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Macroeconomics (Acemoglu/Laibson/List)
Chapter 9 Employment and Unemployment
9.1 Measuring Employment and Unemployment
1) Which of the following is a part of the potential work force of a country?
A) Institutionalized people
B) Children aged 15 and lower
C) People on active duty in the military.
D) Civilian non-institutionalized people aged 16 years and above
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Classifying Potential Workers
2) The potential adult work force includes:
A) civilian non-institutional population 16 years and over.
B) non-institutional population 18 years and over.
C) non-institutional population 16 years and over plus people on active duty in the military.
D) non-institutional population 13 years and over plus people on active duty in the military.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Classifying Potential Workers
3) An employed individual is one who:
A) has a full-time or part-time paid job.
B) has been actively looking for jobs.
C) was previously employed but has quit his job voluntarily.
D) is performing household chores for free.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Classifying Potential Workers
4) Which of the following groups of people will NOT be considered as employed?
A) Teachers in public schools
B) Housewives raising kids at home
C) Paid workers in the agricultural sector of a country
D) Government representatives earning a fixed salary every month
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Classifying Potential Workers
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5) Which of the following statements is true?
A) All people seeking paid jobs are eventually employed.
B) Some people seeking paid jobs may not be able to find employment.
C) The wages expected by potential workers are independent of their work experience.
D) The wages expected by potential workers are independent of their educational qualifications.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Classifying Potential Workers
6) A worker is unemployed if he:
A) does not have a job and is not actively looking for a job.
B) is working from home and drawing a weekly salary.
C) has been working part-time and has been actively looking for full-time work.
D) does not have a job and has been actively looking for one in the prior four weeks and is
available for work.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Classifying Potential Workers
7) Which of the following groups of people will be considered as unemployed?
A) Workers who experienced a wage cut due to recession
B) Employees working in public sector undertakings
C) Housewives raising kids at home and not looking for jobs
D) Agricultural workers who are unemployed and have been looking for jobs for the last four
weeks
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Classifying Potential Workers
8) Which of the following groups of people will be considered as unemployed?
A) Stock brokers
B) Part-time teachers in schools
C) Graduates who do not have a job and are not looking for one
D) Housewives who do not have a job but have been actively looking for jobs for the last two
months
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Classifying Potential Workers
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9) Which of the following statements is true of the U.S. economy in 2014, as per the records of
the BLS?
A) Number of unemployed workers > number of employed workers > number of adults out of
the labor force
B) Number of employed workers > number of unemployed workers > number of adults out of
the labor force
C) Number of employed workers > number of adults out of the workforce > number of
unemployed workers
D) Number of unemployed workers > number of adults out of the workforce > number of
employed workers
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
10) The size of the labor force in a country is equal to the:
A) number of employed workers in the country.
B) number of unemployed workers in the country.
C) number of employed workers plus the number of unemployed workers in the country.
D) number of employed workers minus the number of unemployed workers in the country.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
11) If the number of employed people in a country is 21 million, and the number of unemployed
workers in a country is 10 million. The size of the labor force in the country is equal to
________.
A) 10 million
B) 11 million
C) 21 million
D) 31 million
Answer: D
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
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Consider an economy that consists of the following economic agents only.
2 million full-time workers
1 million part-time workers
1 million people who have been laid off by their employers but are currently looking for
employment
1 million children of age fifteen years or less
2 million housewives not looking for jobs
12) Refer to the scenario above. What is the number of employed workers in the economy?
A) 1 million
B) 2 million
C) 3 million
D) 4 million
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
13) Refer to the scenario above. What is the number of unemployed workers in the economy?
A) 1 million
B) 2 million
C) 3 million
D) 4 million
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
14) Refer to the scenario above. What is the size of the labor force in the economy?
A) 3 million
B) 4 million
C) 5 million
D) 6 million
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
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15) Which of the following equations is correct?
A) Adults not in the labor force = unemployed - employed
B) Adults not in the labor force = labor force - unemployed
C) Adults not in the labor force = potential adult workers
D) Adults not in the labor force = potential adult workers - labor force
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
16) Which of the following groups of people is included in the labor force of a country?
A) Retirees
B) Part-time paid workers
C) Adults who are full-time students
D) Disabled workers who can no longer work
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
17) Which of the following equations is correct?
A) Adults not in labor force = unemployed workers
B) Adults not in labor force = unemployed workers - employed workers
C) Adults not in labor force = potential adult workers - employed workers
D) Adults not in the labor force = potential adult workers - employed workers - unemployed
workers
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
18) If the number of potential workers in a country is 25 million, and the size of the labor force
in the country is 17 million, the number of adults not in the work force will equal:
A) 8 million.
B) 17 million.
C) 25 million.
D) 43 million.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
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19) If the number of employed workers in an economy is 4 million, the number of unemployed
people in the economy is 2 million, and the number of adults not in the labor force is 1 million,
the potential adult workers in the economy is:
A) 1 million.
B) 2 million.
C) 6 million.
D) 7 million.
Answer: D
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
20) If the number of employed workers in an economy is 8 million, the number of potential
workers in the economy is 12 million, and the number of adults not in the labor force is 1
million, the number of unemployed people in the economy will equal:
A) 1 million.
B) 3 million.
C) 5 million.
D) 7 million.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
21) The unemployment rate is defined as the:
A) percentage of labor force that is unemployed.
B) percentage of total population that is unemployed.
C) percentage of civilian non-institutionalized population aged 12 or over that is unemployed.
D) percentage of civilian non-institutionalized population aged 14 or over that is unemployed.
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
22) If the number of unemployed workers in an economy is 4 million, and the size of the labor
force in the economy is 16 million, the unemployment rate in the economy is:
A) 4 percent.
B) 8 percent.
C) 25 percent.
D) 30 percent.
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
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23) If the number of employed workers in a country is 6 million, and the size of the labor force
in the economy is 8 million, the unemployment rate in the country is:
A) 8 percent.
B) 24 percent.
C) 25 percent.
D) 30 percent.
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
24) The number of adults not in the work force of a country equals 6 million and the number of
individuals employed is 5 million. If there are 12 million potential adult workers in the economy,
what is the current unemployment rate in this country?
A) 12.45 percent
B) 16.67 percent
C) 21 percent
D) 30.55 percent
Answer: B
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
25) If there are 48 million people in a country's labor force, and the number of potential adult
workers in the country is 80 million, the labor force participation rate in the economy is:
A) 48 percent.
B) 60 percent.
C) 80 percent.
D) 90 percent.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
26) If the labor force participation rate in an economy is 50%, and there are 100 million potential
adult workers in the economy, the size of the labor force in the economy will equal:
A) 2 million.
B) 10 million.
C) 50 million.
D) 100 million.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
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27) Workers who are unemployed but are not actively looking for jobs are referred to as:
A) laid off workers.
B) laid back workers.
C) abandoned workers.
D) discouraged workers.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
28) Workers who are underemployed are:
A) considered as employed.
