Deck 5: Demand for Labour in Competitive Labour Markets

Question 1

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

Answer 1

B

Question 2

Along an isocost curve, which of the following remains constant?

A) The quantity of capital
B) The wage elasticity of demand for labour
C) The market prices of inputs
D) The level of production
E) The quantity of labour

Answer 2

C

Question 3

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 input market.
C) The firm's demand curve for labour is identical to the case where the firm is a competitor in the output market.
D) The demand for labour is less elastic than it would be if the firm operated in a competitive output market.
E) None of the above choices are correct.

Answer 3

D

Question 4

The slope of an isoquant reflects:

A) the wage elasticity of the demand for labour.
B) the marginal rate of technical substitution between inputs.
C) the marginal cost of labour.
D) the marginal productivity of capital.
E) the marginal productivity of labour.

Question 5

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 hire more workers
B) It will increase production
C) It will substitute capital for labour
D) It will decide based on whether labour is an inferior factor of production or a normal one
E) It will not react at all

Question 6

All of the following statements regarding the marginal product of labour are true except:

A) It diminishes after the inflection point on the total product curve.
B) It is zero at the maximum value of total product.
C) It is the increment to revenue obtained by hiring one more unit of a variable factor.
D) It initially increases with the quantity of labour employed because of specialization.
E) It eventually diminishes because the capital stock is fixed.

Question 7

In the long run, which of the following statements is false?

A) MPL = MPK.
B) MPL / MPK = w / r.
C) Profits are maximized.
D) W = VMPL and r = VMPK.
E) VMPL / VMPK = w / r.

Question 8

What is the behavioural force that underlies the demand curve for labour?

A) Market share maximizing behavior on the part of firms
B) Profit maximizing behaviour on the part of firms
C) Revenue maximizing behaviour on the part of firms
D) Rate of return maximizing behavior on the part of investors
E) Utility maximizing behaviour on the part of workers

Question 9

Which of the following facts are correct regarding international comparison of labour costs and productivity?

A) Canada has relatively low productivity growth since 1990s compared to many other European countries.
B) Canada has relatively higher productivity growth since 1990s compared to many other European countries.
C) Canada's compensation costs are relatively high compared to other European countries.
D) Canada's unit labour costs are much lower since 1990s due to the increase of productivity.
E) Canada's unit labour costs are lower than that of the United States.

Question 10

In order to obtain the substitution effect of a wage change:

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

Question 11

For labour demand choices, the long run is defined as:

A) the period of time over which all inputs can vary.
B) the period of time over which variable factors cannot vary.
C) the period of time over which fixed factors cannot vary.
D) the time period over which all costs are fixed.
E) the period of time over which variable factors can vary.

Question 12

For a firm that is a competitor in the output market, the demand for labour does not depend on:

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

Question 13

A perfectly competitive labour market would be characterized by:

A) the presence of labour unions.
B) infinitely elastic labour demand curves.
C) wage-setting firms.
D) wage-taking firms.
E) the presence of monopsony power.

Question 14

The determinants of the wage elasticity of demand for labour include all of the following except:

A) the elasticity of demand for output.
B) the availability of substitute inputs.
C) the ratio of labour cost to total cost.
D) the elasticity of supply of substitute inputs.
E) All of the choices are determinants of the wage elasticity of demand

Question 15

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 first increases, then reaches a maximum level, and then decreases.
C) The marginal product of labour first decreases, then reaches a minimum level, and then increases.
D) The marginal product of labour increases at a decreasing rate.
E) The marginal product of labour decreases eventually.

Question 16

In order to obtain the scale effect of a wage change:

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

Question 17

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) The slope of the isoquant is equal to the slope of the isocost line.
B) A profit-maximizing firm will choose the cheapest capital-labour combination that yields the optimal output.
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) At the optimal level of output, labour is cheaper than capital.

Question 18

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 away from domestic labour, but the scale effect will work toward domestic labour.
B) There will be a small substitution effect and a larger scale effect away from domestic labour.
C) There will be a small substitution effect toward domestic labour, but the scale effect will work in favour of domestic labour.
D) There will be a large substitution effect and a smaller scale effect away from domestic labour.
E) There will be no substitution effect but only scale effect.

