MULTIPLE CHOICE QUESTIONS TESTBANK –

CHAPTER 12
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Answer the following questions by selecting the appropriate answer from the list below.

Question 1
Which one of the following statements is true?
A. If labour productivity rises more than wages rise, then costs per unit of output will fall.
B. If labour productivity rises more than nominal wages rise, then real wages will decrease.
C. If nominal wages increase by less than inflation, real wages will increase.
D. As real wages increase, nominal wages will fall.

Question 2
An upward-sloping labour supply curve illustrates that, ceteris paribus:
A. the quantity of labour supplied and the hours of work per week are directly related.
B. the quantity of labour supplied and the price of labour used to produce output are
inversely related.
C. individuals use higher income to buy back leisure time.
D. a greater quantity of labour would be supplied at higher wage rates.
E. all of the above statements are correct.

Question 3
Which of the following will NOT shift the market supply of labour?
A. A change in the size of the population due to a change in birth or death rates.
B. A change in the labour force participation rate (for example, of women).
C. A change in migration.
D. Trade union action.
E. A change in the wages of the workers.

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Question 4
Use the following table as the basis to answer Questions (a) to (c).

Number of Output per Marginal physical Price per unit

workers month product per month of output (R)
0 0 0 5
1 200 200 5
2 320 120 5
3 400 80 5

Question (a)
Marginal revenue product for the third worker equals:
A. R400
B. R200
C. R80
D. R2 000
E. R5

Question (b)
If the wage rate is R400 per worker per month, how many workers would the firm employ to
maximise profits?
A. 0
B. 1
C. 2
D. 3
E. More than 3, but not calculable from the given data.

Question (c)
If the marginal physical product of workers doubles as a result of better training and better
supervision, and wage rates stay at R400 per worker per month, how many workers would
be employed to maximise profits?
A. 2
B. 3
C. 6
D. More than 3 but not calculable from the data.
E. Fewer than 2 but not calculable from the data.

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Question 5
A change in wages causes a:
A. shift in the marginal revenue product curve for labour.
B. shift in the marginal physical product curve for labour.
C. shift in the derived demand curve for labour.
D. shift in the marginal revenue curve for labour.
E. movement along the demand for labour curve.

Question 6
Which of the following would cause a rightward shift of the demand for labour curve?
A. An increase in the price of output that labour produces.
B. A decrease in the demand for the output that labour produces.
C. A decrease in labour productivity.
D. A labour shortage.
E. A decrease in wages.

Question 7
Restricting entry into an occupation will ________ supply into that occupation and ________ wages.
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
E. decrease; not change

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Question 8
Use the diagram below which illustrates the imposition of a minimum wage w m in a perfectly
competitive labour market and answer Question 8.

Which one of the following statements about the diagram is false?

A. The minimum wage, wm, may have been introduced in an attempt to ensure a certain
minimum standard of living for all workers.
B. With the imposition of wm, the supply curve of labour will shift outwards.
C. At wm there is an excess supply of labour.
D. The imposition of wm may increase the employers’ costs of production.
E. The imposition of wm will decrease the quantity of labour demanded.

Question 9
An individual’s labour supply curve is positively sloped when:
A. the substitution effect of a wage increase is positive.
B. the income effect of a wage increase is negative.
C. the substitution effect is greater than the income effect.
D. the substitution effect is less than the income effect.
E. the substitution effect equals the income effect.

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Question 10
If wages fall, then:
A. according to the income effect, the worker’s demand for leisure will increase.
B. according to the substitution effect, the worker’s demand for leisure will decrease.
C. according to the substitution effect, the workers will substitute leisure time for working.
D. the income and substitution effects will work in the same direction.
E. the opportunity cost of not working increases.

Question 11
Although individual labour supply curves can have backward-bending segments, the market supply
curve of labour is always sloped upwards because of:
A. The income effect.
B. The substitution effect.
C. The total effect due to substitution and income.
D. The aggregation effect.
E. None of the above.

Question 12
The demand for labour curve slopes downwards because of:
A. falling demand for the output that labour produces.
B. diminishing returns to labour.
C. falling wages, causing more people to demand employment.
D. the supply of output.
E. a falling marginal cost curve in the product market.