B) considered as unemployed.
C) not counted in the labor force.
D) considered as discouraged workers.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
29) Which of the following statements correctly differentiates between unemployed workers and
discouraged workers?
A) Unemployed workers do not have a paid job, while discouraged workers have a paid job.
B) Unemployed workers are counted in the labor force, but discouraged workers are excluded
from the labor force.
C) Unemployed workers refer to the skilled workers who have been laid off, while discouraged
workers refer to the unskilled workers who have lost their jobs.
D) The unemployment benefits received by unemployed workers are not capped, while the
unemployment benefits received by discouraged workers are capped at a maximum.
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
30) If there is an increase in the number of discouraged workers in a country, ________.
A) the unemployment rate will increase
B) the unemployment rate will decrease
C) the labor force participation rate will increase
D) the labor force participation rate will decrease
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
8
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31) If the number of potential workers in an economy increases while the size of the labor force
remains unchanged, ________.
A) the natural rate of unemployment will increase
B) the labor force participation rate will fall
C) the labor force participation rate will increase
D) the labor force participation rate will remain unaffected
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Calculating the Unemployment Rate
32) Which of the following statements is true?
A) As an economy experiences growth in GDP, the rate of unemployment is expected to
decrease.
B) As an economy experiences growth in GDP, the rate of unemployment is expected to
increase.
C) The unemployment rate in a country always remains constant.
D) The unemployment rate in a country is not correlated with the level of economic activity in
the country.
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Trends in the Unemployment Rate
33) Which of the following statements is true of the unemployment rate in a country?
A) It normally increases during periods of economic expansion and decreases during periods of
economic contraction.
B) It normally decreases during periods of economic expansion and increases during periods of
economic contraction.
C) It normally decreases during periods of both economic expansion and contraction.
D) It is not correlated with the level of economic activity in a country.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Trends in the Unemployment Rate
34) Which of the following statements is true of unemployment?
A) In periods of expansion, the unemployment rate in an economy increases.
B) In periods of contraction, the unemployment rate in an economy decreases.
C) The unemployment rate in most of the developed nations in the world is zero percent.
D) The rate of unemployment is positive in any well-functioning economy.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Trends in the Unemployment Rate
9
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35) Which of the following statement is true?
A) The minimum unemployment rate in the U.S. economy has been 0%.
B) The recession of 2007-2009 was the period when the unemployment rate in the United States
was the highest ever.
C) In the last thirty years, the unemployment rate in the U.S. has never gone below 3%.
D) The unemployment rate in the U.S. economy has been increasing since 1900.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Trends in the Unemployment Rate
36) Which of the following statements is true?
A) The unemployment rate in a country normally increases when the country's economy
expands.
B) Unemployment rate is higher among groups with lower educational attainment.
C) More educated workers have a lower opportunity cost of time than less educated workers.
D) In the United States, the unemployment rate among bachelor degree holders is more than the
unemployment rate among high school diploma holders.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Who Is Unemployed?
37) Which of the following statements is true?
A) All else equal, the incentive to look for a job is higher for an individual with a lower
opportunity cost of time.
B) All else equal, the incentive to look for a job is lower for an individual with a lower
opportunity cost of time.
C) All else equal, a worker who earned a higher income earlier but is now unemployed will have
a lower opportunity cost of time than someone who had a lower income but is now unemployed.
D) All else equal, a worker who earned a higher income earlier but is now unemployed will have
the same opportunity cost of time than someone who had a lower income but is now
unemployed.
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Who Is Unemployed?
10
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38) If unemployment rate among workers with no high school diploma is represented by NS,
unemployment rate among workers with an high school diploma is represented by HS, and
unemployment rate among workers with a bachelor's degree is represented by BS, then which of
the following statements is true?
A) NS > HS > BS
B) HS > NS > BS
C) BS > HS > NS
D) NS > BS > HS
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Who Is Unemployed?
39) Which categories of people are excluded while estimating the number of potential workers in
the United States?
Answer: There are three categories of people who are excluded while estimating the number of
potential adult workers in the United States. These are:
a) Children under 16 years of age
b) People on active duty in the military
c) Institutionalized people
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Classifying Potential Workers
40) Who is an unemployed worker? If the number of employed workers in a country, where the
size of the labor force is 4 million, is 2.75 million, what is the number of unemployed workers in
the country?
Answer: A worker is unemployed if he or she does not have a job, has actively looked for work
in the prior four weeks, and is currently available for work.
The labor force in a country equals the sum of employed workers and unemployed workers.
Hence, the number of unemployed workers in the country is (4 - 2.75) million or 1.25 million.
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Classifying Potential Workers; Calculating the Unemployment Rate
41) In an economy, the number of potential workers is 60,000, the size of the labor force is
45,000, and the number of employed workers is 39,000. Calculate the unemployment rate and
labor force participation rate in the country.
Answer: Unemployment rate in the country = (Labor force - employed workers)/Labor force
= (45,000 - 39,000)/45,000 = 13.33%.
Labor force participation rate in the country = Labor force/potential adult workers
= 45,000/60,000 = 75%.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
11
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42) Consider two individuals: John and Jenna. John has an opportunity cost of time equal to $50
per hour, while Jenna has an opportunity cost of time equal to $25 per hour. Which of the two
individuals has a greater incentive to look for work when unemployed?
Answer: In this case, the opportunity cost of time of an individual reflects the amount of income
he would generate if he worked for an hour. Since John has a higher opportunity cost of time
than Jenna, he can earn higher income than Jenna if he finds work. Hence, John will have a
greater incentive to look for work when he is unemployed in comparison to Jenna.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Who Is Unemployed?
43) In an economy, out of 221.6 million potential workers, 180.65 million are employed. If the
labor force in the economy is 200.5 million, calculate:
a. the number of unemployed workers.
b. the unemployment rate.
c. labor force participation rate
d. number of potential workers who are not a part of the labor force.
Answer:
a. Labor force = number of employed workers + number of unemployed workers
200.5 million = 180.65 million - number of unemployed workers
Therefore, number of unemployed workers = 200.5 million - 180.65 million = 19.85 million
b. The unemployment rate in an economy = (number of unemployed workers/labor force) ×
100.
Hence, unemployment rate = (19.85 million/200.5 million) × 100 = 9.9%.
c. Labor force participation rate = (Labor force/potential workers) × 100%
= (200.5/221.6) × 100% = 90.47%.
d. Number of potential workers not in the labor force = potential workers - labor force
= 221.6 million - 200.5 million = 21.1 million
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate
9.2 Equilibrium in the Labor Market
1) As a firm hires more and more workers:
A) the marginal product of the additional workers remains the same.
B) the value of marginal product of the additional workers remains the same.
C) the value of marginal product of the additional workers eventually increases.
D) the value of marginal product of the additional workers eventually decreases.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Demand for Labor
12
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2) A profit-maximizing firm will pay a worker:
A) the revenue that it earns by selling one unit of the product.
