Labour Market Economics 8Th Canadian Edition By Dwayne Benjamin

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Description Labour Market Economics 8Th Canadian Edition By Dwayne Benjamin – Test Bank Sample Questions Instant Download With Answers Chapter 03 Labour Supply and Public Policy: Work Incentive Effects of Alternative Income Maintenance Schemes

Multiple Choice Questions 1. All of the following government programs are types of income maintenance programs except: A.social assistance. B. unemployment insurance. C. the child tax credit. D. negative income tax schemes. E. wage subsidy.

Blooms: Remember Difficulty: Easy Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-01 Static Partial Equilibrium Effects in Theory 2. All of the following are sources of concern with income maintenance programs except that: A.They might reduce wages. B. They might reduce work incentives. C. They might be fiscally costly. D. They might increase wages. E. They might lower employment.

Blooms: Understand Difficulty: Easy Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-01 Static Partial Equilibrium Effects in Theory

All of the following describe a demogrant except? A.an income grant to a specific demographic group B. the simplest income maintenance program C. A grant whose amount varies with the worker’s wage D. a lump-sum transfer E. A demogrant shifts the potential income constraint vertically upward by the amount of the grant.

Blooms: Remember Difficulty: Easy Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-02 Demogrant 5. Which of the following is NOT a way to improve work incentives for welfare recipients? A.Increase the market wages for jobs for which welfare recipients might be qualified

to perform. B. Reduce the very high implicit tax rate that is applied to earnings of welfare recipients. C. Alter the preferences that certain recipients might have for leisure compared to work. D. Raise the benefit level. E. Provide welfare recipients with job training and counselling services.

Blooms: Analyze Difficulty: Medium Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-03 Welfare

Another term for a guaranteed annual income plan is: A.a minimum income policy. B. a negative income tax. C. a child tax benefit. D. total job security. E. social insurance.

Blooms: Remember Difficulty: Easy Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-04 Negative Income Tax 7. What does the term negative refer to in a negative income tax scheme? A.The individual does not have to pay income tax for any of his/her earnings. B. The individual receives a subsidy or a credit rather than paying taxes for a certain number of hours worked. C. The program does not involve any disincentives to working. D. The program involves fewer disincentives to working than does a conventional welfare or social assistance program. E. None of the choices are correct

Blooms: Understand Difficulty: Medium Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-04 Negative Income Tax

The difference between a conventional welfare program and a negative income tax program is that: A.Recipients in the negative income tax program will receive more from the guarantee income than they will pay out in taxes. B. For the negative income tax program, the benefits received have to be repaid once the worker is working full time for wages. C. Individuals have to be living below the poverty line in order to qualify for the negative income tax program. D. The former type of program is transferred to the recipient by the government, while the latter is taxed away from the recipient by the government. E. For the negative income tax program, the worker receives a wage supplement for each hour that he/she works.

Blooms: Understand Difficulty: Medium Learning Objective: 03-01 Differentiate between different types of income maintenance

programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-05 Wage Subsidies and Refundable Tax Credits

10.

Which of the following statements concerning the work incentive (or disincentive) effects under a wage subsidy program and under a negative income tax program is true? A.The negative income tax program is neutral in regards to these effects. B. The wage subsidy program is neutral in regards to these effects. C. Both these programs have the same effects in this regard. D. The negative income tax program has a greater positive effect on the incentive to work. E. The wage subsidy program has a greater positive effect on the incentive to work.

Blooms: Analyze Difficulty: Hard Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-05 Wage Subsidies and Refundable Tax Credits 11. Which of the following programs is superior in terms of its ability to direct payments to those individuals or families in greatest need of assistance? A.Social assistance or welfare B. Unemployment insurance C. Wage subsidies D. Canada Pension Plan E. None of the choices are correct

able to show how individual well-being can be compared across programs within this framework. Topic: 03-03 Welfare

12.

