chapter 10

Question 1

Law of Diminishing Returns

Answer 1

For any particular plant size, as more labor is used, the extra output that an employee can produce declines, at some point.

Question 2

Value marginal product

Answer 2

The price of the output multiplied by the marginal product of the employee

Question 3

3. True, False, Explain: The employer will hire an extra employee if his/her Marginal Product is positive.

Answer 3

3. True, False, Explain: The employer will hire an extra employee if his/her Marginal Product is positive.

Question 4

What is the average wage in the US

Answer 4

About $20/hour

Question 5

How much in benefits does the average employee earn per hour

Answer 5

about $10 per hour

Question 6

True, false, explain: The demand for labor slopes downward because the wage rises as more labor is hired.

Answer 6

False: The demand for labor is the VMP curve, which slopes downward because MP slopes downward–that is, because of the Law of Diminishing Returns

Question 7

Labor supply depends on:

Answer 7

the value of the alternative uses of people’s time

Question 8

True, false, explain: The labor supply curve gets its shape from the Law of Diminishing Returns.

Answer 8

False. The labor supply curve gets its shape from the alternative value of the employee’s time, and is greatly influenced by the principle of optimal arrangement

Question 9

True, false, explain: At any wage, the employee is willing to work for all the hours that the employer will offer

Answer 9

False. At any wage there is a particular amount of labor supplied. That will only be equal to the amount of labor demanded at the equilibrium wage.

Question 10

9. What effect do social welfare programs have on the supply, demand, wages, and employment?

Answer 10

Social welfare programs lower the supply of labor, causing wages to rise and lower employment.

Question 11

10. When the government places a tax on an employer for each hour that a laborer works, what effect will this have on labor supply, demand, wages, and employment?

Answer 11

Labor demand will fall, lowering wages and lowering employment.

Question 12

more capital in a country…

Answer 12

is good for labor because it makes labor more productive

Question 13

According to Bastiat, in the long run, who receives the benefits of a mechanical innovation by James Goodfellow?

Answer 13

the public

Question 14

11. True, false, explain: The Italian labor market is less free than the U. S. labor market.

Answer 14

True. Italian employers can be forced to retain employees that they want to fire. Under proposed legislation, the employer could opt to pay 1/2 a year’s salary to fire an employee.

Question 15

Human capital

Answer 15

Training and education

Question 16

screening theory

Answer 16

says that education and training may be valuable to the individual, not because the training increases productivity, but because it points out which employees will be good

Question 17

human capital theory

Answer 17

says that education makes a worker more productive

Question 18

make work fallacy

Answer 18

the idea that jobs have value, regardless of whether the labor actually creates value

Question 19

Why would Bastiat differ from Marx, who would say that a machine that replaces a worker results in an unemployed worker?

Answer 19

Bastiat notes that there is an unemployed worker, but also that the amount of money saved by efficiency is also unemployed, and is available to support another job.

Question 20

Who does Bastiat say receives the benefit from a technological improvement?

Answer 20

In the short run the innovator benefits. In the long run, as more people adopt the improvement, consumers benefit as competition lowers prices.

Question 21

True, false, explain: The age of railroads resulted in high unemployment rates as many transportation workers lost jobs.

Answer 21

False: More jobs were created as transportation costs fell. These jobs were not limited to building railroads, but in all kinds of manufacture and trade.

Question 22

What are the effects of minimum wage laws? Explain.

Answer 22

Minimum wage laws result in more workers willing to work, but less workers being hired, causing unemployment.

Question 23

Why does Bastiat say that demobilizing troops will not result in unemployment? -

Answer 23

Because for every unemployed soldier there is an “unemployed paycheck” that the taxpayers retain and then spend, which increases employment.

Question 24

How does Bastiat say that those who suffer from make work fallacy can increase the “national profit?”

Answer 24

Drafting the entire male population into the army

Question 25

Why would the BLS establishment survey give different results than the household survey?

Answer 25

The establishment survey asked employers about payrolls, but does not include contractors or other self-employed people.

Question 26

Who is NOT in the civilian non-institutional population?

Answer 26

People 15 and under, in the military, or in an institution

Question 27

How many hours does one have to work to be considered employed?

Answer 27

One for pay or profit, during the previous week, or 15, unpaid, in a family business

Question 28

Who is considered unemployed?

Answer 28

Those who do not have a job, but made specific active efforts to find a job in the previous 4 weeks

Question 29

What is the definition/formula for the unemployment rate?

Answer 29

Unemployed / (Employed + Unemployed)

Question 30

What unemployment rates are considered “high?”

Answer 30

over 5.5%

Question 31

What was the highest unemployment rate in the Great Depression?

Answer 31

24%

Question 32

What are some types of people who are in the CNIP, but not in the labor force?

Answer 32

Stay-at-home parents, retired, some students, bums.

Question 33

What is a major cause of teen unemployment today?

Answer 33

large increases in the minimum wage.

Question 34

31. Define the Labor Force Participation Rate. What does it tell us?

Answer 34

LF / CNIP–how many are interested in working

Question 35

What are the trends in the LFPR?

Answer 35

The LFPR is down for both men and women. It has fallen for men for decades, but was climbing for women until the 2009 recession.

Question 36

Discouraged worker.

Answer 36

No job. Looked during the prior year, but not during the prior 4 weeks. Neither unemployed or employed.

Question 37

What is U-6? How large was it in February 2013?

Answer 37

An unemployment rate that counts discouraged workers and involuntarily part-time workers. 14.3%.

Question 38

35. Why does the media pay attention to “new claims for unemployment insurance?” What is the problem with the measure?

Answer 38

It is weekly. After a while, benefits run out for more and more unemployed, so claims can fall, though the economy is not improving.

Question 39

What is frictional unemployment? Does is show a dysfunction in the economy?

Answer 39

Happens because people change jobs or enter the labor force. It is natural and likely rises in good times as people advance.

Question 40

We reach our potential GDP when

Answer 40

the labor market is in equilibrium

Question 41

What is structural unemployment? Does it show a dysfunction in the economy?

Answer 41

Happens because the skills needed to hold good jobs change over time due to technology and trade. A healthy economy must be moving–which will leave some people behind, but overall creates more/better jobs than it destroys.

Question 42

What is cyclical unemployment? Does it reveal a dysfunction in the economy?

Answer 42

Arises due to the business cycle/recessions. It reveals a problem with the economy. However, given that there must be many coordinated failures, it is likely that government, the best coordinator, is at the root of it.

Question 43

True, false, explain: We say we have “full employment” only if the unemployment rate is zero.

Answer 43

False. Full employment means no cyclical unemployment At full employment, the unemployment rate is about 5.5%

Question 44

What is true about the production possibilities frontier if we have a surplus of labor?

Answer 44

A surplus of labor is unemployment–which means we must be below the PPF

Question 45

What did Keynes say about labor markets that was different than classical economists?

Answer 45

He said labor surpluses can last a long time because wages refuse to fall.

Question 46

What two reasons did Keynes give for wages refusing to fall?

Answer 46

Labor contracts which prevent employers from cutting wages. Workers mistaking nominal wage cuts that come with deflation for real wage cuts, which lead them to quit and look for better jobs–which do not exist.

Question 47

Keynes’ theory has a problem in that people do not respond to incentives. Explain.

Answer 47

People out of work will not take a nominal pay cut in order to get a job. They will continue looking for a higher paying job for years, even though none are available.

Question 48

What did Keynes say was a problem for the economy?

Answer 48

workers mistake nominal wage cuts for real wage cuts and labor contracts.