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1Modern Labor Economics, 12e (Ehrenberg/Smith) Chapter 4 Labor Demand Elasticities1) The own-wage elasticity of demand measures A) change in wages divided by change in quantity of labor demanded. B) change in quantity of labor demanded divided by change in wages. C) percentage change in wages divide...

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Modern Labor Economics, 12e (Ehrenberg/Smith) Chapter 4 Labor Demand Elasticities 1) The own-wage elasticity of demand measures A) change in wages divided by change in quantity of labor demanded. B) change in quantity of labor demanded divided by change in wages. C) percentage change in wages divided by percentage change in quantity of labor demanded. D) percentage change in quantity of labor demanded divided by percentage change in wages. Answer: D Question Status: Old 2) If an increase in the minimum wage leads to higher aggregate earnings by the workers affected, then the own-wage elasticity of demand is A) elastic. B) inelastic. C) of unit elasticity. D) uncertain; more information is needed. Answer: B Question Status: Old 3) Moving from the upper to the lower portion of a straight labor demand curve, the elasticity A) changes from elastic to inelastic. B) changes from inelastic to elastic. C) stays the same. D) could change from inelastic to elastic, or from elastic to inelastic. Answer: A Question Status: Old 4) If the quantity of steel workers demanded falls from 30,000 to 20,000 when the equilibrium wage increases from $9.00 per hour to $11.00 per hour, then the own-wage elasticity of demand for these workers is A) -2.0. B) -0.5. C) -0.4. D) -0.2. Answer: A Question Status: Old 5) If the quantity of auto workers demanded decreases from 66,000 to 54,000 when the equilibrium wage increases from $12.00 per hour to $14.00 per hour, then the own-wage elasticity of demand for these workers is A) inelastic. B) elastic. C) zero. D) neither elastic nor inelastic. Answer: B Question Status: Old 1 Copyright © 2015 Pearson Education, Inc.

6) If Industry A can substitute capital for labor easily and Industry B cannot, then (other things equal) A) Industry A's own-wage elasticity of demand will be higher than Industry B's. B) Industry B's own-wage elasticity of demand will be higher than Industry A's. C) the industries' own-wage elasticities of demand will be equal. D) we cannot predict which firm's own-wage elasticity of demand will be higher. Answer: A Question Status: Old 7) If two inputs are gross complements, the cross-wage elasticity of demand for the two inputs will be A) zero. B) one. C) positive. D) negative. Answer: D Question Status: Old 8) If teenagers and adults are substitutes in production, and the wage of teenagers falls, then A) they must be gross substitutes, and the employment of adults will fall. B) they must be gross complements, and the employment of adults will fall. C) they could be either gross substitutes or gross complements, and the employment of adults could rise or fall. D) they must be gross substitutes, and the employment of adults will rise. Answer: C Question Status: Old 9) Own-wage elasticities of demand are A) always positive. B) always negative. C) either positive or negative. D) positive for gross complements, negative for gross substitutes. Answer: B Question Status: Old 10) If the own-wage elasticity of demand for professors is -0.5, then an increase in the wage of professors from $45,000 to $55,000 will cause the quantity demanded to fall by A) 2%. B) 5%. C) 10%. D) 20%. Answer: C Question Status: Old

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11) The short run own-wage labor demand elasticity A) includes only part of the scale effect. B) includes only part of the substitution effect. C) includes both scale and substitution effects. D) includes all the scale effect. Answer: A Question Status: Old 12) According to empirical estimates, when wages are increased by 10%, the quantity of labor demanded typically falls by about A) 3% in the short run, but 6% in the long run. B) 5% in the short run, but 10% in the long run. C) 10% in the short run, but 20% in the long run. D) more in the short run than in the long run. Answer: B Question Status: Old 13) Cross wage elasticities of demand are A) always positive in magnitude. B) always negative in magnitude. C) either positive or negative in magnitude. D) positive for gross complements, negative for gross substitutes. Answer: C Question Status: Old 14) Along a straight-line demand curve for labor A) the slope becomes more negative as the wage rises. B) the elasticity of demand remains constant. C) demand becomes more elastic as the wage rises. D) demand becomes less elastic as the wage rises. Answer: C Question Status: Old 15) Other things equal, which of the following will have the most elastic own-wage elasticity of demand? A) A steel firm with one plant in California. B) All steel firms in California. C) All steel firms in the United States. D) All steel firms in the world. Answer: A Question Status: Revised

