Modern Labor Economics Theory and Public Policy 12th Edition Ehrenberg Test Bank 1

Modern Labor Economics Theory and
Public Policy 12th Edition Ehrenberg

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Modern Labor Economics, 12e (Ehrenberg/Smith)

Chapter 5 Frictions in the Labor Market
1) A quasi-fixed cost of labor is a cost that

A) is expected to change over time.
B) is proportional to the number of hours worked.
C) is proportional to the number of workers hired.
D) is proportional to the amount of capital used.
Answer: C
Question Status: Old
2) Which of the following is definitely NOT a quasi-fixed cost of labor?

A) unemployment insurance
B) health insurance
C) overtime pay
D) vacation pay
1
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Answer: C
3) An increase in quasi-fixed costs would probably lead to a(n) ________ in the number of
employees hired and a(n) ________ in the number of overtime hours worked.
A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase
Answer: D
4) A mandated increase in overtime pay is likely to

A) cause employers to reduce overtime hours and convert them into added employment.
B) directly reduce the quasi-fixed costs per worker.
C) lead to a reduction in employment if higher costs cause a large scale effect.
D) lead to a reduction in employment if those who work overtime and those who are unemployed
are perfect substitutes.
Answer: C
5) A mandated increase in overtime pay is likely to

A) raise the average costs of labor, even if all overtime hours were eliminated.
B) cause an increase in labor hours due to the scale effect.
C) cause employers to increase straight-time hourly wages to compensate (because of the
"package" agreed upon).
D) cause an increase in labor hours due to the substitution effect.
Answer: A
2
6) Use of temporary-help agencies
A) increases employees' costs associated with searching for and applying for available temporary
openings.
B) increases the quasi-fixed costs of hiring temporary workers.
C) is more common when firms can build up inventories.
D) requires employers to pay more per hour than if they hired the worker directly.
Answer: D
7) Legislation requiring employer-provided health insurance for part-time workers would

probably ________ the employment of part-time workers and ________ the overtime of full-
time workers.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: C
8) If a firm offers specific training to its workers, when the training is over,
A) workers will most likely be paid a wage that is equal to their marginal product.
B) workers will most likely be paid a wage that is greater than their marginal product, to
compensate for the training.
C) workers will most likely be paid a wage that is less than their marginal product.
D) workers will most likely be paid a wage that is less than their wage before training.
Answer: C
9) A reserve clause binds a professional athlete to a sports franchise even if the player does not
have a contract with the team that retains the rights to the player. In other words, the player can
only play for a single team and other teams may not bid for the player's services even in the
absence of a contract. Major League Baseball was forced to outlaw reserve clauses in 1975. As
a result of the ban, we would expect that
A) major league teams would have less incentive to train minor league players.
B) minor league players would be paid more.
C) players in the major leagues would be paid less than their marginal product.
D) players in the major leagues would be paid more than their marginal product.
Answer: A
Question Status: Revised
3
10) Workers with firm-specific training are ________ likely to be laid off than are workers with
general training because ________.
A) more; they are paid less than workers with general training
B) more; their wage is less than their marginal product
C) less; they are paid less than workers with general training
D) less; their wage is less than their marginal product
Answer: D
11) Employment protection policies adopted in many European countries tend to

A) increase job creation.
B) increase layoffs and increase job creation.
C) reduce layoffs and increase job creation.
D) reduce layoffs and reduce job creation.
Answer: D
Question Status: New
12) Policies that protect workers against "unjust dismissal" have been shown to cause
A) decreased employment levels and increased hour fluctuations.
B) increased employment levels and decreased hour fluctuations.
C) increased employment levels and increased hour fluctuations.
D) decreased employment levels and decreased hour fluctuations.
Answer: A
13) A profit-maximizing firm which wants to provide firm-specific training to its workers will
pay ________ in the training period and ________ after training is completed.
A) the market wage for single period jobs; the market wage for single period jobs
B) more than the market wage for single period jobs; more than the market wage for single
period jobs
C) less than the market wage for single period jobs; less than the post-training marginal revenue
product
D) more than the worker's marginal revenue product in other jobs; more than the worker's
marginal revenue product in other jobs
Answer: C
14) A profit-maximizing firm that wants to train its workers CANNOT