What is the approximate rate at which lost earnings are replaced by Canada’s unemployment insurance system? A.100% of all earnings up to a certain threshold, and 0% for wages above that level B. 75% of all earnings C. 55% of all earnings D. 55% of all earnings up to a certain threshold, and 0% for wages above that level E. 0% of earnings up to a certain threshold, and 55% for wages above that level

Blooms: Remember Difficulty: Medium Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-06 Employment Insurance 13. The reason for which worker’s disability insurance can potentially have adverse effects on work incentives is that: A.the income that it provides enables one to reach a certain income level without any work obligation. B. the opportunity cost of leisure increases. C. the recipient is allowed to work as many hours as he/she can without losing any of the benefits. D. the taxes that finance the benefits can have negative effects on labour demand. E. All of the answer choices are correct.

14.

Consider a worker who has small children. All of the following are effects of child care expenses except: A.that they increase reservation wages. B. that they might decrease labour force participation. C. that they increase the hours of work for labour market participates. D. that they reduce the hours of work for labour market participates. E. that they might increase labour force participation.

The following diagrams of budget constraints pertain to the next three questions. The vertical axis is Income and the horizontal axis is Leisure. Figure a

Figure b

Figure c

Figure d

15.

Which of the diagrams of budget constraints above depicts the Earned Income Tax Credit program? A.a B. b C. c D. d

16.

Which of the diagrams of budget constraints above depicts the Wage Subsidy program? A.a B. b C. c D. d

17.

Which of the diagrams of budget constraints above depicts the Negative Income Tax program? A.a B. b C. c D. d

Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-04 Negative Income Tax 18. What is the effect of a demogrant on the budget contraint? A.It shifts the budget line outward. B. It makes the budget line flatter C. It makes the budget line steeper D. It places a kink in the budget line E. It changes the shape of the indifference curve

19.

Which of the following statements concerning subsidies for child care expenses is true? A.They change the slope of the budget line. B. They reduce the fixed costs of working. C. They discourage labour force participation. D. They tend to increase the reservation wage of working. E. They cause a strong substitution effect toward more working activity.

D. The total number of caseload E. All of the above choices are correct

Blooms: Remember Difficulty: Easy Learning Objective: 03-04 Discuss the key challenges to estimating the “real world” effects of income maintenance programs on work incentives. Learning Objective: 03-05 Evaluate the potential validity or shortcomings of empirically based arguments concerning the merits of one income maintenance program versus another, and to be able to cite representative studies from the empirical economics literature. Topic: 03-09 Illustrative Evidence of Incentive Effects

21.

Nonexperimental evidence has suggested that: A.most people who initiate welfare benefits will leave welfare in one year. B. most people who initiate welfare benefits will stay on welfare after one year. C. the longer one is on welfare, the more likely one is to leave. D. individuals with low predictable earnings and relative temporary characteristics are less likely to use welfare. E. individuals with low predictable earnings and relative permanent characteristics are less likely to use welfare.

Blooms: Remember Difficulty: Medium Learning Objective: 03-04 Discuss the key challenges to estimating the “real world” effects of income maintenance programs on work incentives. Learning Objective: 03-05 Evaluate the potential validity or shortcomings of empirically based arguments concerning the merits of one income maintenance program versus another, and to be able to cite representative studies from the empirical economics literature. Topic: 03-10 Nonexperimental Evidence 22. Since 1990, the welfare benefit rate in Ontario has shown: A.an increasing trend. B. a decreasing trend. C. an increasing then decreasing trend. D. a decreasing then increasing trend. E. no trend.

23.

As American economic condition worsens in 2008, we can expect all following changes, except: A.an increase in the unemployment rate. B. an increase in the welfare caseload C. an increase in the basic benefit of welfare D. an increase in the welfare beneficiary rate E. a decrease in the job vacancy rate

Blooms: Understand Difficulty: Medium Learning Objective: 03-04 Discuss the key challenges to estimating the “real world” effects of income maintenance programs on work incentives. Learning Objective: 03-05 Evaluate the potential validity or shortcomings of empirically based arguments concerning the merits of one income maintenance program versus another, and to be able to cite representative studies from the empirical economics literature. Topic: 03-09 Illustrative Evidence of Incentive Effects 24. Based on Reference 03-02, we can estimate that the impact of the program on labour market participation is: A.30 percent. B. 24 percent. C. 15 percent. D. 9 percent. E. 6 percent.

