed.
D. The dollar value of the worker's output.
E. The dollar value of the average worker's output.
7. What is not true when thinking of the firm's objective as a cost-minimization problem rather than as a
profit-maximization problem?
A. The slope at any point on any isoquant reveals the marginal rate of technical substitution.
B. The firm chooses labor and capital to minimize its costs.
C. The firm chooses a particular level of output to produce.
D. The price of the output good never enters the decision as to how much labor or capital to employ.
E. The firm will choose labor and capital inputs so that the marginal productivity of labor relative to the
marginal productivity of capital equals the price of labor relative to the price of capital.
8. Ally owns a shoe store. The market wage is $10 per hour, and the cost of capital is $2 per week for every
$1,000 of capital borrowed. Consider the isocost line associated with spending $8,000 per week, and let the
y-axis be the amount of capital borrowed in $1,000s. Which of the following is not true?
3-2
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9. What is an example of the scale effect?
A. Workers choose to provide more hours of labor when the wage rate decreases.
B. Hiring more labor as long as the marginal product of labor is positive.
C. The firm expands output when production costs fall.
D. The firm expands output when production costs increase.
E. The firm hires more labor when the wage falls because labor has become relatively cheaper compared to
the price of other factors of production.
A. Workers choose to provide more hours of labor when the wage rate decreases.
B. Hiring more labor as long as the marginal product of labor is positive.
C. The firm expands output when production costs fall.
D. The firm expands output when production costs increase.
E. The firm hires more labor when the wage falls because labor has become relatively cheaper compared to
the price of other factors of production.
11. How does a profit-maximizing firm that is operating in a competitive labor market respond to an increase in
the wage rate?
A. The firm will demand less capital due to the substitution effect.
B. The firm will demand more labor due to the substitution effect.
C. The firm will produce less output due to the scale effect.
D. The firm will demand more capital due to the scale effect.
E. The firm will demand more labor due to the scale effect.
12. Why is the short-run labor demand curve less elastic relative to the long-run labor demand curve?
A. Because firms care about changes in wages in the short-run but not in the long-run.
B. Because firms are better able to substitute capital for labor in the long run compared to the short run.
C. Because labor is a normal good.
D. Because a perfectly competitive firm can always pay lower wages in the long run.
E. Because isocost curves get shallower when the wage increases.
3-3
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
14. At a wage of $25 per hour, the firm employs 50,000 hours of labor per week. If the wage would increase to
$27 per hour, the firm would employ 45,000 hours of labor per week. What is the elasticity of labor
demand?
A. -2.50.
B. -1.50.
C. -1.25.
D. -0.50.
E. -0.25.
15.
Which of the following statements is false?
A.
Perfect substitutes are associated with linear isoquants.
B.
Perfect complements are associated with right-angled isoquants.
C.
The elasticity of substitution can be positive or negative.
D.
The more two factors are substitutes in the firm’s production function, the greater is the elasticity of
substitution.
E.
Perfect substitutes do not need to be employed in a 1-to-1 ratio by the firm.
3-4
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
16.
An effective affirmative action program
A.
lowers the production costs of color-blind firms.
B.
lowers the production costs of discriminatory firms.
C.
increases profits of color-blind firms.
D.
makes discriminatory firms more inefficient.
E.
makes color-blind firms more efficient.
18. Labor demand is more elastic the greater the elasticity of substitution between labor and capital because
3-5
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
20. If unskilled labor and capital are substitutes,
A. demand for unskilled labor increases when the price of capital decreases.
B. the cross-elasticity between unskilled labor and capital is positive.
C. the price of unskilled labor decreases when the price of capital increases.
D. the price of capital is increasing.
E. the demand curve for capital is upward-sloping.
21. The imposition of a minimum wage on a competitive labor market will likely
A. create additional employment opportunities because some low-skilled workers will now see their wage
increase.
B. lower the wages of workers earning more than the minimum wage.
C. create unemployment as some people enter the labor market while some firms reduce the quantity of
labor they are willing to employ due to the increased wage.
D. increase unemployment of high-skilled workers as firms substitute high-skilled labor for low-skilled
labor.
E. lower the unemployment rate of low-income families.
22. Labor demand is more elastic the greater the elasticity of demand for the firm's output because
A. the firm would see its quantity demanded fall substantially if the firm tried to pass increased labor costs
through to the consumer by increasing the price of the output good.