A) equate the marginal revenue product of labor to the value of expenditures on labor over time.
B) allow worker marginal revenue product in the post-training period to exceed the wage paid in
the post-training period.
C) allow the wage in the post-training period to be equal to or greater than the worker's post-
training marginal revenue product.
D) allow the cost of training to exceed worker marginal revenue product during the training
period.
Answer: C
4
15) Suppose that mobility costs incurred by workers are low. In this circumstance, the best way
to provide incentives for on-the-job training is for
A) employees to bear all of the costs of the investment.
B) employers and employees to share the costs of the investment.
C) employers to force workers to accept a below market wage during the training period.
D) employers to bear all of the costs of the investment.
Answer: B
16) General training is usually paid for by

A) the employer.
B) the employee.
C) both the employer and the employee.
D) neither the employer nor the employee.
Answer: B
17) Specific training is paid for by

A) the employer.
B) the employee.
C) both the employer and the employee.
D) neither the employer nor the employee.
Answer: C
18) If a worker incurs the entire cost of general training, and if mobility costs are low, then we
would expect that the employee's wage will be
A) equal to his or her marginal revenue product of labor.
B) greater than his or her marginal revenue product of labor, due to the training received.
C) less than his or her marginal revenue product of labor, to pay for the cost of the training
received.
D) either greater or less than his or her marginal revenue product of labor.
Answer: A
19) During a recession, average labor productivity tends to decrease because output falls and
A) prices also fall.
B) workers with specific training are not laid off.
C) workers with general training are not laid off.
D) neither workers with general training nor workers with firm-specific training are laid off.
Answer: B
5
20) A firm could profitably pay for a worker's general training if
A) the worker could change jobs easily.
B) the worker was nearing retirement.
C) the training program would also serve as a screening device.
D) the training increased the quasi-fixed costs of hiring the worker.
Answer: C
21) The use of an internal labor market implies that

A) workers in lower-level jobs will become less motivated and less dependable.
B) workers at the firm have no firm-specific training.
C) most upper-level jobs will be filled by promoting current workers.
D) the firm relies exclusively on credentials.
Answer: C
22) All else equal, a firm will prefer to hire a worker who will
A) stay at the firm for a long period of time.
B) stay at the firm for a short period of time.
C) be willing to work only a limited number of hours.
D) acquire firm-specific training from another firm.
Answer: A
23) Statistical discrimination is