B) the value of the worker's marginal product.
C) less than the value of the worker's marginal product.
D) more than the value of the average revenue of the firm.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Demand for Labor
3) The value of a worker's marginal product:
A) is the additional revenue that the worker brings in to the firm.
B) is the maximum price at which a product can be sold in a market.
C) is the increment in total cost of a firm when the worker is hired.
D) equals the average product of a firm divided by the marginal product of the worker.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Demand for Labor
4) Which of the following equations is true of a profit-maximizing firm?
A) Wage = worker's total product
B) Wage = average product of all workers
C) Wage = worker's marginal product
D) Wage = value of worker's marginal product
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: The Demand for Labor
5) The value of marginal product of the tenth worker hired by a firm is $50. What is the
maximum wage that should be paid to the worker?
A) $5
B) $50
C) $0.20
D) $500
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: The Demand for Labor
13
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6) If a firm hires a worker by paying him a wage higher than his value of marginal product,
________.
A) the firm is making an optimum decision
B) firing the worker will reduce the firm's profits
C) firing the worker will increase the firm's profits
D) the firm will earn higher profits
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: The Demand for Labor
7) If a firm hires a worker by paying him a wage lower than his value of marginal product,
________.
A) profits of the firm are minimized
B) the firm is making an optimum decision
C) firing the worker will increase the firm's profits
D) the firm should hire more workers to increase profits
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: The Demand for Labor
8) The labor demand curve represents the relationship between the quantity of labor demanded
at:
A) different wage rates.
B) different prices of the good that labor is used to produce.
C) different income tax rates.
D) different values of average product of labor.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Demand for Labor
9) The labor demand curve is:
A) horizontal.
B) vertical.
C) upward sloping.
D) downward sloping.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Demand for Labor
14
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10) The slope of the labor demand curve can be attributed to the Law of:
A) Decreasing Opportunity Cost.
B) Increasing Opportunity Cost.
C) Increasing Marginal Productivity of Labor.
D) Diminishing Marginal Productivity of Labor.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Demand for Labor
11) A downward movement along the labor demand curve occurs when ________, assuming all
else equal.
A) the wage rate increases
B) the wage rate decreases
C) the price of the output that the labor is used to produce increases
D) the price of the output that the labor is used to produce decreases
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve
12) The impact of an increase in the wage rate on labor demand is represented by ________,
assuming all else equal.
A) leftward shift in the demand curve for labor
B) rightward shift in the demand curve for labor
C) downward movement along the demand curve for labor
D) upward movement along the demand curve for labor
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve
13) Any change that affects the entire schedule relating the quantity of labor and the value of the
marginal product of labor will ________, assuming all else equal.
A) cause a rotation in the labor demand curve
B) shift the labor demand curve
C) be caused by a change in the wage rate
D) cause the labor demand curve to become vertical
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve
15
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14) Any change that causes an increase in the demand for labor at a given wage rate will be
represented by a(n) ________, assuming all else equal.
A) leftward shift in the labor demand curve
B) rightward shift of the labor demand curve
C) downward movement along the labor demand curve
D) upward movement along the labor demand curve
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve
15) Any change that causes a decrease in the demand for labor at a given wage rate will be
represented by a(n) ________, assuming all else equal
A) leftward shift in the labor demand curve
B) rightward shift in the labor demand curve
C) downward movement along the labor demand curve
D) upward movement along the labor demand curve
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve
16) Which of the following is likely to shift the demand curve for workers in rice farms to the
right, assuming all else equal?
A) An increase in the wage rate
B) A decrease in the wage rate
C) An increase in the price of rice
D) A decrease in the price of rice
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Shifts in the Labor Demand Curve
17) Which of the following is likely to shift the demand curve for coffee workers to the left,
assuming all else equal?
A) An increase in the wage rate
B) A decrease in the wage rate
C) An increase in the price of coffee
D) A decrease in the price of coffee
Answer: D
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Shifts in the Labor Demand Curve
16
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18) What will happen to the demand curve for tea workers if the price of tea increases, assuming
all else equal?
A) There will be a downward movement along the demand curve for tea workers.
B) There will be an upward movement along the demand curve for tea workers.
C) There will be a leftward shift in the demand curve for tea workers.
D) There will be a rightward shift in the demand curve for tea workers.
Answer: D
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Shifts in the Labor Demand Curve
19) What will happen to the demand curve for workers in cotton farms if the price of cotton falls,
assuming all else equal?
A) There will be a downward movement along the demand curve for these workers.
B) There will be an upward movement along the demand curve for these workers.
C) There will be a leftward shift in the demand curve for these workers.
D) There will be a rightward shift in the demand curve for these workers.
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Shifts in the Labor Demand Curve
20) What will happen to the demand curve for workers in steel mills if some technology that
increases their productivity is introduced assuming all else equal?
A) It will cause a downward movement along the demand curve of the workers.
B) It will cause an upward movement along the demand curve of the workers.
C) It may cause a rightward shift in the demand curve of the workers.
D) It will cause a leftward shift in the demand curve of the workers.
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve
21) If a firm introduces some technology that substitutes capital for labor, ________, assuming
all else equal.
A) there will be a rightward shift in the labor demand curve of the firm
B) there will be a leftward shift in the labor demand curve of the firm
C) there will be a downward movement along the labor demand curve of the firm
D) there will be an upward movement along the labor demand curve of the firm
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve
17
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22) Which of the following is likely to shift the demand curve for engineers rightward, assuming
all else equal?
A) An increase in the wage rate paid to engineers
B) A decrease in the wage rate paid to engineers
C) A decrease in the price of all products manufactured by engineers
D) An increase in the productivity of engineers
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve
23) Which of the following is likely to shift the demand curve for corn farmers leftward,
assuming all else equal?
A) A rise in the wage rate of corn farmers
B) A fall in the wage rate of corn farmers
C) A rise in the productivity of farmers due to better fertilizers
D) A fall in the productivity of corn farmers due to increased pest attacks
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve
24) Which of the following is likely to shift the demand curve for carpenters rightward, assuming
all else equal?
A) A fall in the price of wood
B) A rise in the price of wood
C) A rise in the wage rate of carpenters
D) A fall in the wage rate of carpenters
Answer: A
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Shifts in the Labor Demand Curve
25) Which of the following is likely to shift the demand curve for carpenters leftward, assuming
all else equal?
A) A rise in the price of the tools used by carpenters
B) A fall in the price of the tools used by carpenters
C) A rise in the wage rate of carpenters
D) A fall in the wage rate of carpenters
Answer: A
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Shifts in the Labor Demand Curve
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26) As the wage rate increases, ________, assuming all else equal.
A) supply of labor increases.
B) demand for labor increases.
C) quantity supplied of labor increases.
D) quantity demanded of labor increases.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Supply of Labor
27) The labor supply curve is:
A) vertical.
B) horizontal.
C) upward sloping.
