A worker at a firm in a perfectly competitive market produces 3 extra units of output per hour, and each unit sells for $5. What is the value of the worker's marginal product per hour?
$15
✓
$8
$2
$5
Correct Answer
$15
The value of the marginal product of labor is the marginal product times the output price: 3 units x $5 = $15 per hour. $8 comes from adding the units and the price instead of multiplying. $2 comes from subtracting them. $5 is only the price of a single unit.
Category: Demand for Labor
Question 2
A firm in a perfectly competitive market finds that the value of the marginal product of its 1st, 2nd, 3rd and 4th workers is $16, $12, $8 and $4. If the market wage is $10 per hour, how many workers will a profit-maximizing firm hire?
3 workers
2 workers
✓
4 workers
1 worker
Correct Answer
2 workers
The firm hires each worker whose value of marginal product is at least the wage. The first two add $16 and $12, both above $10, but the third adds only $8, less than the $10 it would cost, so the firm stops at 2 workers. 3 workers would include one who adds less than the wage. 4 workers would lose even more on the last hire. 1 worker passes up a second worker who adds $12 while costing only $10.
Category: Demand for Labor
Question 3
For a firm with market power in its output market, the demand for labor equals the marginal product of labor multiplied by what?
Output price
The wage rate
Marginal revenue
✓
Average total cost
Correct Answer
Marginal revenue
A firm with market power must cut its price to sell more, so the value of an extra worker's output is the marginal product times marginal revenue, called the marginal revenue product. Output price is the multiplier for a firm in a perfectly competitive output market. The wage rate is what the firm compares the marginal revenue product against, not part of it. Average total cost has no role in this calculation.
Category: Demand for Labor
Question 4
A firm with market power hires a worker who adds 4 units of output per hour. The product sells for $5, but because the firm must cut its price to sell more, each extra unit sold adds only $3 to total revenue. How much revenue does this worker add to the firm per hour?
$20
$7
$8
$12
✓
Correct Answer
$12
Marginal revenue product is the marginal product times marginal revenue: 4 units x $3 = $12 per hour. $20 uses the $5 price, which overstates the value for a firm that must lower its price to sell more. $7 comes from adding 4 and 3 instead of multiplying. $8 comes from multiplying 4 by the $2 gap between price and marginal revenue.
Category: Demand for Labor
Question 5
Why is the demand for construction workers described as a derived demand?
It depends on the demand for the buildings they produce
✓
It is set by government wage laws for each occupation
It comes from workers' own preferences for certain jobs
It is fixed by the number of trained construction workers
Correct Answer
It depends on the demand for the buildings they produce
Employers want labor because of the output it produces, so the demand for construction workers rises and falls with the demand for new buildings. It is set by government wage laws confuses legal wage rules with demand. It comes from workers' own preferences describes the supply side of the labor market. It is fixed by the number of trained construction workers also describes supply, not demand.
Category: Demand for Labor
Question 6
According to the model, if consumer demand for smartphones rises and pushes up their price, what happens in the market for workers who assemble smartphones?
Labor supply shifts right, lowering wages
Labor demand shifts right, raising wages and employment
✓
Labor demand shifts left, lowering wages and employment
Employment falls along an unchanged labor demand curve
Correct Answer
Labor demand shifts right, raising wages and employment
A higher output price raises the value of each worker's marginal product, so the labor demand curve shifts right and the equilibrium wage and quantity of labor both rise. Labor supply shifts right, lowering wages, would require more people willing to work, not higher product demand. Labor demand shifts left describes a fall in product demand. Employment falls along an unchanged labor demand curve would follow a wage increase from some other cause, not a rise in product demand.
Category: Labor Market Equilibrium
Question 7
Why does a firm's demand curve for labor slope downward when its capital is fixed in the short run?
Rising prices for the firm's output
Increasing returns to scale
Diminishing marginal product of labor
✓
Falling interest rates on loans
Correct Answer
Diminishing marginal product of labor
With a fixed amount of capital, each additional worker adds less output than the one before, so each extra worker is worth less to the firm and it hires more only at a lower wage. Rising prices for the firm's output would shift labor demand, not explain its slope. Increasing returns to scale describe what happens when all inputs grow together, not adding labor to fixed capital. Falling interest rates on loans affect borrowing costs, not the slope of labor demand.
