ECON 320

Review Question Set I

Peter Orazem

1. Can unemployment exist at equilibrium? Explain.

2. In a competitive firm, what happens to the demand curve for labor when the output price rises?

3. If the marginal revenue product of labor rises and then falls, why is the demand curve only the downward sloping portion?

4. What is the difference between the short run versus the long run demand for labor?

5. Will a competitive firm ever increase employment when wages rise, all other factors fixed?

6. Labor mobility has eliminated monopsony power in the United States. Comment.

7. What is the difference between labor supply and the marginal cost of labor in the monopsony case? In the competitive case?

8. Suppose a firm uses capital and labor to produce tractors. The price of labor falls while the price of capital remains constant. Under what circumstances will the demand for capital rise or fall? Illustrate your answer with graphical analysis.

9. How would the imposition of an OPEC embargo on oil affect the demand curve for domestic oil workers? Answer using the Laws of Derived Demand.

10. How would the creation of a mechanical corn detasseler affect the demand curve for summer teenage labor in Iowa? Answer using the Laws of Derived Demand.

11. What is the own wage-elasticity of demand for labor? Are steep demand curves elastic or inelastic?

12. What has happened to the relative earnings for college and high school students since 1980? How is this pattern related to the substitutability of capital for labor?

13. How can a high wage country such as the United States compete in world markets?

14. If unemployment exists, will real wages rise or fall in the path toward equilibrium? Will employment rise or fall?

15. Comment on the view that minimum wages have had a dramatic effect on poverty levels in the United States.

16. How does the U.S. labor market differ from the European labor market in terms of unemployment, employment, and wage flexibility?

17. Unions should target inelastic labor demand sectors. Why?

18. Minimum wages can cause some wages to fall. How?

19. Comment on the statement that, “increased labor productivity (measured as average output per worker) has lowered employment and wages in the United States.”

20. Average compensation for U.S. executives is higher than in Europe or Japan. Some have argued that this is related in part to efforts in the U.S. to tie executive wages to marginal revenue products. Explain.

21. Capital-labor ratios in India are much lower than in the United States. What is the relative cost of labor to capital in India versus the United States? What would you expect to be true of the ratio of marginal product of labor versus the marginal product of capital in India versus the United States? How does the theory of long-run input demand in which firms minimize the cost of producing some desired level of output relate to the pattern of capital-labor ratios observed across countries?

22. How can unemployment be voluntary?

23. Rising wage inequality in the United States is evidence of rising levels of discrimination against women and minorities. Comment.

24. With respect to the labor market, define employment rate, unemployment rate, labor force participation rate, and population. How have employment rates and unemployment rates provided mixed signals on the strength of the labor market over the past 20 years?

25. Which is the better measure of international competitiveness, unit labor cost or wage? Why?

26. What is the principal-agent problem in publicly held firms? How is it solved by stock options?

27. If when wages rise 10%, employment falls by 3%, is labor demand elastic or inelastic? In this circumstance, what happens to the wage bill when wages rise.

28. If when wages rise by 10%, capital demand falls by 3%, are capital and labor complements or substitutes?