D) downward sloping.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Supply of Labor
28) Which of the following is likely to cause an upward movement along the labor supply curve
assuming all else equal?
A) A decrease in the labor population
B) An increase in the labor population
C) A rise in the wage rate.
D) A fall in the wage rate.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Shifts in the Labor Supply Curve
29) Any change that increases the quantity of labor supplied at all wage rates will ________,
assuming all else equal.
A) shift the labor supply curve to the right
B) shift the labor supply curve to the left
C) cause a downward movement along the labor supply curve
D) cause an upward movement along the labor supply curve
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Shifts in the Labor Supply Curve
19
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30) The impact of an increase in the wage rate on labor supply will be represented by ________,
assuming all else equal.
A) a rightward shift of the labor supply curve.
B) a leftward shift of the labor supply curve.
C) a downward movement along the labor supply curve.
D) an upward movement along the labor supply curve.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Shifts in the Labor Supply Curve
31) The impact of a decrease in the wage rate on labor supply will be represented by ________,
assuming all else equal.
A) a rightward shift of the labor supply curve
B) a leftward shift of the labor supply curve
C) a downward movement along the labor supply curve
D) an upward movement along the labor supply curve
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Shifts in the Labor Supply Curve
32) Which of the following is likely to shift the labor supply curve to the left, assuming all else
equal?
A) A fall in the wage rate
B) A rise in the wage rate
C) Decrease in the maximum amount of unemployment benefits
D) A social change that discourages women to participate in the labor force
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Supply Curve
33) Which of the following is likely to shift the labor supply curve to the right, assuming all else
equal?
A) A fall in the population of the country due to a natural disaster
B) A rise in the immigration of workers in search of better work opportunities
C) A fall in the wage rate
D) A rise in the wage rate
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Supply Curve
20
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34) If the opportunity cost of working outside the home decreases then it is likely that ________,
assuming all else equal.
A) there will be a leftward shift in the labor supply curve
B) there will be a rightward shift in the labor supply curve
C) there will be a downward movement along the labor supply curve
D) there will be an upward movement along the labor supply curve
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Supply Curve
35) If the opportunity cost of working outside the home increases then it is likely that ________
assuming all else equal.
A) there will be a leftward shift in the labor supply curve.
B) there will be a rightward shift in the labor supply curve.
C) there will be an upward movement along the labor supply curve.
D) there will be a downward movement along the labor supply curve.
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Supply Curve
36) Which of the following statements is true?
A) At the equilibrium wage rate, quantity demanded of labor exceeds the quantity supplied of
labor.
B) At the equilibrium wage rate, quantity supplied of labor exceeds the quantity demanded of
labor.
C) At wages above the equilibrium wage rate, quantity supplied of labor exceeds the quantity
demanded of labor.
D) At wages below the equilibrium wage rate, quantity supplied of labor exceeds the quantity
demanded of labor.
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Equilibrium in a Competitive Labor Market
21
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37) Which of the following statements is true?
A) At the equilibrium wage rate, quantity demanded of labor exceeds the quantity supplied of
labor.
B) At the equilibrium wage rate, quantity supplied of labor exceeds the quantity demanded of
labor.
C) At wages above the equilibrium wage rate, quantity demanded of labor exceeds the quantity
supplied of labor.
D) At wages below the equilibrium wage rate, quantity demanded of labor exceeds the quantity
supplied of labor.
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Equilibrium in a Competitive Labor Market
38) If at a given wage, the quantity supplied of labor exceeds the quantity demanded of labor:
A) the wage rate will increase.
B) the wage rate will fall.
C) the aggregate price index will rise.
D) the aggregate price index will fall.
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Equilibrium in a Competitive Labor Market
39) If the quantity demanded of labor exceeds the quantity supplied of labor:
A) wage rate will rise.
B) wage rate will fall.
C) aggregate price index will rise.
D) aggregate price index will fall.
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Equilibrium in a Competitive Labor Market
22
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The following figure shows two labor demand curves, LD1 and LD2, and two labor supply
curves, LS1 and LS2.
40) Refer to the figure above. What is the equilibrium wage rate if the labor demand curve is
LD1 and the labor supply curve is LS1?
A) $15
B) $20
C) $25
D) $30
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Equilibrium in a Competitive Labor Market
41) Refer to the figure above. What is the equilibrium employment if the labor demand curve is
LD1 and the labor supply curve is LS1?
A) 5 units
B) 10 units
C) 15 units
D) 20 units
Answer: D
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Equilibrium in a Competitive Labor Market
23
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42) Refer to the figure above. What is the equilibrium wage rate if the labor demand curve is
LD2 and labor supply curve is LS2?
A) $15
B) $20
C) $25
D) $30
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Equilibrium in a Competitive Labor Market
43) Refer to the figure above. What is the equilibrium employment when the labor demand curve
is LD2 and the labor supply curve is LS2?
A) 5 units
B) 10 units
C) 15 units
D) 20 units
Answer: D
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Equilibrium in a Competitive Labor Market
44) Which of the following statements is true of a frictionless labor market?
A) Firms can instantly hire and fire workers.
B) All firms pay below the equilibrium wage rate.
C) The quantity of labor demanded always exceeds the quantity of labor supplied.
D) The quantity of labor supplied always exceeds the quantity of labor demanded.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Equilibrium in a Competitive Labor Market
45) In a frictionless labor market:
A) there is always a surplus of workers.
B) there is always a shortage of workers.
C) the wage adjusts instantly to clear the market.
D) the ongoing wage rate does not change for long periods of time.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Equilibrium in a Competitive Labor Market
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46) Which of the following statements is true?
A) Both employees and employers have complete information about each other in a frictionless
labor market.
B) The market wage rate is always below the equilibrium wage rate in a frictionless labor
market.
C) There is always some unemployment in a frictionless labor market.
D) Labor markets in the United States are frictionless.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Equilibrium in a Competitive Labor Market
47) How is the wage to be paid to a worker determined by a profit-maximizing firm? If a
marginal worker creates 8 units of a product in a month that is sold for $5 per unit, how much
should be the maximum wage that should be paid to him?
Answer: A profit maximizing firm will pay a worker the value of the worker's marginal product,
which is defined as the incremental income that this worker will generate for the firm.
Value of marginal product of the worker = 8 × $5 = $40. Hence, the maximum wage that should
be paid to the worker is $40.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The Demand for Labor
48) Why is the labor demand curve downward sloping?
Answer: An employer will pay the labor it hires a wage equal to the value of the marginal
product of the labor. Since firms experience diminishing marginal product of labor, the value of
marginal product decreases when the employer hires more and more labor. Hence, as more and
more labor is demanded, the wage rate paid to the additional labor decreases. This causes the
labor demand curve to be downward sloping.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: The Demand for Labor
49) What causes the labor demand curve to shift? List three factors that can cause the labor
demand curve to shift rightward?
Answer: Any change that affects the entire schedule relating the quantity of labor and the value
of marginal product of labor will shift the labor demand curve.
