Ch04 Labor and Financial Markets
Multiple Choice Questions
1. The “law of supply” functions in labor markets; that is, a higher __________ for labor leads to a higher quantity of labor supplied.
A. price
B. demand
C. supply
D. quantity
Answer: A Reference:
Explanation:
2. As the __________ substitute for low-skill labor becomes available, the demand curve for low-skill labor will shift to the left.
A. high-skill labor
B. lower wage
C. technology
D. market
Answer: C Reference:
Explanation:
3. Improvements in the productivity of labor will tend to:
A. decrease wages.
B. decrease the supply of labor.
C. increase wages.
D. increase the supply of labor.
Answer: C Reference:
Explanation:
4. Which of the following will not result in a leftward shift of the market demand curve for labor?
A. a decrease in labor productivity
B. a decrease in demand for the firm’s product
C. an increase in the wage rate
D. a decrease in the firm’s product price
Answer: C Reference:
Explanation:
5. Which of the following results in a rightward shift of the market demand curve for labor?
A. a decrease in labor productivity
B. a decrease in the firm’s product price
C. an increase in the wage rate
D. an increase in demand for the firm’s product
Answer: D Reference:
Explanation:
6. Which of the following will not result in a rightward shift of the market supply curve for labor?
A. a decrease in non-wage income
B. an increase in the working-age population
C. an increase in labor productivity
D. an increase in immigration
Answer: C Reference:
Explanation:
7. If the demand for software engineers __________ slower than does supply, then wages of software engineers will __________.
A. increases; remain constant
B. increases, rise
C. increases; fall
D. decreases; fall
Answer: C Reference:
Explanation:
8. In contrast to goods and services markets, _____________ are rare in labor markets, because rules that prevent people from earning income are not politically popular.
A. minimum wages
B. price floors
C. price ceilings
D. living wage laws
Answer: C Reference:
Explanation:
Difficulty:
9. Since Baltimore passed the first _______________ in 1994, several dozen cities enacted similar laws in the late 1990s and into the 2000s.
A. living wage law
B. price ceiling
C. price floor
D. minimum wage
Answer: A Reference:
Explanation:
10. Other things being equal, a __________ supply of workers tends to __________ real wages.
A. smaller; not change
B. larger; increase
C. smaller; decrease
D. larger; decrease
Answer: D Reference:
Explanation:
11. Many states do have ____________, which impose an upper limit on the interest rate that lenders can charge.
A. price ceiling laws
B. usury laws
C. price floor laws
D. minimum interest rate
Answer: B Reference:
Explanation:
12. In the United States, a typical credit card interest rate ranges from ______________ per year.
A. .2% to .8%
B. 2% to 8%
C. 12% to 18%
D. 22% to 28%
Answer: C Reference:
Explanation:
13. When consumers and businesses have greater confidence that they will be able to repay in the future, _______________________.
A. the quantity demanded of financial capital at any given interest rate will remain unchanged.
B. the quantity demanded of financial capital at any given interest rate will shift to the left.
C. the quantity demanded of financial capital at any given interest rate will shift to the right.
D. the quantity demanded of financial capital at any given interest rate will achieve equilibrium.
Answer: C Reference:
Explanation:
14. If labor demand is downward sloping and labor supply is upward sloping, then when labor demand rises faster than labor supply, it is expected that real wages __________.
A. will stay the same
B. will decrease
C. will increase
D. may increase, decrease or stay the same depending on the relative slopes.
Answer: C Reference:
Explanation:
15. The labor ____________ curve(s) will shift _______________ if there is an increase in productivity or an increase in the demand for the final product.
A. demand; left
B. supply; left
C. demand; right
D. supply; right
Answer: C Reference:
Explanation:
16. A straightforward example of a _______________, often used for simplicity, is the interest rate.
A. price ceiling
B. financial investment
C. rate of return
D. price floor
Answer: C Reference:
Explanation:
17. The United States has approximately ___________ credit card holders.
A. 1.8 million
B. 18 million
C. 80 million
D. 180 million
Answer: D Reference:
Explanation:
18. Many economists believe that the trend toward greater wage inequality across the U.S. economy was primarily caused by _____________.
A. the recession
B. new technologies
C. the rise of global markets
D. inflation
Answer: B Reference:
Explanation:
19. As the _____________ complement for high-skill labor becomes cheaper, the demand curve for high-skill labor will shift to the right.
A. technology
B. low-skill labor
C. market
D. lower wage
Answer: A Reference:
Explanation:
20. Many cooks view butter and margarine to be substitutes. If the price of butter rises, then in the market for margarine:
A. the equilibrium price will fall and the equilibrium quantity will fall.
B. both the equilibrium price and quantity will rise.
C. the equilibrium price will rise and the equilibrium quantity will decrease.
D. the equilibrium price will rise, while the change to equilibrium quantity is indeterminate.
Answer: B Reference:
Explanation:
21. The supply curve of textbooks (which are produced using paper made from trees) will shift to the left in response to:
A. a decline in college tuition.
B. a sharp increase in the demand for and construction of wood-frame homes.
C. an increase in the supply of lumberjacks.
D. an end to government regulations that limit timber harvesting in national forests.
Answer: B Reference:
Explanation:
22. Steel mill wage costs increase by 18 percent over a year. What is the likely economic effect on the market for steel?