Blooms: Apply Difficulty: Hard Learning Objective: 03-04 Discuss the key challenges to estimating the “real world” effects of income maintenance programs on work incentives. Learning Objective: 03-05 Evaluate the potential validity or shortcomings of empirically based arguments concerning the merits of one income maintenance program versus another, and to be able to cite representative studies from the empirical economics literature. Topic: 03-11 Experimental Evidence

Essay Questions 25. Congratulations! You have just been appointed to be the social policy czar by the prime minister. Your mission, whom you have no choice but to accept, is to reform these programs because they are presently not affordable and rife with inefficiencies. There is one fundamental issue that underlies the reform of workers’ compensation, welfare/social assistance, and unemployment insurance, and that is the conflicting objectives of providing adequate income protection on one hand and providing a more efficient incentive structure on the other hand. · Explain the nature of the disincentive effects that are involved with demogrant payments and the disincentive effects that are involved with tax and/or subsidy

measures that vary directly with the number of hours worked. Do not get bogged down in technical details, and do not give graphs. Your response should be set in the framework of the labour supply model, which means a discussion of the income effect and the substitution effects. · Explain the motivation of two variants of social assistance programs, the negative income tax program and wage subsidies. How are they supposed to improve the incentive structure? Restrict your analysis to an intuitive explanation of the economic behavioural mechanisms.

The income-leisure framework is a useful way to analyze work incentive effects from different income maintenance programs. The budget constraint of a consumer is composed of two parts: non-labour income and wage income from total working hours. Therefore the change of non-labour income and wage rate will affect a consumer’s labour supply decision. If non-labour income increases, there will be a pure income effect, an individual who choose not to participate before will remain out of participation and an individual who has positive working hours will reduce his/her working hours and enjoy more leisure time. The change of the wage rate, however, will have a more complex effect on one’s labour supply decision. For those who do not participate before, if the increase of the wage rate exceeds the reservation wage, they will choose to participate and the working hours is determined by the marginal rate of substitution of consumption and leisure and the wage rate. For those individuals who already work positive hours, a wage increase will have both income and substitution effect. An income effect from wage increase will induce more leisure and less working hours and a substitution effect (from the increase of the opportunity cost of leisure) will induce more working hours and less leisure. The overall effect of labour supply depends on the relative magnitudes of the two. Demogrants are pure lump-sum transfers, based only on immutable individual characteristics like age or sex. While these transfers are independent of income, they will still have adverse work incentive effects as long as leisure is a normal good. Demogrant payments will directly add to non-labour income part of the budget constraint, which will induce a pure income effect. The individual choose not to participate in the labour market will remain out of workforce and for individual who has positive working hours, he/she will reduce work hours or if the income effect is large enough, withdrawing from the workforce. In general, welfare programs are designed to increase the income of individuals with low income. Because welfare payments lead to income effect, all programs have adverse work incentive effects. The degree to which they have adverse work incentive effects depends on how strictly benefits are reduced in response to higher earnings. Negative income taxes are proposed as an alternative to welfare programs with steep earnings tax-back rates. It composed of two parts: the first part is the basic guarantee income, which adds to the non-labour income part of the budget constraint, and the effect of that is work-reducing income effect; the second part is the implicit tax, any labour market earnings will subject to an implicit tax rate. The tax rate reduces the recipient wage rate and induce both income and substitution effect. In most cases, the dominated substitution effect will lead to fewer hours worked. As with the demogrant and welfare, at the point of maximum leisure, the basic income guarantee shifts the potential income constraint upward by the amount of the guarantee: even if the individual does not work, she has positive income equal to the amount of the guarantee. Unlike welfare, as the individual works, income assistance is not reduced by the full

amount of labour market earnings. However, income support does decline as income from work increases; thus, labour market earnings are subject to a positive implicit tax rate. Take-home pay does not rise as fast as labour market earnings; hence, the income constraint under the negative income tax plan is less steeply sloped than the original labour market income constraint.