Question 13
If foreign competition for South African producers of textiles increased, then we would expect the
demand for domestically produced textiles to _____ and the demand for labour to _____.
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
E. stay the same; decrease

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Question 14
The acquisition of human capital:
A. is an investment undertaken by an individual.
B. imposes both direct costs and opportunity costs on the individual.
C. would be expected to increase an individual’s productivity in employment.
D. would be expected to increase an individual’s earnings.
E. all of the above statements are correct.

Question 15
Workers are likely to have more bargaining power to negotiate higher wages with employers if:
A. they belong to a trade union.
B. they are more skilled.
C. there is limited substitution of capital for labour.
D. there is an excess demand for labour.
E. all of the above are correct.

Question 16
Which one of the following statements is incorrect?
A. The labour market is an important factor market in the economy.
B. The cost of labour is determined solely by the wages and salaries paid to workers.
C. Wages and salaries are also an important demand factor in the economy.
D. Productivity is an important determinant of the cost of labour.
E. There are significant differences between the labour market and the goods market.

Question 17
Which one of the following is not an important difference between the labour market and the goods
market?
A. Labour services are not transferable from one person to another.
B. Labour is always rented rather than sold.
C. Labour is embodied in people and is therefore homogeneous or standardised.
D. Labour is not traded at the best price on a daily basis.
E. The labour market is subject to a wide range of non-economic factors.

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Question 18
Which one of the following is not a requirement for perfect competition in the labour market?
A. A large number of employers.
B. A large number of employees.
C. Free entry and exit.
D. Labour should be heterogeneous (ie each worker must have unique skills).
E. Perfect knowledge of market conditions.

Question 19
Which one of the following is not a requirement for perfect competition in the labour market?
A. Perfect competition in the goods market.
B. Government intervention to support the market.
C. All employers must be wage takers.
D. All employees must be wage takers.
E. All firms must be price takers in the goods market.

Question 20
Which one of the following statements is incorrect?
A. Equilibrium in a perfectly competitive labour market occurs where the demand for labour is
equal to the supply of labour.
B. Equilibrium in a perfectly competitive labour market occurs where the quantity of labour
demanded is equal to the quantity of labour supplied.
C. Equilibrium in a perfectly competitive labour market is the result of the interaction between
the demand for labour and the supply of labour.
D. The demand for labour is a derived demand.
E. The individual supply of labour bends backwards when the income effect becomes stronger
than the substitution effect.

Question 21
Which one of the following statements is incorrect?
A. The individual supply of labour may bend backwards but it is unlikely that the market supply
of labour will bend backwards.
B. The market supply of labour may bend backwards but it is unlikely that the individual supply
of labour will bend backwards.
C. An increase in the wage rate increases the opportunity cost of leisure and persuades
workers to substitute work for leisure. This is called the substitution effect.
D. An increase in the wage rate increases the quantity of leisure demanded (since leisure is a
normal good). This is called the income effect.
E. If the income effect is stronger than the substitution effect, the individual supply of labour
bends backwards.

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Question 22
Which one of the following will not cause a shift in the market supply of labour?
A. Workers die as a result of tuberculosis and Aids.
B. An increase in the wage rate.
C. Illegal immigrants stream into the country, looking for work.
D. Safer and more pleasant working conditions are provided by employers.
E. A flood of new matriculants enter the labour market.

Question 23
Which one of the following statements is incorrect?
In a perfectly competitive labour market:
A. an individual firm faces an upward-sloping supply of labour.
B. all firms are wage takers.
C. all workers are wage takers.
D. the wage rate is determined in the market by the forces of supply and demand.
E. the marginal cost of labour to the firm is equal to the wage rate.

Question 24
Which one of the following statements is incorrect?
A. A firm will continue to employ labour as long as the employment of each additional unit
adds more to its total revenue than to its total cost.
B. A firm will continue to employ labour as long as the marginal benefit of the employment of
each additional unit exceeds the marginal cost thereof (ie the wage rate).
C. The marginal benefit of employing an additional unit is equal to the marginal physical
product (MPP) multiplied by the price of the product (P).
D. The marginal benefit of employing an additional unit is equal to the marginal revenue
product (MRP).
E. A firm will be in equilibrium if the marginal benefit of employing labour (MRP) is greater
than the marginal cost (the wage rate).