Factors that can cause the labor demand curve to shift rightward are:
a) Increase in output prices: If the price of the output the labor is used to produce increases, the
labor demand curve shifts rightward.
b) Technology and productivity: If technological progress increases labor productivity, the
demand schedule for labor shifts to the right.
c) Falling input prices: If there is a fall in the price of inputs that are combined with labor to
produce output, the labor demand curve shifts rightward.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Equilibrium in a Competitive Labor Market
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50) a. Everything else remaining unchanged, if there is no wage rigidity in the market, how will
equilibrium employment and wage rate change if there is a leftward shift in the demand curve for
labor?
b. Everything else remaining unchanged, if there is no wage rigidity in the market, how will
equilibrium employment and wage rate change if there is a rightward shift in the supply curve of
labor?
Answer:
a. Everything else remaining unchanged, and in the absence of wage rigidity, a leftward shift in
the demand curve for labor will result in a lower equilibrium wage rate and a lower equilibrium
employment level.
b. Everything else unchanged, and in the absence of wage rigidity, a rightward shift in the
supply curve of labor will result in a lower equilibrium wage rate and a higher equilibrium
employment level.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Shifts in the Labor Demand Curve; Shifts in the Labor Supply Curve
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51) Several people from a neighboring country migrated to Industria when a war broke out in
their homeland. How will this affect the labor market in Industria if labor demand remains
unchanged? Explain with a labor demand and labor supply diagram.
Answer: Increases in the size of the population, corresponding to increases in the number of
potential workers in the economy, shift the labor supply curve to the right. Another factor
increasing population is immigration. Thus, the labor supply curve of Industria will shift to the
right as shown in the diagram below. If labor demand remains unchanged, the equilibrium wage
rate in Industria will fall from "w" to "wnew" and the equilibrium level of employment will
increase from "L" to "Lnew" as shown in the diagram below.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Shifts in the Labor Supply Curve
27
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52) a. Everything else remaining unchanged, what is likely to happen to the demand curve for
coffee workers if:
i. there is a fall in the price of coffee.
ii. there is an increase in the wage rate.
iii. there is a rise in the price of coffee seeds.
iv. a new fertilizer that increases the productivity of coffee farmers is invented.
b. Everything else remaining unchanged, what is likely to happen to the supply curve of female
workers if:
i. the opportunity cost of working outside home decreases.
ii. there is an increase in the wage rates.
Answer:
a. i. A decrease in the price of coffee reduces the value of marginal product of coffee workers.
Therefore, the demand curve for coffee workers shifts to the left.
ii. If there is an increase in the wage rate, the quantity demanded of coffee workers will
decrease. This will cause a upward movement along the demand curve for coffee workers.
iii. An increase in the price of coffee seeds is likely to result in a decrease in the marginal
product of coffee farmers. This in turn will cause a leftward shift in the demand curve for coffee
workers.
iv. If a new fertilizer that increases the productivity of coffee farmers is invented, it will
increase the value of marginal product of coffee workers. This will cause a rightward shift in the
demand curve for coffee workers.
b. i. If the opportunity cost of working outside home decreases, it implies that there is a
reduction in the time consumed on household chores. This encourages workers to shift more time
out of home production into paid employment. This will increase the supply of female workers at
all wage rates. The change will cause a rightward movement in the supply curve of women
workers.
ii. If there is an increase in the wage rate, there will be an increase in the quantity supplied
of women workers. This will cause an upward movement along the supply curve of female
workers.
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Shifts in the Labor Demand Curve; Shifts in the Labor Supply Curve
28
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53) Suppose the labor market for industrial workers is in equilibrium. Everything else remaining
unchanged, what will happen to the equilibrium wage and employment level if:
a. the demand for industrial workers increases, everything else remaining unchanged.
b. the supply of industrial worker decreases, everything else remaining unchanged.
Illustrate the change in equilibrium in both cases with the help of suitable diagrams.
Answer: The equilibrium wage rate and employment level is determined in the labor market by
the interaction of the labor demand and labor supply curve. This is illustrated in the figure below:
LS1 is the initial labor supply curve and LD1 is the initial labor demand curve. The intersection
of these two curves determines the equilibrium wage rate at W1 and equilibrium employment at
Q1.
29
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a. If there is an increase in the demand for industrial workers, the labor demand curve will shift
rightward. This is illustrated in the figure below:
When the demand for industrial workers increases, the labor demand curve shifts rightward to
LD2. The new equilibrium is determined by the interaction of LS1 and LD2. The new
equilibrium wage rate is W2 and the employment level is Q2. From the figure it is seen that
W2 > W1, and Q2 > Q1. Hence, everything else remaining unchanged, if the demand for labor
increases, both the equilibrium wage rate and employment increase.
30
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b. If there is a decrease in the supply of industrial workers, the labor supply curve will shift
leftward. This is illustrated in the figure below:
When the supply of industrial workers decreases, the labor supply curve shifts leftward to LS2.
The new equilibrium is determined by the interaction of LS2 and LD1. The new equilibrium
wage rate is W2 and the employment level is Q2. From the figure it is seen that W2 > W1, and
Q2 < Q1. Hence, everything unchanged if the supply of labor decreases equilibrium wage rate
increases and equilibrium employment level decreases.
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Equilibrium in a Competitive Labor Market
9.3 Why is There Unemployment?
1) Which of the following statements is true?
A) All workers are willing to work at the equilibrium wage rate.
B) At all wages below the equilibrium, labor supplied exceeds labor demanded.
C) At all wages above the equilibrium, labor demanded equals zero.
D) Some workers may be willing to work only at a wage rate above the equilibrium wage rate.
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Why is There Unemployment?
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2) Which of the following statements is true?
A) Lack of information relating to the job market can lead to unemployment.
B) There is no voluntary unemployment at the equilibrium wage rate.
C) If the supply of labor exceeds the demand for labor, wage rates tend to rise.
D) If the demand for labor exceeds the supply of labor, wage rates tend to fall.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Why is There Unemployment?
9.4 Job Search and Frictional Unemployment
1) An implication of the fact that the labor market is perfectly competitive is that:
A) there is always some unemployment.
B) the quantity of labor demanded always exceeds the quantity of labor supplied.
C) a worker willing to work at the equilibrium wage rate can instantly find work.
D) the labor demand curve is upward sloping and the labor supply curve is downward sloping.
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Job Search and Frictional Unemployment
2) Which of the following statements is true?
A) Job search is normally a month-long process.
B) Job search refers to the activities that workers undertake to find appropriate jobs.
C) It is easier to find full-time suitable employment than to find seasonal part-time employment.
D) In a competitive market, workers who demand a wage higher than the equilibrium wage rate
are likely to get employed faster.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Job Search and Frictional Unemployment
3) In a perfectly competitive labor market, at the equilibrium wage rate:
A) frictional unemployment is positive.
B) frictional unemployment is zero.
C) cyclical unemployment is positive.