A) using statistics to judge the average characteristics of a group of workers.
B) judging one person according to a group to which he or she belongs.
C) using statistics in hiring.
D) firing people due to low average productivity.
Answer: B
24) If workers share in the cost of training but also share in the productivity payoff from the
training, then we expect that
A) quit rates will be lower.
B) quit rates will be higher.
C) layoff rates will be higher.
D) employers would have no incentive to hire such workers in the first place.
Answer: A
6
25) Training costs
A) exclude opportunity costs of trainees' time.
B) arise mostly from out-of-classroom training.
C) exclude the opportunity cost of using capital equipment.
D) exclude opportunity costs of trainers' time.
Answer: B
26) A monopsony can hire one worker at a wage of $5, two workers at a wage of $6 each, three
workers at $7 each, and so on (each added worker adding one dollar to the wage rate). If the
marginal revenue product for all workers is $16, what wage will it pay?
A) $10
B) $11
C) $16
D) $17
Answer: A
27) When a firm hires a fourth worker, its wage rate goes from $80 a worker to $90. The
marginal revenue product of the fourth worker is $100. If the firm hires the fourth worker, its
profits
A) will increase by $10.
B) will increase by $20.
C) will decrease by $10.
D) will decrease by $20.
Answer: D
28) Initially, when a firm hires a fourth worker, its wage rate goes from $80 a worker to $90. The
marginal revenue product of the fourth worker is $100. Then the government imposes a
minimum wage of $90 a worker. If the firm now hires the fourth worker, its profits
A) will increase by $10.
B) will increase by $20.
C) will decrease by $10.
D) will decrease by $20.
Answer: B
7
29) The marginal product of a new worker is 80 units and the marginal expense of a new worker
is $800. The marginal product of hiring current workers another hour is 10 units and the
marginal expense of hiring current workers another hour is $12. If the firm needs extra hours of
work (assuming the work could be done by either the new or current workers), it should
A) hire new workers.
B) hire current workers more hours.
C) be indifferent between hiring new workers or hiring current workers more hours.
D) not hire anyone for the added hours of work.
Answer: A
30) Which of the following events will likely lead a firm to use overtime rather than hire new
workers?
A) The firm gets rid of its pension plan.
B) The firm starts to pay for health insurance.
C) The marginal productivity of all workers, new and current, increases 20%.
D) Both overtime and base pay increase 20%.
Answer: B
31) A firm employs 10 workers at a weekly wage of $500. If it employs an eleventh worker, it
has to raise all of its workers wage to $520. The eleventh worker adds $750 a week to revenues.
If the firm hires the eleventh worker, its weekly profits will
A) go up by $230.
B) go up by $30.
C) go up by $23.
D) go down by $270.
Answer: B
32) Two employers, A and B, pay the same wage but Employer A faces a more inelastic supply
curve of labor than Employer B. Both firms are monopsonies but have similar outputs and
technologies. Other things being the same, then in the long run
A) Employer A will employ less capital than Employer B.
B) Employer A will employ more capital than Employer B.
C) Both employers will employ the same amount of capital.
D) Both firms, in the long run, will pay a wage equal to their marginal revenue product.
Answer: B
8
33) Two employers pay a wage of $10 an hour. Employer A is a monopsony while Employer B
hires in a competitive labor market. Both firms sell their output in competitive markets. Which of
the following will be true?
A) The marginal worker in both firms will add the same to the firm's revenue.
B) If a worker left employer A and joined employer B, the economy would be better off.
C) Employer A has a higher average wage cost per worker than Employer B.
D) It will cost employer A more to hire another worker.
Answer: D
34) Members of certain groups have the right to sue employers if discriminated against. Other
things the same, then according to the model of quasi-fixed costs, this right will tend to
A) increase the wage rate of the group.
B) reduce the employment of the group.
C) increase the turnover rate of the group.
D) reduce the unemployment rate of the group.
Answer: B
35) Workers that are least susceptible to layoffs during a recession are ________ and those with
________.
A) the most skilled; the longest job tenure
B) the least skilled; the least job tenure
C) the most skilled; the least job tenure
D) the least skilled; the most job tenure
