Group a Group b

1) wage rate a. is the summation of the labor

demanded by all firms in a
particular labor market at each
level of the real wage
2) Rationality b. is the study of the workings of
the market for labor, which is
primarily concerned with the
behavior of employers and
employees in response to the
general incentives of wages,
prices, profits, nonpecuniary
aspects of the employment
relationship
3) Normative Economics c. to analyze the effect of this
wage increase on the
employment of machinists in
the entire aircraft industry, we
utilize an industry demand
curve.
4) The Market-Clearing Wage d. such as minimum wage laws
usually serve to keep wages
above market levels, which
could result in widespread
unemployment.
5) Public Goods e. The price of labor that
equilibrate the labor market
6) The labor force f. Market failure that arises when
a person is willing to consume
a good or service but he/she is
not willing to pay the cost of its
 provision/production – “free
rider problem.”
7) (AWP) g. The basic assumption that
people are rational – that
means they have an objective,
which they pursue in a
reasonably consistent fashion.
8) Earnings h. Eventually, adding more L will
produce progressively smaller
increments of output
9) Labor economics i. is the study of what “should
be,” and the theories of social
optimality are based in part on
the underlying philosophical
principle of “mutual benefits” –
which begins with the
realization that there could be
two kinds of economic
transactions.
10) A substitution effect j. consists of those (>16 years of
age) who are employed (E) and
those who are unemployed (U)
but are actively seeking work
or waiting to be recalled from
layoff
11) Industry level k. refer to wages multiplied by
the number of time
units/hours worked.
12) Positive Economics l. The wage rate (We) at which
LD equals LS that is, no labor
surplus and/or no labor
shortage
13) Total compensation m. includes earnings, benefits, and
unearned income, which
included dividends or interest
14) deferred payments n. consists of those who are over
16 years of age and are in the
 labor force (LF) and not in labor
force (NLF).
15) Earnings o.
16) Income p. capital is substituted for labor
in the production process.
17) A market demand curve q. consists of earnings plus
employee benefits.
18) law of diminishing r. employer-financed retirement
marginal returns. benefits – Social Security taxes
– set aside money that enables
employees to receive pensions
later.
19) Government programs or s. is a theory of behavior in which
laws people are typically assumed to
respond favorably to benefits
and negatively to costs, and
underlying this theory of
behavior are the basic
assumptions of scarcity and
rationality.

1. Labor services cannot be separated from workers.

2. When we study economic of labor the objective for persons is
utility maximization.
3. The assumption of rationality implies a consistency of response to
general economic incentives and an adaptability of behavior when
those incentives change.
4. Economists assume that the choices and decisions made by
employees and employers. are guided by their desire to maximize
utility or to maximize profit, respectively.
5. Externalities – Market failure that arises when a buyer and a seller
agree to a transaction that imposes costs (negative externality or
spillover) or benefits (positive externality/spillover) on people who
were not party to their decision.
 6. Real wages or the real purchasing power of a worker’s earnings –
nominal wages divided by some measure of prices (usually the
consumer price index – CPI).
7. Total compensation consists of earnings plus employee benefits.
8. increase in wage will lead to: A scale or output effect – the
reduction in the scale of production or output due to the reduction
in employment
9. In perfectly or purely competitive product market: MR = AR = P
10.When both product and labor markets are competitive, it is
assumed that: All producers or sellers are price takers in the
product market.
11.Profits are maximized only when employment is such that any
further one-unit change in labor would have a marginal revenue
product equal to marginal expense.
12.In long-run, the firm’s ability to adjust other inputs such as capital
will affect the demand for labor.
13.To maximize profits, the firm must adjust its labor and capital
inputs so that the marginal cost of producing an added unit of
output using labor is equal to the marginal cost of producing an
added unit of output using capital.
14.If two inputs are substitutes in production, and if an increase in
the price of one input shifts the demand for another input to the
left then the scale effect dominates the substitution effect – inputs
are gross complements.
15.If the increase in the price of one input shifts the demand for the
other input to the right as indicated in panel (b) of Figure 3.3, then
the substitution effect dominates – inputs are gross substitutes.

 MCQ

One way a transaction can be unanimously supported is when:

 Some gain and some lose from the transaction;
however the gainers do not fully compensate
the losers.
All parties affected by the transaction lose.

All parties affected by the transaction gain.

Joe wins but Sue loses.

One’s working conditions other than their wage are known as:

Product market factors.

Slavery factors.

Nonpecuniary factors.

Monetary factors.

Some economists are against minimum wage laws because:

Economists argue that "money cannot buy happiness, so paying these people more will
not necessarily increase their utility."
Minimum wage laws may block transactions that parties might be willing to make at a
lower wage.
Economists are notorious for having disregard for the poor.