D) cyclical unemployment is negative.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Job Search and Frictional Unemployment
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4) Which of the following statements is true?
A) The unemployment rate in an economy is constant over the long run.
B) There always exists some amount of unemployment in an economy.
C) In almost every economy, each job opening is instantly filled by a qualified worker.
D) The unemployment in an economy normally increases at times of expansion and decreases at
times of contraction.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Job Search and Frictional Unemployment
5) Unemployment arising from job search is called:
A) cyclical unemployment.
B) structural unemployment.
C) frictional unemployment.
D) disguised unemployment.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Job Search and Frictional Unemployment
6) Which of the following explains why frictional unemployment exists in an economy?
A) It arises because most of the workers shirk at work.
B) It arises because unemployment benefits encourage workers not to look for jobs.
C) It arises because it takes time for an unemployed worker to find a firm with a well-matched
job vacancy.
D) It arises because job search is completely a supply side phenomenon in the labor market, and
firms make no attempts to advertise for the vacancies they have.
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Job Search and Frictional Unemployment
7) Frictional unemployment exists because:
A) job markets are heavily regulated by the government..
B) unemployment benefits are capped in most economies.
C) firms do not make an attempt to advertise the vacancies they have.
D) firms and workers have imperfect information about each other and the state of the economy.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Job Search and Frictional Unemployment
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8) In case of the textile industries of England in 1811, the invention of new technology that
allowed workers to complete tasks in minutes that had previously taken hours, resulted in a(n):
A) decrease in the demand for labor in the textile industries.
B) increase in the demand for labor in the textile industries.
C) decrease in the quantity demanded of labor in the textile industries.
D) increase in the quantity demanded of labor in the textile industries.
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Choice and Consequence: The Luddites
9) Which of the following statements is true?
A) Technological innovation always complements labor.
B) Technological innovation always substitutes labor.
C) Technological innovation can cause unemployment in a single industry.
D) Technological innovation can cause unemployment in a country as a whole.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Choice and Consequence: The Luddites
10) Which of the following statements is true?
A) Technological innovation always leads to unemployment in the economy as a whole.
B) Technological innovation can cause wages to fall for some workers.
C) Technological innovation increases wages for all workers in an economy.
D) Technological innovation reduces the demand for goods and services in an economy.
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Choice and Consequence: The Luddites
11) How can technological innovations be a source of unemployment?
Answer: Technological innovation can be a source of unemployment at times. There are times
when new technology substitutes for labor instead of complementing them. Introduction of such
technologies in a particular industry can make workers redundant in that industry, thereby
creating unemployment.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Choice and Consequence: The Luddites
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9.5 Wage Rigidity and Structural Unemployment
1) ________ refers to any factor that keeps the market wage above the level that would clear the
labor market.
A) Wage discrimination
B) Price ceiling
C) Wage stability
D) Wage rigidity
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Wage Rigidity and Structural Unemployment
2) Downward wage rigidity is likely to:
A) increase unemployment.
B) decrease unemployment.
C) increase wage rates.
D) decrease wage rates.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Wage Rigidity and Structural Unemployment
3) Unemployment that arises when there is a mismatch between the quantity of labor demanded
and supplied is referred to as:
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) disguised unemployment.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Wage Rigidity and Structural Unemployment
4) Unemployment normally arises when:
A) wages are equal to market clearing wage level.
B) wages are below the market clearing wage level.
C) wages are above the market clearing wage level.
D) labor markets are frictionless.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Minimum Wage Laws
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5) Minimum wage laws:
A) are used to solve the problem of wage rigidity.
B) can give rise to wage rigidity.
C) can cause the quantity demanded to exceed the quantity supplied of labor.
D) help in equating the quantity of labor demanded and supplied.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Minimum Wage Laws
6) Minimum wages:
A) benefit all workers.
B) can reduce wage rigidity.
C) can increase unemployment.
D) are usually set below equilibrium wages.
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Minimum Wage Laws
7) Which of the following statements is true of minimum wages?
A) Minimum wages benefit firms and producers.
B) Minimum wages are sometimes referred to as wage ceilings.
C) No state in the U.S. economy has ever enforced a minimum wage.
D) Minimum wages are normally set above the labor market clearing wage rate.
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Minimum Wage Laws
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The following figure shows the labor demand curve, LD1, and labor supply curve LS1 in a
market.
8) Refer to the figure above. What is the equilibrium wage rate and equilibrium level of
employment?
A) $15 and 35 units of labor
B) $20 and 15 units of labor
C) $25 and 20 units of labor
D) $35 and 10 units of labor
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Minimum Wage Laws
9) Refer to the figure above. If the government institutes a minimum wage rate at $30, the
unemployment in the market will be:
A) 10 units of labor.
B) 15 units of labor.
C) 20 units of labor.
D) 25 units of labor.
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Minimum Wage Laws
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10) Refer to the figure above. If the government sets the minimum wage rate at $35, the
unemployment in the market will be:
A) 10 units of labor.
B) 15 units of labor.
C) 20 units of labor.
D) 25 units of labor.
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Minimum Wage Laws
11) Refer to the figure above. If the government fixes a minimum wage rate at $25, the
unemployment in the market will be:
A) 0 unit of labor.
B) 10 units of labor.
C) 20 units of labor.
D) 30 units of labor.
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Minimum Wage Laws
12) Refer to the figure above. If the government fixes a minimum wage rate at $15, the
unemployment in the market will be:
A) 0 units of labor
B) 10 units of labor
C) 20 units of labor
D) 30 units of labor
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Minimum Wage Laws
13) Contract negotiations between an employer and a labor union representing workers are
referred to as:
A) treaties.
B) crowding out.
C) collective bargaining.
D) contractualization of employment.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Labor Unions and Collective Bargaining
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14) Collective bargaining can:
A) reduce wages.
B) increase unemployment.
C) increase profitability of firms.
D) makes it easier for workers outside a union to get jobs.
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Labor Unions and Collective Bargaining
15) Collective bargaining between unions and employers often lead:
A) to wages that are lower than what workers would have received at equilibrium.
B) to wages that are higher than what workers would have received at equilibrium.
C) to wages equal to what workers would have received at equilibrium.
D) to reduction in the unemployment rate.
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Labor Unions and Collective Bargaining
16) Wages that are above the wage that workers would accept, where the premium is paid to
increase worker productivity, are referred to as:
A) wage ceilings.
B) wage floors.
C) productivity wages.
D) efficiency wages.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Efficiency Wages and Unemployment
17) Wages that are higher than the current market wage:
A) dissuade workers from shirking.
B) lower the productivity of workers.
C) lower the aggregate price index.
D) reduce the cost of production of various goods.
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Efficiency Wages and Unemployment
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18) At a fixed level of worker productivity, ________.
A) higher wages reduce profits
B) higher wages reduce cost of production
C) lower wages reduce quantity of labor demanded
D) lower wages increase quantity of labor supplied
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Efficiency Wages and Unemployment
19) Which of the following statements is true?