Question 19

Which of the following statements is false?

A) The demand for school teachers is likely to fall when the government decides to cut funding to schools.
B) The quantity demanded for school teachers is equal to the quantity supplied in equilibrium.
C) The demand for school teachers is likely to rise when the government decides to cut funding to schools.
D) The demand for school teachers is downward sloping because it is profitable for schools to hire more teachers when wages fall.
E) The demand for school teachers is likely to be quite wage elastic.

Question 20

The scale effect of a wage change implies that:

A) Firms substitute toward the input that has become relatively cheaper.
B) The demand for labour may be upward sloping if labour is an inferior input.
C) Along with the substitution effect, the demand for labour is downward sloping.
D) In order to increase output, a firm will use more labour even if the wage increases.
E) The firm reduces its output in response to the wage increase.

Question 21

In the short run, the demand for labour for a competitive firm is:

A) the marginal product of labour curve.
B) perfectly inelastic at the market wage.
C) the value of the marginal product curve.
D) the downward sloping portion of the value of the marginal product curve.
E) perfectly elastic at the market wage.

Question 22

• Outline step by step the derivation of the short run labour demand curve. Do not confuse this wit the model for long run labour demand involving isoquants and the isocost curves. You do not have t give a graph. The first step is a description of the behavioural assumption. Restrict your analysis to a 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 marke 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.

Question 23

The primary reason why workers in the fast-food industry are paid less is that:

A) These workers are seldom unionized.
B) These workers collect economic rents.
C) The demand for the product that they produce is quite elastic, making the demand for labour wage elastic.
D) It is easy to substitute capital for labour in the industry, making the demand for labour wage elastic.
E) Labour costs comprise a large share of the employer's expenses, making the demand for labour wage inelastic.

Question 24

Which of following is correct regarding the impact of globalization on the Canadian market?

A) The labour demand in the Canadian market will decrease.
B) 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.
C) The labour demand in the Canadian market will increase.
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) Due to global competition, due to the change of product price, productivity of Canadian labour will decrease.

Question 25

Which of the following statements regarding a firm's production function is true?

A) The marginal product of labour curve must not intersect the average product of labour curve.
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 intersects the average product of labour curve at its lowest point.
E) The marginal product of labour curve intersects the average product of labour curve at its highest point.

Question 26

The figures below give the production schedule and the product demand schedule for a firm, which has to decide how many workers to hire.
If the wage = $40 for the time period in question, then the number of workers hired is:

A) 2
B) 3
C) 6
D) 5
E) 4

Question 27

Regarding an increase in wage, which of the following is INCORRECT?

A) The wage increases will reduce output, therefore total costs will be reduced as well.
B) In a perfectly competitive industry, the wage increases will reduce output, which raises the market price of the product.
C) In the case of wage increases, the scale effect and the substitution effect work in the same direction to reduce labour demand.
D) In a perfectly competitive industry, the wage increases shift up the firm's marginal and average cost curves.
E) In a monopoly, the wage increases will raise the product price and reduce output.

Question 28

The figures below give the production schedule and the product demand schedule for a firm, which has to decide how many workers to hire.
Which of the following is correct regarding the elasticity of labour demand?

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

Question 29

Consider a firm that seeks to minimize the cost of producing a given level of output. Which of the following statements is true?

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

Question 30

It is not necessarily the case that Canadian workers are doomed to hold "bad" jobs as all of the "good" jobs are outsourced to countries with cheap labour. Which of the following related statements is false?

A) Canadian employers always have an incentive to seek out the lowest-cost labour and send the work there.
B) Outsourcing typically lowers the costs of production, which can lower the prices that Canadian consumers pay for certain goods, thereby permitting an increase in spending on other goods.
C) It is not clear that Canadian and foreign labour are substitutes in production.
D) One has to consider the unit labour costs in the two countries.
E) While Canadian labour is often expensive compared to foreign labour, it is often much more productive.

Question 31

The empirical evidence that exists concerning the magnitude of the wage elasticity of labour demand indicates that it tends to be:

A) negative and unitary elastic.
B) negative and inelastic.
C) negative and elastic.
D) nositive and inelastic.
E) None of the above choices are correct.