B. the firm's output price falls when the firm produces less output.
C. a firm that operates in a competitive output market cannot lower its price.
D. capital is usually price elastic.
E. the firm will want to hire fewer workers when the wage rate increases.
23. In the United States, the federal minimum wage is legislated in nominal terms. This means that
3-6
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
24. How would imposing a minimum wage above the market clearing wage affect employment in a
competitive labor market?
A. Employment would increase as previously unemployed workers would be more encouraged to find a
job.
B. Employment would increase because a higher minimum wage would create more jobs for low-skilled
workers.
C. Employment would increase as firms would illegally hire workers below the original competitive wage.
D. Employment would be unchanged as workers are non-responsive to low wages.
E. Employment would decrease as some workers who are willing to work at the lower competitive wage
would no longer be able to find work.
25. For which reason is increasing the federal minimum wage not a good anti-poverty program?
26. If the minimum wage applies to one sector (the covered sector) but not another sector (the uncovered
sector), an increase in the minimum wage in the covered sector is likely to result in which of the
following?
27. Consider the following hypothetical difference-in-differences results concerning the average of hours
worked in "big-box stores" between North and South Dakota before and after North Dakota increased its
minimum wage.
The minimum wage increase is associated with average hours of working decreasing by how much per
week in North Dakota relative to South Dakota?
A. 2.1 hours
B. 11.7 hours
C. 13.8 hours
D. 15.9 hours
E. 20.2 hours
3-7
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
28. In the U.S. labor market, it is typically the case that:
A. incurred by a firm as it transports its product from the factory to the marketplace.
B. incurred by a firm when it pays its workers overtime.
C. incurred by a firm as it changes the size of its workforce.
D. saved by a firm as it takes advantage of tax credits offered by the government.
E.
saved by the firm when it sells one more unit of output.
A.
hiring costs are typically higher than firing costs.
B.
firing workers is relatively easy compared to hiring workers.
C.
firing workers can be difficult and costly for legal reasons compared to hiring workers.
D.
workers are reluctant to change jobs during a recession but not during an expansion.
E.
firms vary in size.
3-8
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Chapter 03 Labor Demand Answer Key
3-9
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3.
The law of diminishing returns, as it applies to labor, means that
A.
the marginal product of labor eventually declines.
B.
the marginal product of labor will eventually be a horizontal line at zero.
C.
the average product of labor increases at a decreasing rate.
D.
the average product of labor starts to decline before the marginal product of labor.
E.
total output eventually decreases.
5. What is the most accurate description of the value of a worker to the firm?
A. The wage.
B. The firm's total output when holding capital fixed.
C. The firm's average product when holding capital fixed.
D. The dollar value of the worker's output.
E. The dollar value of the average worker's output.
3-10
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Blooms: Understand
Difficulty: 02 Medium
Topic: The Employment Decision in the Short Run
7. What is not true when thinking of the firm's objective as a cost-minimization problem rather than as a
profit-maximization problem?
A. The slope at any point on any isoquant reveals the marginal rate of technical substitution.
B. The firm chooses labor and capital to minimize its costs.
C. The firm chooses a particular level of output to produce.
D. The price of the output good never enters the decision as to how much labor or capital to employ.
E. The firm will choose labor and capital inputs so that the marginal productivity of labor relative to
the marginal productivity of capital equals the price of labor relative to the price of capital.
8. Ally owns a shoe store. The market wage is $10 per hour, and the cost of capital is $2 per week for
every $1,000 of capital borrowed. Consider the isocost line associated with spending $8,000 per week,
and let the y-axis be the amount of capital borrowed in $1,000s. Which of the following is not true?
3-11
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9. What is an example of the scale effect?
A. Workers choose to provide more hours of labor when the wage rate decreases.
B. Hiring more labor as long as the marginal product of labor is positive.
C. The firm expands output when production costs fall.
D. The firm expands output when production costs increase.
E. The firm hires more labor when the wage falls because labor has become relatively cheaper
compared to the price of other factors of production.
A. Workers choose to provide more hours of labor when the wage rate decreases.
B. Hiring more labor as long as the marginal product of labor is positive.
C. The firm expands output when production costs fall.
D. The firm expands output when production costs increase.
E. The firm hires more labor when the wage falls because labor has become relatively cheaper
compared to the price of other factors of production.
11. How does a profit-maximizing firm that is operating in a competitive labor market respond to an
increase in the wage rate?