A) A higher wage can reduce the quantity supplied of labor.
B) A higher wage can increase the quantity demanded of labor.
C) A higher wage can raise profits if productivity of workers is fixed.
D) A higher wage can raise profits if productivity is directly proportional to wages.
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Efficiency Wages and Unemployment
20) Efficiency wages:
A) can lead to wage rigidity.
B) can be used to reduce wage rigidity.
C) can increase profits if productivity of workers is fixed.
D) can decrease costs if workers' productivity varies directly with wage rates.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Efficiency Wages and Unemployment
21) Which of the following statements is true?
A) Efficiency wages help reduce unemployment while minimum wages increase unemployment.
B) Efficiency wages increase unemployment while minimum wages help reduce unemployment.
C) Both efficiency wages and minimum wages help reduce unemployment.
D) Both efficiency wages and minimum wages increase unemployment.
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Efficiency Wages and Unemployment
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22) Downward wage rigidity arises when:
A) workers expect wages to increase due to economic expansion.
B) quantity of labor demanded exceeds the quantity of labor supplied.
C) workers and firms resist to wage cuts.
D) firms resist increasing wages.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
23) A reduction in wage is most likely to:
A) increase worker productivity.
B) lower worker productivity.
C) increase quantity of labor supplied.
D) decrease quantity demanded of labor.
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
24) Which of the following statements is true?
A) Cuts in wages boost worker morale.
B) Wage rigidity can cause unemployment.
C) Workers normally resist increases in wages.
D) Firms normally prefer wage cuts over lay-offs.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
25) Downward wage rigidity:
A) helps lower unemployment.
B) leads to frictionless labor markets.
C) is common only in industries with strong labor unions.
D) causes the wage to be above the market clearing wage.
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
41
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26) Recessions are periods of:
A) rightward shifts in labor supply.
B) rightward shifts in labor demand.
C) leftward shifts in labor supply.
D) leftward shifts in labor demand.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
27) Which of the following statements is true?
A) Firms usually tend to lay off workers than cut wages to reduce costs.
B) Firms usually tend to cut wages than lay off people to cut costs.
C) Firms tend to increase wages in periods of contracting economic activity to boost morale.
D) Firms tend to decrease wages in periods of contracting economic activity to boost labor
productivity.
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
42
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The following figure shows the labor demand curve, LD1, and labor supply curve, LS1, in a
market. A month later, the labor demand curve shifts to LD2.
28) Refer to the figure above. What is the initial equilibrium employment and wage rate?
A) 10 units of labor and $35
B) 10 units of labor and $25
C) 20 units of labor and $25
D) 30 units of labor and $15
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
29) Refer to the figure above. What is the equilibrium employment and wage rate after the
demand curve shifts to LD2?
A) 15 units of labor and $20
B) 20 units of labor and $35
C) 5 units of labor and $15
D) 10 units of labor and $10
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
43
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30) Refer to the figure above. If there is downward wage rigidity in the market, what is the wage
rate at which wages will be held, everything else remaining unchanged?
A) $10
B) $15
C) $25
D) $30
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
31) Refer to the figure above. If there is downward wage rigidity in the market, what will be the
unemployment in the market after the demand curve shifts to LD2?
A) 5 units of labor
B) 10 units of labor
C) 15 units of labor
D) 20 units of labor
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
32) Which of the following statements is true when wages are above the market clearing wage?
A) The larger the gap between the current market wage and the market clearing wage, smaller
will be the amount of unemployment.
B) The larger the gap between the current market wage and the market clearing wage, greater
will be the amount of unemployment.
C) At wage rates above the market clearing wage rate, there is an excess demand for workers.
D) At wage rates below the market clearing wage rate, there is an excess supply of workers.
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
33) Everything else remaining unchanged, a sudden increase in the price of oil is likely to cause
a(n):
A) leftward shift in the demand curve for labor.
B) rightward shift in the demand curve for labor
C) upward movement along the demand curve for labor.
D) downward movement along the demand curve for labor.
Answer: A
Difficulty: Hard
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
44
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The following figure shows the labor demand curve, LD1, and labor supply curve, LS1, in a
market. A month later, the labor demand curve shifts to LD2.
34) Refer to the figure above. What is the initial equilibrium wage rate and employment level?
A) $20 and 40 units of labor
B) $40 and 40 units of labor
C) $50 and 40 units of labor
D) $60 and 20 units of labor
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
35) Refer to the figure above. What is the equilibrium wage rate and employment level after the
labor demand curve shifts to LD2?
A) $10 and 60 units of labor
B) $20 and 40 units of labor
C) $40 and 30 units of labor
D) $50 and 50 units of labor
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
45
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36) Refer to the figure above. If there is no wage rigidity in the labor market, how much
unemployment is created after the labor demand curve shifts to LD2?
A) 0 units
B) 10 units
C) 20 units
D) 30 units
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
37) Refer to the figure above. Everything else remaining unchanged, at what rate will the wage
be held if there is downward wage rigidity in the market, when the demand curve shifts to LD2?
A) $20
B) $30
C) $40
D) $50
Answer: D
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
38) Refer to the figure above. If there is wage rigidity in the market, how much unemployment is
created when the labor demand curve shifts to LD2?
A) 10 units of labor
B) 20 units of labor
C) 30 units of labor
D) 40 units of labor
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
39) Everything else unchanged, following an adverse shift in the labor demand curve, ________.
A) the fall in employment will be greater if there is downward wage rigidity
B) the fall in employment will be greater if there is no wage rigidity
C) the increase in employment will be greater if there is downward wage rigidity
D) the increase in employment will be greater if there is no wage rigidity
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
46
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40) Which of the following statements is true?
A) Unemployment will be higher if there is a leftward shift in the labor demand curve and there
is no wage rigidity, everything else remaining unchanged.
B) Unemployment will be higher if there is a leftward shift in the labor demand curve and there
is downward wage rigidity in the labor market, everything else remaining unchanged.
C) There will be no change in unemployment if there is a leftward shift in the labor demand
curve and there is wage rigidity, everything else remaining unchanged.
D) There will be an increase in unemployment if there is a leftward shift in the labor demand
curve and there is no wage rigidity, everything else remaining unchanged.
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
41) The natural rate of unemployment:
A) is a constant.
B) is the average of the unemployment rate in a country over time.
C) is always lesser than the level of cyclical unemployment in an economy.
D) is determined by adding the unemployment rates in all countries and then dividing it by the
number of countries.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Natural Rate of Unemployment and Cyclical Unemployment
42) Which of the following is true of the natural rate of unemployment?
A) The natural rate of unemployment excludes frictional unemployment.
B) The natural rate of unemployment excludes long-term structural unemployment.
C) The natural rate of unemployment is the socially optimal or desirable rate of unemployment.
D) The actual rate of unemployment is higher than the natural rate of unemployment during a
recession.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Natural Rate of Unemployment and Cyclical Unemployment
43) If the natural rate of unemployment in a country is 6% and the unemployment rate in the
country is 8%, the cyclical unemployment in the country must be:
A) 2%.