Question 25
A firm operating in a perfectly competitive labour market is in equilibrium where:
A. the marginal benefit of employing labour is greater than the marginal cost thereof.
B. marginal revenue product is equal to the wage rate.
C. marginal physical product multiplied by the price of the product is equal to marginal
revenue product.
D. the last worker hired adds nothing to the total product or revenue of the firm.
E. the law of diminishing returns has run its course.

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Question 26
Which one of the following statements about a perfectly competitive labour market is incorrect?
A. A firm is in equilibrium where the marginal cost of labour is equal to the marginal revenue
product of labour.
B. The marginal cost of labour is equal to the wage rate.
C. The marginal cost of labour represents the supply of labour to the firm.
D. The marginal revenue product represents the demand for labour by the firm.
E. The marginal cost of labour is illustrated by a downward-sloping curve.

Question 27
Which one of the following will not cause a change in the demand for labour, illustrated by a shift of
the demand curve?
A. An increase in the number of employers.
B. An increase in the wage rate.
C. An increase in the productivity of labour.
D. A decrease in the price of the product.
E. The introduction of labour-saving machinery.

Question 28
Which one of the following will not cause a change in the demand for labour, illustrated by a shift of
the demand curve?
A. A decrease in the number of employers.
B. A decrease in the wage rate.
C. A decrease in the productivity of labour.
D. An increase in the price of the product.
E. The introduction of labour-intensive machinery.

Question 29
Which one of the following is not a source of imperfection in the labour market?
A. Government intervention
B. Imperfect knowledge
C. Minimum wage legislation
D. Full mobility of labour
E. Trade unions

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Question 30
Which one of the following statements is incorrect?
A. Trade unions act as monopolistic suppliers of labour.
B. Labour markets are sometimes monopsonistic, meaning that there is only one major
employer or organisation.
C. Employers and employees usually have perfect knowledge about the labour market
conditions in which they operate.
D. The labour market is a segmented market.
E. Workers tend to lack occupational and geographical mobility.

Question 31
Trade unions can employ various strategies in an attempt to increase the wage rates of their
members. Which one of the following options will not tend to be accompanied by lower
employment (increased unemployment)?
A. Restrict the supply of labour.
B. Enforce a higher (disequilibrium) wage through strike action.
C. Lobby the government to institute a minimum wage above the equilibrium wage.
D. Work with the employers to increase the demand for the product.

Question 32
The current labour legislation in South Africa is best described as:
A. employer-friendly, flexible labour market policies.
B. worker-friendly, stable labour market policies.
C. regulated flexibility.
D. perfectly competitive labour market policies.
E. monopsonistic labour market policies.

Question 33
Which one of the following statements is incorrect?
Minimum wages:
A. are propagated as a means of avoiding the exploitation of labour.
B. are propagated as an attempt to ensure a certain minimum standard of living for the
workers concerned.
C. will create a surplus of labour if the minimum wage is fixed below the equilibrium wage.
D. will result in unemployment in a perfectly competitive labour market if the minimum wage
is fixed above the equilibrium wage.
E. will not necessarily create problems in imperfect labour markets.

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Question 34
Consider the following information for a firm that operates in perfectly competitive goods and
labour markets.

Number of Total physical Marginal physical Price of Marginal revenue

workers product product product product
(units per day) (units per day) (R per unit) (R)
1 10 20
2 25
3 35
4 44
5 52
6 58
7 60
8 57

Complete the table and use the data to answer the questions below.

Question (a)
How many workers should the firm employ if the wage rate is R160 per day?
A. 2
B. 3
C. 4
D. 5
E. 6

Question (b)
How many workers should the firm employ if the wage rate is R180 per day?
A. 2
B. 3
C. 4
D. 5
E. 6

Question (c)
What will happen to the firm’s profit if a sixth worker is employed at a wage rate of R160 per
day?
A. Rise
B. Fall
C. Remain unchanged
D. Reach a maximum
E. It is impossible to answer the question on the basis of the available information.

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