Wage subsidies are targeted directly to the working poor. In this program, additional earnings are added directly to the wage rate to encourage higher participation and more working hours. For the recipients, it is exactly like a wage increase. If the person does not work, his income is still zero even though his wage is subsidized. However, as the person works more, his take-home pay rises more under the wage subsidy than if he were receiving only his market wage. Just as an increase in wages has both an income and a substitution effect working in opposite directions insofar as they affect work incentives, so will the wage subsidy have an ambiguous effect on work incentives. The higher wage means higher potential income from which the individual will buy more of all normal goods, including leisure; hence, work incentives are reduced via the income effect. This income effect will be at work even though the individual has to work to receive the income: the increased leisure could come in the form of reduced hours or longer vacations or periodic withdrawals from the labour force or reduced work from another family member. The higher wage also means that the price (opportunity cost) of leisure has now increased; hence, work incentives are increased via this substitution effect. On net, theory does not indicate which effect dominates; hence, the work incentive effects of a wage subsidy are ultimately an empirical proposition. Other things being equal (the recipients’ welfare, their post-transfer income, or the size of the subsidy), the adverse work incentive effects of the wage subsidy are not as great as those of the negative income tax. Remember that under a negative income tax plan, both the income and substitution effects go in the direction of reducing hours of work. Work incentives are better under the wage subsidy because it increases the wage by the amount of the subsidy, while negative income tax reduced the wage by the amount of the implicit tax.

Blooms: Create Difficulty: Medium Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits. Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints. Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework. Topic: 03-01 Static Partial Equilibrium Effects in Theory Topic: 03-02 Demogrant Topic: 03-03 Welfare Topic: 03-04 Negative Income Tax Topic: 03-05 Wage Subsidies and Refundable Tax Credits

Chapter 05 Demand for Labour in Competitive Labour Markets

Multiple Choice Questions The figures below give the production schedule and the product demand schedule for a firm, which has to decide how many workers to hire.

Workers hired

Total Physical Product

If the wage = $40 for the time period in question, then the number of workers hired is: A. 2 B. 3 C. 4 D. 5 E. 6

other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run. Topic: 05-02 Demand for Labour in the Short Run Topic: 05-03 Wages, the Marginal Productivity of Labour, and Competition in the Product Market

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.5 hours per week B. 12 hours per week C. 20 hours per week D. 24 hours per week E. 36 hours per week

Blooms: Analyze Difficulty: Medium Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market? Topic: 05-10 Elasticity of Demand for Labour 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.A profit-maximizing firm will choose the cheapest capital-labour combination that yields the optimal output. B. At the optimal level of output, labour is cheaper than capital. C. 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. D. If the firm were to alter its input combination by hiring more or less of a factor, its profits would fall. E. The slope of the isoquant is equal to the slope of the isocost line.

Blooms: Understand Difficulty: Medium Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run. Topic: 05-04 Demand for Labour in the Long Run

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. Labour costs comprise a large share of the employer’s expenses, making the demand for labour wage inelastic.

D. These workers collect economic rents. E. These workers are seldom unionized.

Blooms: Apply Difficulty: Hard Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market? Topic: 05-13 Elasticity of Demand for Output 5. If the employer is a monopolist in the output market: A.There is monopsony in the input market. B. The demand for labour is less elastic than it would be if the firm operated in a competitive output market. C. The demand for labour is less elastic than it would be if the firm operated in a competitive input market. D. The firm’s demand curve for labour is identical to the case where the firm is a competitor in the output market. E. None of the above choices are correct.

Blooms: Understand Difficulty: Medium Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market? Topic: 05-10 Elasticity of Demand for Labour

The empirical evidence that exists concerning the magnitude of the wage elasticity of labour demand indicates that it tends to be: A.negative and elastic. B. negative and inelastic. C. negative and unitary elastic. D. positive and inelastic. E. None of the above choices are correct.