A. There is an increase in the cost of producing steel, which shifts the supply curve of steel to the right, thereby increasing the price of steel.
B. There is an increase in the cost of producing steel, which shifts the supply curve of steel to the left, thereby increasing the price of steel.
C. There is a decrease in the cost of producing steel, which shifts the supply curve of steel to the left, thereby increasing the price of steel.
D. The increase in wage costs will shift the demand curve for steel to the left, increasing the cost of steel.
Answer: B Reference:
Explanation:
23. A more efficient means of processing algae to produce an anticancer drug is discovered. As a result, the supply curve for the drug will:
A. shift to the right, increasing the price of the drug.
B. shift to the left, increasing the price of the drug.
C. shift to the right, decreasing the price of the drug
D. shift to the left, decreasing the price of the drug.
Answer: C Reference:
Explanation:
24. How do apple growers react to the news of medical research findings that suggest that eating apples leads to greater health benefits than were previously known?
A. They increase the supply of apples.
B. They increase the quantity of apples supplied.
C. They decrease the supply of apples.
D. They decrease the quantity of apples supplied.
Answer: B Reference:
Explanation:
25. Are markets always in equilibrium?
A. No, they never “settle down” into a stable price and quantity.
B. No, but if there is no outside interference, they tend to move toward equilibrium.
C. Yes, because very few things tend to alter supply and demand.
D. Yes, they are always at the equilibrium point, or very close to it.
Answer: B Reference:
Explanation:
26. The imposition of a price ceiling on a market often results in:
A. an increase in investment in the industry.
B. a surplus
C. a shortage
D. a decrease in discrimination on the part of sellers.
Answer: C Reference:
Explanation:
27. On April 1, 2009, in the middle of a recession, the government of the province of Ontario, Canada increased the provincial minimum wage from $8.75 to $9.50. What will the likely effect of this policy be?
A. Both the leftward shift in the labor demand curve and the higher minimum wage will lead to an increase in the unemployment rate.
B. Low income workers will be better able to survive the recession at the new, higher wage rate.
C. More people will be hired at the higher wage rate offsetting the effects of the recession.
D. The higher wage will increase the supply of labor offsetting the effects of the recession.
Answer: A Reference:
Explanation:
28. Whenever there is a shortage at a particular price, the quantity sold at that price will equal:
A. the quantity demanded at that price.
B. the quantity supplied minus the quantity demanded.
C. the quantity supplied at that price.
D. (quantity demanded plus quantity supplied)/2.
Answer: C Reference:
Explanation:
29. Whenever there is a surplus at a particular price, the quantity sold at that price will equal:
A. (quantity demanded plus quantity supplied)/2.
B. the quantity supplied at that price.
C. the quantity supplied minus the quantity demanded.
D. the quantity demanded at that price.
Answer: D Reference:
Explanation:
Figure 5-1
30. Refer to Figure 5-1. The movement from __________ to __________ is consistent with a successful advertising campaign that claims wool keeps you warm.
A. Point A; Point B
B. Point A; Point F
C. Point A; Point D
D. Point A; Point H
Answer: B Reference:
Explanation:
31. Refer to Figure 5-1. The movement from __________ to __________ is consistent with a decrease in the price of cotton (a substitute).
A. Point A; Point H
B. Point A; Point D
C. Point A; Point F
D. Point A; Point B
Answer: A Reference:
Explanation:
32. In 2010, Americans had about _____________ outstanding in credit card debts not paid on time.
A. $900 billion
B. $90 billion
C. $900 million
D. $90 million
Answer: A Reference:
Explanation:
Price D 1 D 2 S 1 S 2
$12 5 9 19 14
$10 8 12 17 12
$8 11 15 15 10
$6 13 18 13 8
$4 16 21 11 6
$2 18 24 9 4
Table 5-1
33. Refer to Table 5-1. If D1 and S1 represent the demand and supply schedules in a particular market, then the equilibrium price and quantity are __________ and __________, respectively.
A. $4; 11
B. $4; 16
C. $6; 13
D. $8; 15
Answer: B Reference:
Explanation:
34. Refer to Table 5-1. If D2 and S2 represent the demand and supply schedules in a particular market, then the equilibrium price and quantity are __________ and __________, respectively.
A. $12; 12
B. $10; 12
C. $8; 15
D. $6; 18
Answer: B Reference:
Explanation:
35. Refer to Table 5-1. If D2 and S1 represent the demand and supply schedules in a particular market, then the equilibrium price and quantity are __________ and __________, respectively.