Category: Demand for Labor
Question 8
What does the labor supply curve facing a single firm in a perfectly competitive labor market look like?
Vertical at a fixed number of workers
Upward sloping like the market supply curve
Downward sloping like the demand curve
Horizontal at the market wage
✓
Correct Answer
Horizontal at the market wage
A firm too small to affect the market wage can hire as many workers as it wants at that wage, so the supply curve it faces is flat. Vertical at a fixed number of workers would mean no more workers could be hired at any wage. Upward sloping like the market supply curve describes the whole market or a monopsony, not a small competitive firm. Downward sloping like the demand curve confuses supply with demand.
Category: Labor Market Equilibrium
Question 9
Why can a monopsony pay a lower wage than a competitive labor market would?
Workers have few other employers to turn to
✓
The government sets its wage below the market
Its workers produce less output than others
Its product always sells at a lower price
Correct Answer
Workers have few other employers to turn to
When one employer dominates a labor market, workers cannot easily leave for a rival firm, so the employer can hold the wage down. The government sets its wage below the market is not a feature of monopsony. Its workers produce less output than others is not the reason; the low wage comes from market power. Its product always sells at a lower price is about the output market and does not explain the wage.
Category: Monopsony
Question 10
A monopsony must pay $3 per hour to attract three workers and $4 per hour to attract four, and it pays the same wage to every worker. What is the marginal cost of hiring the fourth worker?
$4
$7
✓
$16
$1
Correct Answer
$7
Total labor cost rises from 3 x $3 = $9 to 4 x $4 = $16, so the fourth worker adds $16 - $9 = $7, more than the $4 wage because the raise goes to all workers. $4 is only the new worker's own wage. $16 is the total cost of four workers. $1 is just the increase in the wage.
Category: Monopsony
Question 11
Compared with a perfectly competitive labor market, what does the model predict a monopsony will do?
Hire more workers at a lower wage
Hire fewer workers at a higher wage
Hire fewer workers at a lower wage
✓
Hire more workers at a higher wage
Correct Answer
Hire fewer workers at a lower wage
Because the marginal cost of labor lies above the supply curve, a monopsony stops hiring sooner and then pays only the wage needed to attract that smaller workforce. Hire more workers at a lower wage is inconsistent with an upward-sloping supply curve. Hire fewer workers at a higher wage describes the union model, not monopsony. Hire more workers at a higher wage is the opposite of the monopsony outcome.
Category: Monopsony
Question 12
After choosing the employment level where the marginal cost of labor equals labor demand, how does a monopsony set the wage?
It pays the wage on the marginal cost of labor curve
It pays the wage on the labor demand curve at that quantity
It pays whatever wage the workers first request
It pays the wage on the labor supply curve at that quantity
✓
Correct Answer
It pays the wage on the labor supply curve at that quantity
The supply curve shows the lowest wage that will attract each number of workers, so the monopsony pays that wage, which is below both the marginal cost of labor and the value of the last worker's output. It pays the wage on the marginal cost of labor curve would pay more than needed. It pays the wage on the labor demand curve would hand workers the full value of their marginal product. It pays whatever wage the workers first request ignores the employer's market power.
Category: Monopsony
Question 13
If a union negotiates a wage above the equilibrium wage, what does the demand and supply model predict?
Fewer workers are hired, and more want jobs than are available
✓
More workers are hired than at the equilibrium wage
The labor demand curve shifts right to match the wage
The wage falls back to equilibrium within a few weeks
Correct Answer
Fewer workers are hired, and more want jobs than are available
At the higher wage, firms move up their labor demand curve and hire fewer workers, while more people want those jobs, creating an excess supply of labor. More workers are hired is the opposite of moving up a downward-sloping demand curve. The labor demand curve shifts right is not caused by a change in the wage. The wage falls back to equilibrium ignores that the union contract holds the wage up.
Category: Unions
Question 14
Which change is commonly cited as a reason for the decline in U.S. private-sector union membership since the 1950s?