B) 6%.
C) 8%.
D) 14%.
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The Natural Rate of Unemployment and Cyclical Unemployment
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44) Which of the following is true of cyclical unemployment?
A) Cyclical unemployment is also known as frictional unemployment.
B) Cyclical unemployment increases during periods of economic boom.
C) Cyclical unemployment decreases during periods of economic boom.
D) Cyclical unemployment is the deviation of unemployment from its natural rate.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Natural Rate of Unemployment and Cyclical Unemployment
45) Excessive dependence on cheaper foreign imports can cause a(n) ________ in certain sectors
of the economy.
A) leftward shift in the domestic labor demand curve.
B) rightward shift in the domestic labor demand curve.
C) downward movement along the domestic labor demand curve.
D) upward movement along the domestic labor demand curve.
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Evidence-Based Economics: What Happens To Employment and Unemployment If
Local Employers Go Out of Business
46) Explain the differences between frictional unemployment and structural unemployment.
Answer: Frictional unemployment refers to unemployment that arises because it takes time for
an unemployed worker to find a firm with a well-matched job vacancy. This is generally
unemployment arising from the process of job search, which normally takes time. On the other
hand, structural unemployment arises when there is a persistent gap between the quantity of
labor supplied and demanded.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Job Search and Frictional Unemployment; Wage Rigidity and Structural Unemployment
47) What is collective bargaining? How can it result in higher unemployment in a country?
Answer: Collective bargaining refers to contract negotiations between an employer and a labor
union representing workers. One of the objectives of collective bargaining is to bargain for better
wages for workers. As a result, collective bargaining fixes the wage rate above the market
clearing level. Once the wages are fixed at a higher level, wage rigidity prevents it from falling.
At this higher level of wage, quantity supplied of labor exceeds the quantity demanded of labor
and this causes unemployment.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Labor Unions and Collective Bargaining
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48) How do efficiency wages help increase a firm's profits?
Answer: Efficiency wages are wages offered above the wage that workers would accept, where
the premium is paid to increase worker productivity. It helps increase a firm's profits in a number
of ways. Some of these are:
a. Efficiency wages reduce worker turnover
b. Risk of losing a high-paying job motivates employees to work harder than they otherwise
would.
c. There is a possibility that employees are grateful for receiving an above-market wage,
leading them to work harder.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Efficiency Wages and Unemployment
49) What is downward wage rigidity?
Answer: Downward wage rigidity refers to the phenomena where workers resist a cut in their
wages. When downward wage rigidity exists, last year's wage acts as a wage floor for current
wages.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Downward Wage Rigidity and Unemployment Fluctuations
50) Gary, Kevin, and Joshua are three individuals who were previously employed but do not
have jobs now. Gary lost his job a year ago. Although he would like to have a job, he has given
up looking for one as he thinks there are no suitable jobs available for him. Kevin was working
as a finance teacher, but quit his job a few months back to become a stock broker. Ever since he
quit his job, he is unable to get a new one, although he is actively seeking. Joshua was employed
in a steel mill. He lost his job when the labor union in his mill demanded a hike in wages.
Classify the three individuals according to their type of unemployment.
Answer: Since Gary previously had a job but has stopped looking for one now, he can be
considered a discouraged worker. Discouraged workers are potential workers who have stopped
looking for jobs since they think there are none available for them.
Kevin is unemployed because it is taking time for him to find a suitable job. Hence, Kevin can be
said to be frictionally unemployed. Such unemployment arises because workers have imperfect
information about available jobs and need to engage in a time-consuming process of job search.
Joshua is unemployed because the labor union in his workplace demanded higher wages. When
wages are above the market clearing wage, there is a fundamental mismatch between the
quantity demanded and quantity supplied of labor. Unemployment caused because of this
mismatch is referred to as structural unemployment.
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Calculating the Unemployment Rate; Job Search and Frictional Unemployment; Wage
Rigidity and Structural Unemployment
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51) The following figure illustrates the labor demand curve, LD1, and labor supply curve, LS1,
in the market for engineers.
a. What is the equilibrium wage rate and employment level in the market?
b. If the government thinks that engineers are underpaid in the country and fixes a minimum
wage of $50 per hour, what will be the impact on the level of employment?
c. If engineers unionize themselves and negotiate a wage that is $30 higher than the market
clearing wage, what will be the impact on the employment level?
Answer:
a. The equilibrium wage is determined by the intersection of the labor demand curve LD1 and
labor supply curve LS1. Hence, the equilibrium wage rate in the market is $40 per hour and the
equilibrium employment level is 30 engineers.
b. If the government fixes a minimum wage at $50 per hour, which is higher than the
equilibrium wage rate, the quantity supplied of engineers will exceed the quantity demanded of
engineers. This will cause unemployment. The extent of unemployment = 40 - 20 = 20
engineers. 20 engineers will be unemployed if the government fixes a minimum wage at $50 per
hour.
c. If engineers form a union and bargain for wages $30 above the equilibrium wage, 60
engineers would be willing to work but the firms would not hire any engineer. This will result in
unemployment. Extent of unemployment = 60 - 0 = 60 engineers. Hence, 60 engineers will be
unemployed in the market.
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Minimum Wage Laws; Labor Unions and Collective Bargaining
50
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52) Consider a labor market for farm workers. Suppose an increase in the price of fertilizers
reduces the demand for farm workers. What will be the impact of this change on the employment
levels in the market for farm workers if:
a. there is no wage rigidity.
b. there is a downward wage rigidity.
Explain your answers with the help of suitable diagrams.
Answer: Wage rigidity refers to any factor that keeps the market wage above the level that
would clear the market.
a. In case of no wage rigidity, market forces will bring the wage rate and the employment level
to the new equilibrium after the demand changes. This is illustrated in the figure below.
The initial equilibrium wage rate and employment levels are determined at W1 and Q1 by the
intersection of the labor demand curve, LD1, and the labor supply curve LS1. After, the fall in
demand for labor, the demand curve shifts to LD2 and a new equilibrium wage rate and
employment level is determined at W2 and Q2 respectively. In the absence, of wage rigidity, the
new market wage will be W2 and all workers willing to work at the wage will find work. Hence,
there will be no unemployment.
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b. In case of wage rigidity, market forces will not bring the wage rate and the employment level
to the new equilibrium after the demand changes. This is illustrated in the figure below:
The initial equilibrium wage rate and employment levels are determined at W1 and Q1 by the
intersection of the labor demand curve, LD1, and the labor supply curve LS1. After, the fall in
demand for labor, the demand curve shifts to LD2 but because of downward wage rigidity, the
wage rate stays at W1. Now, at this wage rate, quantity demanded of workers falls short of the
quantity supplied of workers. Hence, there will be unemployment. The extent of unemployment
is given by Q1 - Q2.
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Downward Wage Rigidity and Unemployment Fluctuations
52
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