Blooms: Apply Difficulty: Medium Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market? Topic: 05-15 Empirical Evidence 7. What is the behavioural force that underlies the demand curve for labour? A.Profit maximizing behaviour on the part of firms B. Utility maximizing behaviour on the part of workers C. Rate of return maximizing behavior on the part of investors D. Revenue maximizing behaviour on the part of firms E. Market share maximizing behavior on the part of firms

Blooms: Understand Difficulty: Easy Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions. Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run. Topic: 05-02 Demand for Labour in the Short Run

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 downward sloping because it is profitable for schools to hire more teachers when wages fall. C. The demand for school teachers is likely to fall when the government decides to cut funding to schools. D. The demand for school teachers is likely to be quite wage elastic. E. The demand for school teachers is likely to rise when the government decides to cut funding to schools.

Blooms: Apply Difficulty: Medium Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market? Topic: 05-10 Elasticity of Demand for Labour 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 all inputs can 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 variable factors cannot vary.

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 market demand for the final product. C. the structure of the labour market. D. the marginal product of labour. E. the price of the output.

Blooms: Understand Difficulty: Medium Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions. Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run. Topic: 05-04 Demand for Labour in the Long Run 11. All of the following statements regarding the marginal product of labour are true except: A.It initially increases with the quantity of labour employed because of specialization. B. It diminishes after the inflection point on the total product curve. C. It is zero at the maximum value of total product. D. It eventually diminishes because the capital stock is fixed. E. It is the increment to revenue obtained by hiring one more unit of a variable factor.

12.

In the area of diminishing returns in production: A.Total output declines with each additional unit of labour input. B. The marginal product of labour increases at a decreasing rate. C. The marginal product of labour decreases eventually. 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.

Blooms: Analyze Difficulty: Medium Learning Objective: 05-01 Understand how firms decide how much labour they need to

employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions. Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run. Topic: 05-02 Demand for Labour in the Short Run 13. In the short run, the demand for labour for a competitive firm is: A.the marginal product of labour curve. B. the value of the marginal product curve. C. the downward sloping portion of the value of the marginal product curve. D. perfectly elastic at the market wage. E. perfectly inelastic at the market wage.

Blooms: Analyze Difficulty: Easy Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions. Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run. Topic: 05-02 Demand for Labour in the Short Run

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, it will produce on the inelastic portion of its long-run labour demand curve. B. In equilibrium, the ratio of input prices equals the marginal rate of technical substitution. C. In equilibrium, the wage rate equals the slope of the isoquant. D. In equilibrium, the rate of return on capital equals the slope of the isoquant. E. In equilibrium, the rate of return on capital equals the wage rate.

D. MPL = MPK. E. Profits are maximized.

Blooms: Analyze Difficulty: Medium Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion. Topic: 05-08 The Relationship Between Short- and Long-Run Labour Demand 16. The scale effect of a wage change implies that: A.Firms substitute toward the input that has become relatively cheaper. B. Along with the substitution effect, the demand for labour is downward sloping. C. The demand for labour may be upward sloping if labour is an inferior input. D. The firm reduces its output in response to the wage increase. E. In order to increase output, a firm will use more labour even if the wage increases.

Blooms: Understand Difficulty: Medium Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion. Topic: 05-07 Separating Scale and Substitution Effects of a Wage Change

17.

The determinants of the wage elasticity of demand for labour include all of the following except: A.the availability of substitute inputs. B. the elasticity of supply 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

Blooms: Remember Difficulty: Medium Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market? Topic: 05-10 Elasticity of Demand for Labour 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 increase production B. It will hire more workers C. It will substitute capital for labour D. It will not react at all E. It will decide based on whether labour is an inferior factor of production or a normal one

Blooms: Apply Difficulty: Medium Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion. Topic: 05-09 Labour Demand Under Cost Minimization 19. The slope of an isoquant reflects: A.the marginal cost of labour. B. the wage elasticity of the demand for labour. C. the marginal rate of technical substitution between inputs. D. the marginal productivity of capital. E. the marginal productivity of labour.

Blooms: Remember Difficulty: Medium Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions. Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run. Topic: 05-05 Isoquants, Isocosts, and Cost Minimization

20.

Along an isocost curve, which of the following remains constant? A.The market prices of inputs B. The quantity of labour C. The quantity of capital D. The level of production E. The wage elasticity of demand for labour

22.