Answer: A
36) A firm is currently employing 10 workers. To hire an 11th worker, it must raise its weekly
pay by $5 and pay the 11th worker $100. What is the marginal expense of the hiring the 11th
worker?
A) $100
B) $150
C) $105
D) $5
Answer: B
9
37) Regardless of area of expertise, a public school pays all teachers the same annual wage. At
$70,000, it hires good teachers in all areas except science. Because science is a field in demand,
the school can only hire poor science teachers. It would have to pay science teachers $90,000 to
hire good science teachers. If one out of five teachers is a science teacher, what is the marginal
expense of getting a good science teacher instead of a poor one?
A) $90,000
B) $100,000
C) $20,000
D) $450,000
Answer: B
38) Most colleges pay teachers different salaries in different fields. For example, they usually
pay science teachers more than English teachers. Public schools pay teachers in different fields
the same. As a result, in public schools, if they want to get better science teachers, they have to
raise everyone's wage. Which of the following is a consequence of paying teachers different
salaries, as they do in colleges?
A) It raises the cost of hiring a higher quality of teachers.
B) It reduces the cost of getting good teachers in the areas that are in high demand.
C) It results in relatively fewer good teachers being hired in areas of high demand.
D) It results in most teachers getting similar pay.
Answer: B
39) A monopsony's marginal worker has a marginal revenue product of $12 an hour and a wage
of $8. A minimum wage of $10 will have which of these effects?
A) decrease the average hourly cost of a worker
B) decrease the marginal hourly cost of a worker
C) increase the marginal revenue product of the marginal worker
D) increase the firm's average profit per worker
Answer: B
40) What is meant by the term monopsony? Under what circumstances do monopsonistic
conditions arise in the labor market?
Answer: A monopsony is the sole buyer of labor services in a labor market. Classic examples of
monopsony are a single employer in an isolated geographic area such as a coal mine or a mill.
Monopsony can exist in occupations. For example, again assuming a relatively small town that
is somewhat geographically isolated, there may be a single school system that hires teachers or a
single hospital that employs nurses. Monopsonistic conditions exist when the labor supply curve
faced by an individual employer is upward sloping rather than perfectly elastic. The labor supply
curve slopes upward when workers aren't completely mobile and find it costly to change jobs.
10
41) Suppose that a monopsonist employs 100 workers at a wage of $15 per hour. Assume that
the monopsonist has maximized profit and that the marginal revenue product is $20 per hour at
the current employment level. Explain how imposition of a minimum wage in this setting could
increase employment at the firm. Illustrate your discussion with an appropriate graph. What is
the highest minimum wage that could be imposed without loss of employment? Explain and
illustrate graphically.
Answer: A minimum wage set above $15 per hour and below $20 per hour will lead to an
increase in employment. This is because such a minimum wage reduces the employer's marginal
expense of labor from its current value of $20 per hour. Given the reduction in MEL, MRP >
MEL at an employment level of 100 workers, giving the firm the incentive to employ additional
workers. The student should draw an appropriately labelled graph, such as Figure 5.3 in the
textbook, to illustrate the discussion. The highest minimum wage that can be imposed without
loss of employment is $20 per hour. Any minimum wage above $20 per hour would mean that
MRP < MEL at an employment level of 100 thus giving the firm incentive to reduce the number
of workers it employs.
42) Explain what is meant by the term quasi-fixed cost of employment. Give some examples of
quasi-fixed costs of employment.
Answer: A quasi-fixed cost of employment is a cost that is associated with the number of
workers employed rather than the number of hours that employees work. Variation in hours
worked causes change in hourly wage costs incurred but does not change the quasi-fixed costs of
employment. Examples of quasi-fixed costs of employment include hiring and training costs,
firing cost, unemployment insurance payroll-tax liability, pension contributions under defined
benefit plans, provision of medical and life insurance, and paid vacations.
43) Is an employer's unemployment insurance payroll-tax liability a quasi-fixed cost of