A. $8; 15
B. $10; 17
C. $12; 9
D. $12; 10
Answer: A Reference:
Explanation:
36. Refer to Table 5-1. Suppose that D1 and S1 are the prevailing demand and supply curves for a product. If the demand schedule changes from D1 to D2, then:
A. equilibrium price decreases from $6 to $4.
B. equilibrium quantity decreases from 15 to 13.
C. equilibrium quantity increases from 13 to 18.
D. equilibrium price increases from $6 to $8
Answer: D Reference:
Explanation:
37. Refer to Table 5-1. Suppose that D2 and S1 are the prevailing demand and supply curves for a product. If the demand schedule changes from D2 to D1, then:
A. equilibrium price increases from $6 to $8.
B. equilibrium quantity increases from 13 to 18
C. equilibrium quantity decreases from 15 to 13.
D. equilibrium price decreases from $6 to $4.
Answer: C Reference:
Explanation:
38. Refer to Table 5-1. Suppose that D1 and S2 are the demand and supply schedules for Product A. If the government imposes a price ceiling of $4, then:
A. a 5 unit shortage will result.
B. a 5 unit surplus will result.
C. a 10 unit surplus will result.
D. a 10 unit shortage will result.
Answer: D Reference:
Explanation:
Essay Questions
1. Several types of economic events can cause a shift in labor demand, so that a higher or lower quantity of labor is hired at every salary or wage. List three of these events.
Reference:
Explanation: Changes in education and training, changes in technology, changes in government regulations.
2. Several types of economic events can cause a shift in labor demand, so that a higher or lower quantity of labor is hired at every salary or wage. List three of these events.
Reference:
Explanation: Changes in the number of workers, changes in required education, changes in government policies.
3. Explain the nature of individual and business decisions which drive the demand and supply of financial capital. Specifically, what kinds of factors will shift demand and supply of financial capital?
Reference:
Explanation: Those who supply financial capital face two broad decisions: how much to save, and how to divide up their savings among different forms of financial investments. In thinking about how much to save, people must decide what they will need in the future to address expected or unexpected events. If Investment A becomes more risky, or the return diminishes, then savers will shift their funds to Investment B—and the supply curve of financial capital for Investment A will shift back to the left while the supply curve of capital for Investment B shifts to the right. Those who demand financial capital want the money now and are willing to repay in the future. For example, individuals might borrow money to purchase a long-term possession such as a condominium, a house or a car. A business might seek financial investment so that it has the funds to build a factory or invest in a research and development project that won’t pay off for five years, ten years or even more
4. Explain why U.S. minimum wage laws have historically had only a small impact on employment.
Reference:
Explanation: From text: Let’s suppose that the minimum wage set lies just slightly below the equilibrium wage level. Wages could fluctuate according to market forces above this price floor, but they would not be allowed to move beneath the floor. In this situation, the price floor minimum wage is said to be nonbinding—that is, the price floor isn’t determining the market outcome. Even if the minimum wage moves just a little higher, it will still have no effect on the quantity of employment in the economy, as long as it remains below the equilibrium wage. Even if the minimum wage is increased by enough so that it rises slightly above the equilibrium wage and becomes binding, only a small excess supply gap between the quantity demanded and quantity supplied of low-skill labor.
5. As the text suggests, the demand and supply model predicts that the new computer and communications technologies will raise the pay of high-skill labor but reduce the pay of low-skill labor. Explain how this works using the four-step process.
Reference:
Explanation: Step 1: What did the market look like before the change? In this case there are two markets: low-skill labor and high-skill labor. In each market, the original demand curve for labor is D0, the original supply curve for labor is S0, and the original equilibrium is E0, where the equilibrium wage is w0 and the equilibrium quantity is q0.
Step 2: Does the new technology affect the supply of labor or the demand for labor? The new technology affects demand for labor.
Step 3: How will the new technology alter demand for the two types of labor? As the technology substitute for low-skill labor becomes cheaper, demand for low-skill labor will shift to the left, as shown by the shift from D0 to D1 in the market for low-skill labor. As the technology complement for high-skill labor becomes cheaper, demand for high-skill labor will shift to the right, as shown by the shift from D0 to D1 in the market for high-skilled labor.
Step 4: Compare the new equilibrium to the original equilibrium. The new equilibrium for low-skill labor at E1 has a lower wage and quantity than the original equilibrium E0 in the market for low-skill labor. The new equilibrium for high-skilled labor at E1 has a higher wage and quantity than the original equilibrium.
6. The demand and supply model can explain the existing levels of prices, wages, and rates of return. Demand and supply can also be used to explain how economic events will cause changes in prices, wages, and rates of return. There are only four possibilities: what are they?
Reference:
Explanation: The economic event may cause the demand curve to shift right or to shift left; or it may cause the supply curve to shift right or to shift left.
7. Markets tend toward equilibrium and, as a result, will tend to eliminate shortages and surpluses. Why?
Reference:
Explanation: Markets tend toward equilibrium because when a shortage exists, consumers who are unhappy about not being able to purchase the products or services they want will tend to bid the prices higher, moving the market toward equilibrium. If a surplus exists, suppliers are unhappy about not being able to sell the quantity of goods or services they wish, and will tend to lower prices in order to persuade consumers to purchase more goods and services.