A large rise in manufacturing employment
A shift of jobs from manufacturing to services
✓
A federal law banning unions in private firms
A sharp drop in imported cars and steel
Correct Answer
A shift of jobs from manufacturing to services
Unions were strongest in manufacturing, and employment has shifted toward service industries where unions have been weaker. A large rise in manufacturing employment is the opposite of what happened. A federal law banning unions in private firms does not exist. A sharp drop in imported cars and steel is backward; rising import competition weakened unions in those industries.
Category: Unions
Question 15
Which 1935 federal law gave most private-sector workers the right to organize unions?
Taft-Hartley Act
Fair Labor Standards Act
National Labor Relations Act
✓
Equal Pay Act
Correct Answer
National Labor Relations Act
The National Labor Relations Act of 1935 protected workers' right to organize and bargain collectively, and union membership rose sharply afterward. Taft-Hartley Act passed in 1947 and limited some union powers. Fair Labor Standards Act passed in 1938 and set the minimum wage and overtime rules. Equal Pay Act passed in 1963 and addresses pay differences between men and women.
Category: Unions
Question 16
In a bilateral monopoly, in which a single union bargains with a single employer, where does the wage end up?
Exactly at the competitive equilibrium wage
At the union's preferred wage in every case
Below the employer's preferred monopsony wage
Between the two sides' preferred wages, set by bargaining power
✓
Correct Answer
Between the two sides' preferred wages, set by bargaining power
The union wants a high wage and the monopsony wants a low one, so the model cannot pin down one wage; it lands between them, closer to whichever side bargains more strongly. Exactly at the competitive equilibrium wage would require the market power on both sides to cancel perfectly, which the model does not predict. At the union's preferred wage in every case ignores the employer's power. Below the employer's preferred monopsony wage would be less than the monopsony itself chooses to pay, while the union pushes the wage up.
Category: Bilateral Monopoly
Question 17
To judge whether a wage gap between two groups reflects discrimination, what must economists hold constant?
Productivity-related traits such as education and experience
✓
The number of workers in each group
The total wage bill of each employer
The prices of the goods each group buys
Correct Answer
Productivity-related traits such as education and experience
Discrimination means paying workers with the same skills differently, so a valid comparison must match workers on education, experience and similar traits. The number of workers in each group does not affect whether equally skilled workers are paid equally. The total wage bill of each employer says nothing about individual pay differences. The prices of the goods each group buys concern spending, not earnings.
Category: Employment Discrimination
Question 18
When a union wins a higher wage, how may firms change the way they produce, according to the model?
Use more labor hours and fewer machines
Use more machines and fewer labor hours
✓
Raise output with no change in labor or machines
Stop using all of their existing equipment
Correct Answer
Use more machines and fewer labor hours
A higher wage makes labor relatively more expensive, so the lowest-cost way to produce may shift toward capital and away from labor. Use more labor hours and fewer machines is the response to cheaper labor, not costlier labor. Raise output with no change in labor or machines ignores the change in input costs. Stop using all of their existing equipment would make labor-saving substitution impossible.
Category: Unions
Question 19
Which federal law made it illegal for employers to discriminate based on race, color, religion, sex or national origin?
Equal Pay Act of 1963
National Labor Relations Act of 1935
Civil Rights Act of 1964
✓
Taft-Hartley Act of 1947
Correct Answer
Civil Rights Act of 1964
The Civil Rights Act of 1964 banned employment discrimination on those grounds and created the Equal Employment Opportunity Commission to investigate complaints. Equal Pay Act of 1963 requires equal pay for men and women doing equal work but does not cover race or religion. National Labor Relations Act of 1935 concerns the right to form unions. Taft-Hartley Act of 1947 changed rules on unions and labor disputes.
Category: Employment Discrimination
Question 20
According to the demand and supply model, how does a large inflow of immigrants with little formal education affect the market for low-skill labor?
Demand shifts left, lowering the equilibrium wage
Supply shifts left, raising the equilibrium wage
Demand shifts right, raising the equilibrium wage
Supply shifts right, lowering the equilibrium wage
✓
Correct Answer
Supply shifts right, lowering the equilibrium wage
More people looking for low-skill jobs increases the supply of that labor, so the model predicts a lower wage and more employment in those jobs. Demand shifts left would come from employers wanting fewer workers, not from more workers arriving. Supply shifts left, raising the wage, describes a fall in the number of workers. Demand shifts right, raising the wage, is not the direct effect of more job seekers.
Category: Immigration