A. The firm will demand less capital due to the substitution effect.
B. The firm will demand more labor due to the substitution effect.
C. The firm will produce less output due to the scale effect.
D. The firm will demand more capital due to the scale effect.
E. The firm will demand more labor due to the scale effect.
3-12
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
12. Why is the short-run labor demand curve less elastic relative to the long-run labor demand curve?
A. Because firms care about changes in wages in the short-run but not in the long-run.
B. Because firms are better able to substitute capital for labor in the long run compared to the short run.
C. Because labor is a normal good.
D. Because a perfectly competitive firm can always pay lower wages in the long run.
E. Because isocost curves get shallower when the wage increases.
14. At a wage of $25 per hour, the firm employs 50,000 hours of labor per week. If the wage would
increase to $27 per hour, the firm would employ 45,000 hours of labor per week. What is the elasticity
of labor demand?
A. -2.50.
B. -1.50.
C. -1.25.
D. -0.50.
E. -0.25.
3-13
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
15.
Which of the following statements is false?
A.
Perfect substitutes are associated with linear isoquants.
B.
Perfect complements are associated with right-angled isoquants.
C.
The elasticity of substitution can be positive or negative.
D.
The more two factors are substitutes in the firm’s production function, the greater is the elasticity of
substitution.
E.
Perfect substitutes do not need to be employed in a 1-to-1 ratio by the firm.
16.
An effective affirmative action program
A.
lowers the production costs of color-blind firms.
B.
lowers the production costs of discriminatory firms.
C.
increases profits of color-blind firms.
D.
makes discriminatory firms more inefficient.
E.
makes color-blind firms more efficient.
3-14
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Topic: Affirmative Action and Production Costs
18. Labor demand is more elastic the greater the elasticity of substitution between labor and capital because
3-15
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
20. If unskilled labor and capital are substitutes,
A. demand for unskilled labor increases when the price of capital decreases.
B. the cross-elasticity between unskilled labor and capital is positive.
C. the price of unskilled labor decreases when the price of capital increases.
D. the price of capital is increasing.
E. the demand curve for capital is upward-sloping.
21. The imposition of a minimum wage on a competitive labor market will likely
A. create additional employment opportunities because some low-skilled workers will now see their
wage increase.
B. lower the wages of workers earning more than the minimum wage.
C. create unemployment as some people enter the labor market while some firms reduce the quantity of
labor they are willing to employ due to the increased wage.
D. increase unemployment of high-skilled workers as firms substitute high-skilled labor for low-skilled
labor.
E. lower the unemployment rate of low-income families.
22. Labor demand is more elastic the greater the elasticity of demand for the firm's output because
A. the firm would see its quantity demanded fall substantially if the firm tried to pass increased labor
costs through to the consumer by increasing the price of the output good.
B. the firm's output price falls when the firm produces less output.
C. a firm that operates in a competitive output market cannot lower its price.
D. capital is usually price elastic.
E. the firm will want to hire fewer workers when the wage rate increases.
3-16
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
23. In the United States, the federal minimum wage is legislated in nominal terms. This means that
24. How would imposing a minimum wage above the market clearing wage affect employment in a
competitive labor market?
A. Employment would increase as previously unemployed workers would be more encouraged to find
a job.
B. Employment would increase because a higher minimum wage would create more jobs for low-
skilled workers.
C. Employment would increase as firms would illegally hire workers below the original competitive
wage.
D. Employment would be unchanged as workers are non-responsive to low wages.
E. Employment would decrease as some workers who are willing to work at the lower competitive
wage would no longer be able to find work.
25. For which reason is increasing the federal minimum wage not a good anti-poverty program?
3-17
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
26. If the minimum wage applies to one sector (the covered sector) but not another sector (the uncovered
sector), an increase in the minimum wage in the covered sector is likely to result in which of the
following?
27. Consider the following hypothetical difference-in-differences results concerning the average of hours
worked in "big-box stores" between North and South Dakota before and after North Dakota increased
its minimum wage.
The minimum wage increase is associated with average hours of working decreasing by how much per
week in North Dakota relative to South Dakota?
A. 2.1 hours
B. 11.7 hours
C. 13.8 hours
D. 15.9 hours
E. 20.2 hours
3-18
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
29. Adjustment costs are those costs
A. incurred by a firm as it transports its product from the factory to the marketplace.
B. incurred by a firm when it pays its workers overtime.
C. incurred by a firm as it changes the size of its workforce.
D. saved by a firm as it takes advantage of tax credits offered by the government.
E.
saved by the firm when it sells one more unit of output.
A.
hiring costs are typically higher than firing costs.
B.
firing workers is relatively easy compared to hiring workers.
C.
firing workers can be difficult and costly for legal reasons compared to hiring workers.
D.
workers are reluctant to change jobs during a recession but not during an expansion.
E.
firms vary in size.
3-19
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.