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16) Empirical estimates of cross-wage elasticities show that A) well-educated labor is more likely to be complementary with capital than is unskilled labor. B) the extent of substitution in production between immigrant and native workers is very high. C) labor and energy are complements in production. D) labor and raw materials are complements in production. Answer: A Question Status: Old 17) Empirical estimates of the short-run employment effects of minimum wage increases A) have produced a consensus that teen employment will fall by almost 10% for every 10% increase in the minimum wage. B) are very low, partly because it takes a long time for employers to adjust fully to changes in the minimum wage. C) are very high, partly because it takes a long time for employers to adjust fully to changes in the minimum wage. D) have produced a consensus that teen employment will not fall at all when the minimum wage is increased by 10%. Answer: B Question Status: Revised 18) Other things equal, an elastic demand for an industry's output will tend to make the industry's own-wage elasticity of demand A) high. B) low. C) positive. D) zero. Answer: A Question Status: Old 19) If labor is a small percentage of the total costs of an industry, this will tend to make the own-wage elasticity of labor demand A) high. B) low. C) positive. D) zero. Answer: B Question Status: Old 20) Own-wage elasticity of labor demand tends to A) increase with skill level. B) decrease with skill level. C) be unrelated to skill level. D) remain unchanged with skill level. Answer: B Question Status: Old

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21) Other things equal, the own-wage elasticity of demand for a category of labor is higher when A) the price elasticity of demand for the product being produced is low. B) other factors of production can be easily substituted for the category of labor. C) the supply of other factors of production is highly inelastic. D) the cost of employing the category of labor is a small share of the total costs of production. Answer: B Question Status: Old 22) The introduction of new forms of capital generally A) decreases the own-wage elasticity of labor demand. B) increases the bargaining power of unions. C) increases the own-wage elasticity of labor demand. D) shifts the labor demand curve to the right. Answer: C Question Status: Old 23) The minimum wage is a relatively blunt instrument with which to reduce poverty because A) only about half the labor force is covered by the minimum wage. B) only about half the employers comply with the law. C) most workers whose wages are affected by minimum wage increases do not live in poor families. D) minimum wage increases cause large increases in unemployment. Answer: C Question Status: Old 24) If the labor market is competitive and coverage is complete, then legislation to enact a minimum wage above the equilibrium wage level would A) increase both wages and employment. B) decrease both wages and employment. C) decrease wages and increase employment. D) increase wages and decrease employment. Answer: D Question Status: Old 25) Employment often increases after an increase in the minimum wage because A) more people want to work at the new, higher wage. B) independently, labor demand increases significantly at the same time. C) the minimum wage is below the equilibrium level of wages. D) the labor supply curve is vertical. Answer: B Question Status: Old

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26) If the absolute elasticity of labor demand is 2.0, then an eight percent increase in the wage will A) increase employment by 16%. B) increase employment by 4%. C) decrease employment by 16%. D) decrease employment by 4%. Answer: C Question Status: Old 27) In most states, there is a mandatory maximum number of children allowed per day care worker. If this maximum number is binding, then, if the wage of day care workers goes up, the main effect on day care employment will be A) through the scale effect. B) through the substitution effect. C) equally shared between the substitution and scale effect. D) through neither the scale nor the substitution effect, as labor demand will not change. Answer: A Question Status: Revised 28) Which of the following factors would allow a union to raise wages while losing fewer jobs? A) The demand for output becomes more elastic due to world competition. B) Labor costs are a large share of the total cost of producing output. C) The opening up of other markets around the world where output can also be produced D) Modernizing plants is unlikely because the demand for output is not growing. Answer: D Question Status: Old 29) An increase in the minimum wage will decrease employment more when A) the supply of labor is more elastic. B) the uncovered sector is small. C) the demand for labor is inelastic. D) All of the above will cause the minimum wage to decrease employment more. Answer: B Question Status: Old 30) Output is produced with capital and labor. If the price of capital goes up, A) the price of output will fall. B) output will be increased. C) the firm will use more labor per unit of output produced. D) None of the above will result when the price of capital goes up. Answer: C Question Status: Revised