Minimum wage laws will inevitably result in excess demand for labor at the newly-
established minimum wage.

Which of the following is not an

example of market failure?
Perfect information.

Nonexistence of markets.

Price distortions.

Ignorance.

To be counted as one of the official

unemployed, one needs to be:
16 or older and not seeking employment.
 16 or older and actively seeking employment.

16 or older and incarcerated in a corrections

facility.
under 16 and a full-time student.

Which sector of the economy has shown the

greatest percentage reduction in employment
since 1954?
Government

Services

Wholesale and Retail Trade

Manufacturing

A person’s real wages are:

the same thing as their discretionary income.

always equal to their nominal wages.

nominal wages divided by some index of prices.

what is really reported on their paycheck after taxes

have been taken out.

Who represents the supply side of the labor market?

Firms

Government

Workers and potential workers

All of the above.

At the market-clearing wage rate:

there is an excess demand for labor.

unintended inventory accumulation will necessarily result in the output market.

demand for labor equals supply of labor.

there is an excess supply of labor.

When
economists
refer to labor
demand as a
derived demand,
they mean:
Its demand is derived from supply.

Its demand is found by taking the first derivative of the total

revenue function.
Its demand is derived from the demand for the good or service
workers contribute to producing.
Its demand is derived from the historical precedent of
compensation for comparable jobs.

The profit-maximizing output will always occur where:

Total revenue equal total costs.

Marginal revenue equals marginal costs.

Average revenue equals average costs.

A firm’s customer goodwill is maximized.

The Marginal Product of Labor (MPL) represents the:

Additional output generated by increasing capital by one unit.

Additional sales generated by increasing labor by one unit.

Additional output generated by increasing both labor and capital

such that the factor proportions used in the production process
are unaltered.
Additional output generated by increasing labor by one unit.

In the long run an increase in the wage, W, causes

both a scale effect and a substitution effect, but the overall impact on
employment is ambiguous because either one of these effects might
dominate depending on the firm in question.
a scale effect and a substitution effect, which both cause the firm to
reduce its desired employment level.
a substitution effect, leading the firm to reduce its desired
employment level, and an income effect, leading the firm to increase
its desired employment level.
only a substitution effect, leading the firm to reduce its desired
employment level.
If two inputs are substitutes in production, then an increase in the
price of the other input will shift the demand curve for a given
category of labor to
the left under any conceivable circumstance.

the right if the substitution effect is larger than the scale effect in absolute
value.
the right if the substitution effect is smaller than the scale effect in absolute
value.
the left if the substitution effect is larger than the scale effect in absolute
value.

A critical assumption economists make about the relationship

between the quantity of labor hired and the marginal product of
labor is that:

The MPL diminishes to an irreducible minimum, then increases (i.e., the

MPL curve is u-shaped).
The two variables are totally unrelated.

The MPL increases as additional units of labor are added to the production
process.
The MPL diminishes as additional units of labor are added to the
production process.

Explain

Policy Application:
The Labor Market Effects of Employer Payroll Taxes and Wage
Subsidies
Governments finance certain social programs through taxes –
payroll taxes – that require employers to remit payments based on
their total payroll costs.

Who Bears the Burden of a Payroll Tax?

Payroll taxes are used to finance government programs such as:
Unemployment insurance
Social Security retirement
Disability
Medicare/Medicaid
Let X be the fixed amount of tax per labor hour rather than a
percentage of payroll.
Shifting the Demand Curve

Payroll taxes will shift the labor demand curve to the left.

Employers will decrease their employment of workers if their wage

costs (wage bill) increase by the tax amount of X (that is, W + X )
due to payroll tax.

Employers will retain the same amount of workers as before the

payroll tax was imposed if the entire tax burden is passed onto the
workers, that is, workers’ wages fall by the tax amount of X
(hence, W – X).
Employees bear a burden in the form of lower wage rates and
lower employment levels when the government chooses to
generate revenues through a payroll tax on employers.

The Market Demand Curve and Effects of an Employer-Financed

Payroll Tax

 Effects of Labor Supply Curves

If the labor supply curve were vertical – meaning that lower or
higher wages have no effect on labor supply – the entire amount
of the tax will be shifted to workers in the form of a decrease in
their wages by the amount of X (hence W – X).
The incidence of tax burden on employers and employees depends
on the responsiveness (elasticities) of labor demand and labor
supply to changes in wages.
If wages do not fall due to an employer payroll-tax increase,
employment levels will, and employer labor costs will increase
thus reducing the quantity of labor demanded.

Payroll Tax with a Vertical Supply Curve