employment? Why or why not?
Answer: The unemployment insurance payroll-tax liability is a (small) percentage of an
employee's annual earnings, but the amount of annual earnings subject to the tax is capped at
$15,000 or less in a majority of states. Because most full time workers earn more than $15,000,
variation in hours worked generally has no effect on unemployment insurance payroll-tax
liability and therefore this cost is a quasi-fixed cost of employment.
11
44) A firm employs M workers per week and the length of the workweek at the firm is H hours.
Let MPM be the added output from an additional employee and let MPH be the added output
from a one hour increase in the workweek at the firm. MEM and MEH are, respectively, the
marginal expense of an added worker and of an added hour of work. At present, the cost of an
added unit of output produced by hiring more workers is $5 while the cost of an added unit of
output produced by employing existing workers for more hours is $3. Is the firm maximizing
profits given its current employment level and workweek? If your answer is yes, explain why. If
your answer is no, explain why not and discuss what adjustments the firm should make.
Answer: The firm is not maximizing profit given the figures cited in the question. The marginal
unit of output can be produced at lower cost using fewer workers working a longer workweek.
For example, if the last unit of output is produced via an appropriate increase in H and
appropriate reduction in M, the cost of production falls by $2 and profit increases
commensurately by $2. The firm should substitute increases in H for reductions in M to the
point where = . Reducing the employment level and increasing the length of the
workweek, while holding capital and output produced constant, will cause MPH to decrease and
MPM to increase via the law of diminishing marginal returns, thus driving the marginal expense
to marginal product ratios toward equality somewhere between $3 and $5 per unit. Once the
ratios are equalized, no further reduction in cost (and increase in profit) can be achieved by
adjustment of the employment level and length of the workweek.
45) What is the overtime pay premium? Discuss its origin and who it covers.
Answer: The Fair Labor Standards Act of 1938 established an overtime pay premium of 50% of
the wage rate (time and a half) for eligible workers working more than 40 hours per week.
Eligible workers are, generally speaking, non-supervisory and paid on an hourly basis.
46) Approximately what percentage of male skilled craft workers and technicians work regularly
scheduled overtime? Given the overtime pay premium, why would an employer have workers
work regularly scheduled overtime rather than simply hire more workers and thus avoid the
overtime pay premium?
Answer: The textbook cites a study showing that over 20% of male skilled craft workers and
technicians work more than 44 hours per week on a regular basis. Though employers must pay
time and a half for hours worked beyond 40 hours, they must find it less expensive than bearing
the quasi-fixed costs of employment that would be incurred were the production accomplished
by more workers working 40 hours per week. Empirical evidence supports this insight, in that
the production workers that are more likely to work overtime hours on a regular basis are those
for which hiring and training costs are higher, i.e., skilled craft workers as opposed to unskilled
workers.
12
47) Under what conditions would an employer invest in training its employees? Explain.
Answer: Training is an investment in that it imposes costs (both explicit and implicit) in the
present, but yields a flow of benefits (the increased productivity that results from the training) in
future periods. An employer will be willing to train a new worker if the training raises the
worker's marginal revenue product by a greater degree than it raises the worker's future wage rate
and if, once the training has occurred, the employer is able to retain the worker for a period
sufficient to allow the firm to recoup the cost of the training.
48) "An employer will not invest in general training for its employees." Agree or disagree with
the statement and justify your response.
Answer: General training is training that provides skills that are useful to many different
employers. In order for a firm to bear the cost of training, the firm must be able to pay a wage
below the worker's marginal revenue product in the post-training period in order to recoup the
cost of the investment. Generating this surplus may prove difficult when the training is general,
because employers that did not bear the training cost will be able to pay a wage commensurate
with the value of the worker's productivity. So the basic theory predicts that firms will not be
inclined to provide general training to workers.
On the other hand, if the labor market is characterized by monopsonistic conditions and workers
find it costly to change jobs, then the firm's incentive to provide general training is stronger.
Another possibility is that the combinations of general skills required by particular employers
vary across employers. Therefore, if a given firm provides a particular combination of general
skills to a given employee, that specific combination may only be of use at the firm that provided
the training despite the general nature of the training. A third possibility is that what appears to
be general training is actually an investment by the firm used to ascertain information regarding
the learning abilities, work habits, and motivation levels of new employees.
49) Discuss how the use of credentials in the hiring process can represent an efficient investment
by the firm.
Answer: Credentials are objective indicators of a new employee's potential productive
capability. Credentials are used in the hiring process as a means by which to deal with the
inherent asymmetric information problem confronting the employer. Examples of credentials are
diplomas, certifications, letters of reference, and so on. They represent a lower cost means by
which to judge a worker's potential. Without use of credentials in the hiring process, an
employer might have to incur significant expense in order to identify workers with the skills and
abilities necessary to perform effectively in the position for which they are being considered.
Use of credentials in the hiring process is efficient in the sense that such use generally serves to
reduce hiring and training costs for the firm.
13
50) What is an internal labor market? What types of firms are most likely to rely on an internal
labor market? Explain.
Answer: An internal labor market is a means by which firms deal with asymmetric information
regarding potential new employees. Personal characteristics such as innate ability, motivation,
dependability, ability to work well with others, and so on are difficult to judge in the hiring
process. The presence or absence of such characteristics and qualities may only be revealed in
due time once the individual is employed. An internal labor market admits new workers into
low-level jobs. Workers that demonstrate the desired qualities and characteristics are
subsequently able to advance to positions with greater pay and responsibilities within the firm.
With an internal labor market, the firm commits to promoting from within. Workers that don't
meet expectations may be let go after a probationary period.
Firms most likely to rely on an internal labor market are those whose upper-level workers must
have a lot of firm specific knowledge. Such firm-specific knowledge is achieved by on the job
learning over a period of years. An internal labor market fosters long term commitment on the
part of employees to the firm, which is necessary in an environment where the firm makes
significant investment in a worker's firm-specific skills.
14

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Modern Labor Economics Theory and Public Policy 12th Edition Ehrenberg Test Bank 1

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Copyright:

Available Formats

Modern Labor Economics Theory and

Public Policy 12th Edition Ehrenberg

Full download at link:

Test Bank: https://testbankpack.com/p/test-bank-for-modern-labor-

Solution Manual: https://testbankpack.com/p/solution-manual-for-

Modern Labor Economics, 12e (Ehrenberg/Smith)

1) A quasi-fixed cost of labor is a cost that

2) Which of the following is definitely NOT a quasi-fixed cost of labor?

4) A mandated increase in overtime pay is likely to

5) A mandated increase in overtime pay is likely to

7) Legislation requiring employer-provided health insurance for part-time workers would

11) Employment protection policies adopted in many European countries tend to

14) A profit-maximizing firm that wants to train its workers CANNOT

16) General training is usually paid for by

17) Specific training is paid for by

21) The use of an internal labor market implies that

23) Statistical discrimination is

43) Is an employer's unemployment insurance payroll-tax liability a quasi-fixed cost of

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