Which of the following statements regarding a firm’s production function is true? A.The marginal product of labour curve intersects the average product of labour curve at its lowest point. B. The average product of labour curve intersects the marginal product of labour curve at its highest point. C. The average product of labour curve intersects the marginal product of labour curve at its lowest point. D. The marginal product of labour curve must not intersect the average product of labour curve. E. The marginal product of labour curve intersects the average product of labour curve at its highest point.

Blooms: Analyze Difficulty: Medium Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions. Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run. Topic: 05-03 Wages, the Marginal Productivity of Labour, and Competition in the Product Market 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 and a larger scale effect away from domestic labour. B. There will be a large substitution effect and a smaller 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 small substitution effect toward domestic labour, but the scale effect will work in favour of domestic labour. E. There will be no substitution effect but only scale effect.

Blooms: Apply Difficulty: Hard Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion. Topic: 05-07 Separating Scale and Substitution Effects of a Wage Change

24.

In order to obtain the substitution effect of a wage change: A.One traces the change of the quantity demanded of labour through a parallel shift in the isocost line. B. One moves either up or down the labour demand curve. C. One traces the change in the quantity demanded of labour by moving along an isoquant curve as the prices change. D. One needs to first know the wage elasticity of demand for labour. E. One traces the change in output as firms respond to it.

Blooms: Analyze Difficulty: Hard Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion. Topic: 05-07 Separating Scale and Substitution Effects of a Wage Change 25. In order to obtain the scale effect of a wage change: A.One traces the change of the quantity demanded of labour through a parallel shift in the isocost line. B. One moves either up or down the labour demand curve. C. One traces the change in the quantity demanded of labour by moving along an isoquant curve as the prices change. D. One needs to first know the wage elasticity of demand for labour. E. One traces the change in output as firms respond to it.

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. It is not clear that Canadian and foreign labour are substitutes in production. 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. 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.

Blooms: Apply Difficulty: Medium Learning Objective: 05-05 Understand the impact of free trade, and of international competition more generally, on the Canadian labour market. Topic: 05-17 The Impact of Trade on a Single Labour Market 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. In a perfectly competitive industry, the wage increases will reduce output, which raises the market price of the product. C. In a monopoly, the wage increases will raise the product price and reduce output. D. The wage increases will reduce output, therefore total costs will be reduced as well. E. In the case of wage increases, the scale effect and the substitution effect work in the same direction to reduce labour demand.

28.

Which of the following is correct regarding the elasticity of labour demand? A.If capital and labour are easily substitutable, the derived demand for labour will be inelastic. B. If the supply of substitute inputs is inelastic, the derived demand for labour will be inelastic. C. If the product demand is elastic, the derived demand for labour will be inelastic. D. If the share of the labour costs in total costs is large, the derived demand for labour will be inelastic. E. None of the choices are correct.

Blooms: Analyze Difficulty: Hard Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market? Topic: 05-10 Elasticity of Demand for Labour Topic: 05-11 Availability of Substitute Inputs Topic: 05-12 Elasticity of Supply of Substitute Inputs

Topic: 05-13 Elasticity of Demand for Output Topic: 05-14 Share of Labour Costs in Total Costs 29. Which of the 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 decrease. 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 increase.

30.

Which of the following facts are correct regarding international comparison of labour costs and productivity? A.Canada’s compensation costs are relatively high compared to other European countries. B. Canada has relatively low productivity growth since 1990s compared to many other European countries. C. Canada’s unit labour costs are much lower since 1990s due to the increase of productivity. D. Canada’s unit labour costs are lower than that of the United States. E. Canada has relatively higher productivity growth since 1990s compared to many other European countries.

Essay Questions 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.

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. 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.

Blooms: Create Difficulty: Medium Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions. Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run. Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market? Topic: 05-01 Categorizing the Structure of Product and Labour Markets Topic: 05-02 Demand for Labour in the Short Run Topic: 05-03 Wages, the Marginal Productivity of Labour, and Competition in the Product Market Topic: 05-10 Elasticity of Demand for Labour Topic: 05-11 Availability of Substitute Inputs Topic: 05-12 Elasticity of Supply of Substitute Inputs Topic: 05-13 Elasticity of Demand for Output