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31) In an industry, when the price of electricity goes up, the company employs more low-skilled workers. This implies A) the substitution effect dominated the scale effect. B) the scale effect dominated the substitution effect. C) the substitution effect worked in the same direction as the scale effect. D) the scale effect was positive. Answer: A Question Status: Revised 32) Technological progress implies that A) everyone could be better off if gainers compensate losers. B) everyone will be better off. C) there must be losers. D) losers lose more than gainers gain. Answer: A Question Status: Old 33) For a given increase in the minimum wage, which of the following would likely result in a smaller decrease in teenage employment? A) Teenage workers are close substitutes with older workers who are paid more than the minimum wage. B) Teenagers produce goods that have a high price elasticity of demand. C) Teenager labor represents a small fraction of the cost of making goods. D) Teenagers are paid so little that the minimum wage increases their wage more. Answer: C Question Status: Revised 34) A city mandates that all businesses who sell goods and services to the city must pay at least a living wage to their workers that is substantially above what low-skilled workers are currently being paid. Which of the following will result in a greater decrease in employment of low-skilled workers who were working for the affected businesses? A) The city's demand for the services that businesses supply them is highly inelastic. B) Low-skilled workers represent a small fraction of the costs of doing business with the city. C) Higher-skilled workers are readily available at the higher wage. D) Low-skilled workers are complements with other inputs providing city services. Answer: C Question Status: Old

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35) In a simple economy, there are 100 workers. 50 workers produce clothing: one worker produces one unit of clothing. The other 50 workers produce food: one worker produces one unit of food. By trading goods, each person consumes 0.5 unit of clothing and 0.5 unit of food. A technological improvement enables one worker to produce two units of clothing. The results are that 40 workers will be producing 80 units of clothing and 60 workers will be producing food and that each person consumes 0.8 units of clothing and 0.6 units of food. Which of the following is true? A) Workers in the sewing industry are worse off. B) Workers in the clothing industry are worse off. C) The increase in the productivity of clothing workers shifted the demand for clothing workers rightward. D) The increase in the productivity of clothing workers had a net negative effect on the demand for clothing workers. Answer: D Question Status: Old 36) What does the own-wage elasticity of labor demand measure? What do empirical estimates suggest the elasticity of labor demand is in the short run? In the long run? Explain what accounts for the difference. Answer: The own-wage elasticity of demand measures the degree of response in labor demand to a given percent change in the wage rate. If the absolute value of the elasticity exceeds 1, then the percent change in labor demand induced by a change in the wage rate is larger than the percent change in the wage that occurred. Conversely, if the absolute value of the elasticity is less than one, then the percent response in demand to a change in the wage is smaller than the percent change in the wage. Empirical estimates using data from firms and narrowly defined industries put the short run own-wage elasticity of labor demand at approximately -0.5 and the long run elasticity at about -1.0. The short run elasticity should be smaller in absolute magnitude than the long run elasticity because, in the short run, employers are not able to adjust to a wage change by adjusting the input mix (i.e., there is no substitution effect in the short run). In the long run, both the scale effect and the substitution effect are present and, because these two effects reinforce each other, the labor demand response to a wage change is larger in the long run. Question Status: New

