ECON 2123 Quiz 3

Instructor: Prof. Wenwen Zhang

TA: Mr. Ding Dong

1. Which of the following variables is most directly determined in the labor market?
A) stock prices
B) nominal wages
C) interest rates
D) none of the above
Answer: B

2. The reservation wage is

A) the wage that an employer must pay workers to reduce turnover to a reasonable
level.
B) the wage that ensures a laid-off individual will wait for re-hire, rather than find
another job.
C) the lowest wage firms are allowed by law to pay workers.
D) none of the above
Answer: D
Solution: Reservation wage: the wage that would make them indifferent between
working or being unemployed.

3. In the wage-setting relation, the nominal wage tends to decrease when

A) the price level increases.
B) the unemployment rate decreases.
C) unemployment benefits decrease.
D) the minimum wage increases.
Answer: C
Solution: From wage setting equation that W = P e F (u, z), nominal wage decreases
when: price level decreases; unemployment rate increases or unemployment benefits
decrease. Intuitively, when the condition of unemployment is worsen, people are

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inclined to work, thus labor supply increases, and labor price (which is nominal
wage) decreases.

4. Suppose workers and firms expect the overall price level to increase by 5%. Given
this information, we would expect that
A) the nominal wage will increase by less than 5%.
B) the nominal wage will increase by exactly 5%.
C) the nominal wage will increase by more than 5%.
D) the real wage will increase by 5%.
Answer: B
Solution: From wage setting equation that W = P e F (u, z), wage changes at the
same rate as price level.

5. Suppose the aggregate production function is given by the following: Y = AN.

Given this information, we know that labor productivity is represented by which of
the following?
A) 1/A
B) A
C) 1/N
D) N/Y
Answer: B

6. The price setting equation is represented by the following: P = (1 + m)W. When

there is perfect competition, we know that 1+m will equal
A) W.
B) P.
C) 1.
D) W/P.
Answer: C
Solution: At perfect competition, mark-up is zero. In other words, at perfect com-
petition companies set price at marginal cost.

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7. The natural level of employment (N) will increase when which of the following
occurs?
A) an increase in the markup of prices over costs
B) a reduction in unemployment benefits
C) an increase in the actual unemployment rate
D) all of the above
Answer: B
Solution: The natural rate of unemployment is solely determined by the condition:
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F (un , z) = 1+m . An increase in the markup of prices over costs will lower the RHS,
thus at equality LHS F (un , z) will decrease accordingly. Because F (un , z) is a de-
creasing function of un , F (un , z) decreases implies that un will increase, or that N
will decreases. Thus A) is incorrect. A reduction in unemployment benefits de-
creases z, thus decreases F (un , z). As the RHS remains unchanged, to ensure that
the equality holds, it must be that un decreases (which implies F increases), or that
N increases. Thus B) is correct. Actual unemployment rate is irrelevant to natural
unemployment rate in this sense.

8. Suppose we wish to examine the determinants of the equilibrium real wage and
equilibrium level of employment (N). In a graph with the real wage on the vertical
axis, and the level of employment on the horizontal axis, the price-setting relation
will now be
A) a vertical line.
B) a horizontal line.
C) an upward sloping line.
D) a downward sloping line.
Answer: B

9. Suppose that the mark-up of goods prices over marginal cost is 25%, and the
wage-setting equation is W = P (1 − u), where u is the unemployment rate. The
natural rate of unemployment is :

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A) 0.1
B) 0.2
C) 0.3
D) 0.4
Answer: B
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Solution: From the condition that (1 − u) = 1+m
, when m=0.25, u=0.2.

10. Based on our understanding of the labor market model presented in Chapter 7,
we know that an increase in the markup will cause
A) an increase in the equilibrium real wage.
B) a reduction in the equilibrium real wage.
C) a reduction in the natural rate of unemployment.
D) both B and C
Answer: B
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Solution: From the condition of W/P = F (un , z) = 1+m , when m increases, real
wage decreases.

THIS IS THE END OF QUIZ 3.