Deck 3: Labor Demand

Question 1

The elasticity of substitution is the

A) change in capital over the change in the price of labor.
B) percentage change in capital over the percentage change in labor.
C) change in the price of capital over the change in the price of labor.
D) percentage change in the price of capital over the percentage change in the price of labor.
E) percentage change in the capital/labor ratio resulting from a 1-percent change in the relative price of labor to capital.

Answer 1

E

Question 2

Labor demand is more elastic the greater the elasticity of substitution between labor and capital because

A) workers supply more labor when their wage increases.
B) the firm's output price falls when the firm produces more output.
C) a firm is less willing to pay higher labor costs if it is easy for the firm to substitute capital for labor.
D) firms always have the option of substituting capital for labor.
E) a firm's technology is slow to change.

Answer 2

C

Question 3

The production function relates

A) factor prices to output prices.
B) wages to labor employed.
C) factors of production to total output.
D) factors of production to profit.
E) the output price to factors of production.

Answer 3

C

Question 4

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

Question 5

Labor demand is more elastic

A) the greater is the supply elasticity of capital.
B) the greater is the elasticity of substitution between labor and capital.
C) the greater is the elasticity of demand for the firm's output.
D) the greater is labor's share in total costs.
E) All of the statements are correct.

Question 6

The marginal rate of technical substitution at any particular labor-capital bundle is

A) the slope of the isoquant.
B) the average product of labor relative to the average product of capital.
C) the wage relative to the cost of capital.
D) the slope of the indifference curve.
E) the ratio of labor to capital.

Question 7

Ally owns a shoe store. The market wage is $10 per hour, and the cost of capital is $2 per week for every $1000, of capital borrowed. Consider the isocost line associated with spending $8000, per week, and let the y-axis be the amount of capital borrowed in increments of $1000. Which of the following is not true?

A) If Ally borrows no capital, she can employ 800 hours of work.
B) If Ally employs no workers, she can borrow $4 million of capital.
C) If Ally employs 600 hours of work, she can borrow $1 million of capital.
D) If Ally employs 400 hours of work, she can borrow $3 million of capital.
E) The slope of the isocost line is −5.

Question 8

At a wage of $25 per hour, the firm employs 50,000 of 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

Question 9

What is an example of the substitution effect?

A) Workers choose to provide more hours of labor when the wage rate decreases.
B) More labor is hired 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.

Question 10

Why is the short run labor demand curve less elastic relative to the long run labor demand curve?

A) Firms care about changes in wages in the short run but not in the long-run.
B) Firms are better able to substitute capital for labor in the long run compared to the short run.
C) Labor is a normal good.
D) A perfectly competitive firm can always pay lower wages in the long run.
E) Isoquant lines get shallower when the wage increases.

Question 11

At what point should a firm stop hiring workers?

A) when the wage per worker starts to increase
B) when the price of capital starts to decrease
C) when the firm's marginal gain in output from hiring an additional worker is zero
D) when the firm's marginal profit from hiring an additional worker equals the cost of hiring that worker
E) when the firm's value of marginal product equals zero

Question 12

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 one-to-one ratio by the firm.

Question 13

When estimating a labor demand function, one needs to

A) assume labor demand is equal across states.
B) assume labor demand is equal across industries.
C) labor supply is perfectly elastic.
D) find an instrument (e.g., policy) that shifts labor demand over time or location.
E) find an instrument (e.g., policy) that shifts labor supply over time or location.

Question 14

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.

Question 15

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 to employ either labor or capital, depending on which factor is cheaper.
C) The firm chooses a particular level of output to produce.
D) The price of the output good does not enter the decision of how much labor or capital to employ once the total amount of output to produce has been determined.
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.

Question 16

What is an example of the scale effect?

A) Workers choose to provide more hours of labor when the wage rate decreases.
B) The firm hires 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.

Question 17

The cross-elasticity of labor with respect to capital is the

A) change in labor relative to a change in capital.
B) change in wages relative to a change in the price of capital.
C) percent change in labor relative to a percent change in capital.
D) percent change in wages relative to a percent change in the price of capital.
E) percent change in labor relative to a percent change in the price of capital.

Question 18

The slope of the production function while holding capital fixed is

A) the marginal product of labor.
B) the marginal product of capital.
C) the average product of labor.
D) the labor-capital ratio.
E) the capital-labor ratio.

Question 19

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) the total output eventually decreases.

Question 20

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.

Question 21

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 nonresponsive 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.

Question 22

When using synthetic cohort analysis, the recent substantial increases in the minimum wage in Seattle led to

A) hours of work falling by about 10% and the number of low-wage jobs falling by about 5%.
B) no identifiable changes in the labor market for low-wage workers.
C) hours of working falling by about 10% for the average worker but no change in the number of low-wage jobs.
D) an increase in both hours of work and the number of low-wage jobs.
E) hours of work not changing and a very slight decrease in the number of low-wage jobs.

Question 23

In the United States, the federal minimum wage is legislated in nominal terms. This means that

A) the federal minimum wage is indexed for inflation.
B) the federal minimum wage historically decreases in value during stretches when the minimum wage is not increased.
C) employers do not have to pay payroll taxes on wages paid to minimum wage workers.
D) unemployed workers collect government assistance equal to the minimum wage.
E) the government pays the minimum wage to all local, state, and federal workers.

Question 24

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 for high-skilled labor with low-skilled labor.
E) lower the unemployment rate of low-income families.

Question 25

The imposition of an effective minimum wage in a non-competitive industry might result in

A) workers earning a lower wage.
B) more workers being hired.
C) higher firm profits.
D) a decrease in labor supply.
E) an increase in labor demand.

Question 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?

A) greater employment in the covered sector
B) less employment in the uncovered sector
C) a lower wage in the covered sector
D) a lower wage in the uncovered sector
E) workers willingly leaving the covered sector for the uncovered sector in search of higher wages

Question 27

If unskilled labor and capital are substitutes,

A) the 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.

Question 28

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. Average Weekly Hours per Big-Box Establishment
$\begin{array}{lcc} & \text { North Dakota } & \text { South Dakota } \\\text { Before } \mathrm{ND} \text { minimum wage increase: } & 128.4 & 110.3 \\\text { After } \mathrm{ND} \text { minimum wage increase: } & 114.6 & 108.2\end{array}$ The minimum wage increase is associated with average hours of work 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

Question 29

Compared to a more standard experimental design which would assign observations to a control group or to a treatment group, a synthetic cohort analysis

A) only has a treatment group.
B) only has a control group.
C) assigns observations to the control or treatment group based on certain demographics such as location or race.
D) finds other populations that "mirror" the treatment group in many ways in order to argue that these other populations can serve as a valid control group.
E) uses a sophisticated algorithm to estimate data for observations in the control group.

Question 30

For which reason is increasing the federal minimum wage not a good antipoverty program?

A) It is very costly for the government.
B) Roughly two-thirds of minimum wage earners are not the primary worker in their household.
C) Increasing the federal minimum wage will likely increase employment opportunities.
D) The minimum wage discriminates against minorities.
E) The minimum wage discriminates against the young.