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37) How is the own-wage elasticity of labor demand for unskilled workers affected by the elasticity of supply of other factors of production (such as skilled labor and capital equipment)? Explain. Answer: According to one of the Hicks-Marshall Laws of Derived Demand, the own-wage elasticity of demand for a given category of labor (for example, unskilled labor) is greater the larger is the elasticity of supply of other factors of production (such as skilled labor and capital). The logic of this has to do with the substitution effect. Specifically, an increase in the wage of unskilled labor causes the cost of producing the marginal unit of output with unskilled labor to exceed the cost of producing the marginal unit of output using other inputs. In order to reduce total production cost, the firm substitutes toward the now relatively less expensive inputs and away from unskilled labor. As such substitution takes place, the marginal product of labor increases and marginal products of substitute inputs decrease ultimately restoring input price to input marginal product ratios to equality. The preceding explanation assumes that supplies of other inputs such as skilled labor and capital are perfectly elastic. If other inputs are supplied on something less than a perfectly elastic basis (i.e., their supply curves slope up), then substitution toward those inputs will drive their unit prices up, which will lead to quicker restoration of the input price to input marginal product ratios to equality. The implication here is that less substitution away from unskilled labor will take place when the supplies of other inputs are less elastic because the substitution effect will be smaller and, therefore, the elasticity of demand for unskilled labor will be smaller as a result. Question Status: New 38) Other things equal, the labor demand curve of a monopolistic firm is likely to be less wage elastic than the labor demand curve of a perfectly competitive firm. Explain why using the relevant Hicks-Marshall Law of Derived Demand. Answer: According to the first Hicks-Marshall Law of Derived Demand, the demand for a given category of labor will be more elastic when the price elasticity of demand for the product is high. The product demand curve of a competitive firm is perfectly elastic at the level of the market determined product price. A monopolist, on the other hand, faces the downward sloping market demand curve and sets product price. Because the monopolist faces a less elastic product demand curve, its demand for labor will be less elastic than that of a competitive firm by virtue of the first Hicks-Marshall Law. Question Status: New 39) The own-wage elasticity of labor demand tends to decrease in absolute value as worker skill level increases. Agree or disagree, using the Hicks-Marshall Laws of Derived Demand to explain. Answer: Agreed. The second Hicks-Marshall Law of Derived Demand holds that demand for a given category of labor is higher when other factors of production can be easily substituted for the category of labor of interest. According to this law, unskilled labor, because it doesn't bring to the production process any particularly unique capabilities, is easily replaced by other inputs and would therefore have higher demand elasticity. Increasing skill level, on the other hand, implies the labor in question brings qualities and capabilities to the production process that are more difficult to replace through use of other inputs and, therefore, demand elasticity will be lower the greater the skill level embodied in the labor. Question Status: New 9 Copyright © 2015 Pearson Education, Inc.

40) Industry A has own-wage elasticity of labor demand of -2.5. Industry B has own-wage elasticity of labor demand of -0.5. Which industry is more likely to be unionized? Explain why. Answer: Industry B is more likely to be unionized due to its relatively low labor demand elasticity. Unions value both higher wages and employment opportunities for their members. Given the elasticities cited, a union that negotiates a 5% wage increase in industry A, would cause an employment loss of 12.5% there. The same wage increase in industry B would only result in a 2.5% loss in employment. Given this reasoning, a union will operate more successfully in Industry B because a given negotiated wage increase will come at a smaller loss in employment. Alternatively said, a union will be able to negotiate larger wage increases at a given loss in employment in Industry B due to the smaller labor demand elasticity there. Question Status: New 41) Suppose that a 5% increase in carpenters' wages causes a 1% drop in demand for plumbers. What is the cross-wage elasticity of demand for plumbers with respect to the wage of carpenters? Based on your calculation, are plumbers and carpenters gross substitutes or gross complements? Briefly explain. Answer: = -0.2. Plumbers and carpenters are gross complements because the cross-wage elasticity is negative. Question Status: New 42) When the minimum wage increased 10 percent, the demand for skilled workers increased by 3 percent. What cross-wage elasticity would you calculate here? Explain. Is the cross-wage elasticity indicative of input categories that are gross substitutes or gross complements? Explain. Answer: Given that the least skilled in the labor force (for example, teenagers) earn the minimum wage, this cross-elasticity could be characterized as the cross-wage elasticity of demand between skilled workers and very unskilled labor. The value of the cross-wage elasticity is +0.3, implying that skilled labor and very unskilled labor are gross substitutes. Question Status: New 43) Whether or not the cross-wage elasticity of demand between two inputs is positive or negative depends on the degree of substitutability between the two inputs. Agree or disagree. Explain your reasoning. Answer: Agreed. Given two productive inputs, an increase in the price of one exerts a positive substitution effect and a negative scale effect on t...