1. b   Hours worked in the labor market in the United States and Japan average over 2000 per year, whereas in Europe they average between 1500 and 1800 hours. In the rest of the world, work days may be longer, but the average hours spent in formal employment are fewer.

2. b   Children, by definition of not being adults, may not make choices in a wholly rational way. Therefore, if labor market decisions are being made by children, a rational actor framework may not be the appropriate model for these decisions. The law of demand and the law of one price may still hold.

3. b   The neoclassical economists pioneered the idea of predicting economic behavior based on formal models and testing whether the behavior was consistent with those models. While classical economists did use modeling, they did not subsume economic behavior to the rules of the models.

4. a   Marx wrote of a distinction between labor used and labor done; the idea of a difference between work hours and output was discussed by institutionalists, but was not formally incorporated into neoclassical models until the efficiency wage and compensating differentials models of the 1970s.

5. d   Members of this school were influenced by the Great Depression, which gave them an experience in which labor markets did not clear for a long period; World War II, when they had to set firm-level policy on the War Labor Board; and models of imperfect competition developed in the 1930s, which explained many aspects of firms more clearly to them than perfect competition.

6. c   Williamson's theory stated that the modern production process is too complex for one employee to understand; therefore, individual employees may have private information about production that they may use opportunistically to their advantage and against the interest of the firm.

7. d   In Ethiopia, both public and formal private sector employment are about 3% of total employment; this is smaller than most industrialized countries, where private sector employment is generally over 50% and public sector employment may is generally in the range of 7 to 15 percent; but the public sector is large, employment-wise, relative to the formal private sector.

8. c   If jobs in the informal sector are less desirable than jobs in the informal sector, then workers should quit them more readily. Lower wages are not direct evidence of a secondary labor market, because those lower wages could be due to lower unobservable skills. Lower pay for lower skills does not constitute a secondary labor market, because those lower skilled workers may still have equal opportunity to higher skilled workers. If there is a secondary labor market, we would expect the average age to be lower in that market, because workers will try to migrate from the secondary labor market to the primary market over the course of their careers.

9. a   For someone who both works and engages in leisure, the marginal value of leisure is equal to the wage. For someone who does not work, the wage is not enough to entice him to give up leisure, so he must value the leisure more than the wage, except for the borderline case where the person is indifferent between working and not working, in which case the marginal value of leisure is equal to the wage.

10. a  If the indifference curves are everywhere steeper than the budget line, then the person will choose a corner solution at the bottom right corner.

11. d The effect of income on hours worked is generally negative, and the effect of substitution from a wage increase is always positive. The labor supply curve will slope upward if the (negative) income effect is smaller in magnitude.

12. b Backward sloping labor supply curves result from the income effect of a wage change. Workers who work few hours in the labor market have a small income effect from a wage change, so the substitution effect will dominate, meaning that their labor supply curve will be upward-sloping.

13. b  The outcome is symmetric, but not equal if players do not have equal possibilities. The outcome is Pareto efficient. The outcome for a player is worse if her default allocation is worse, even if the outcome is above the default allocation.

14. c  Separate harvesting is a form of asserting control over a resource. This affects the threat point in a non-cooperative marriage. Cooperation, however, matters during the allocation process; we do not know that the marriage is in fact non-cooperative unless we know something about the allocation.

15. d  The cross-substitution effect describes how one member responds to the other member's decision to substitute market work for non-market work. It is positive when an resulting increase in one member's work hours makes the other want to work more (e.g., if they enjoy leisure time together). In this case, when one member's decision to work more makes another member wish to work less, the cross-substitution effect is negative. The cross-income effect on hours worked is always negative.

16. c  The marginal cost always equals the marginal revenue. The marginal cost equals the wage whenever the labor market is perfectly competitive; the marginal revenue equals the marginal product times its price whenever the product market is perfectly competitive.

17. d  If a firm is maximizing profits, it sets the marginal cost of labor equal to the marginal revenue product. If the labor market is perfectly competitive, that marginal cost equals the wage. In the short run, firms make adjustments to changes in the wage by picking different points on the marginal revenue curve. In the long run, while the wage equals the marginal revenue product at the chosen employment level, firms will shift their capital usage in response to a wage change, so they are not setting employment along the same marginal revenue product curve.

18. c  For any profit maximizing firm, the marginal cost of labor equals the marginal revenue product; the marginal cost equals the wage as long as the labor market is perfectly competitive. If the employer is a monopolist, then the marginal revenue product is below the price times the marginal product, meaning that the effect of increased employment on a firm's profits is below its effect on economic output. Therefore, the firm will hire fewer workers than would be output-maximizing.

19. c  Output is maximized when the price of the output that a worker produces is equal to his or her wage (which is the marginal cost of the worker to society rather than the firm). A profit maximizing firm sets output where the marginal revenue from a worker is equal to its marginal cost of hiring that worker. If the firm is a monopolist, then the price of the output may not equal the firm's marginal revenue from the output; if the firm is a monopsonist, then the wage might not equal the firm's marginal cost. In either case, the quantity chosen by the firm might not be output-maximizing.

20. c  If every firm in an industry hires at a lower wage, it will increase its employment and thereby increase its output. If every firm does this, the price will have to fall for markets to clear. This in turn will lower the marginal revenue product curve, causing each firm to increase employment less than it would if it alone faced a drop in its wage.

21. c  If product markets are perfectly competitive, then the labor supply to an individual firm (which is the same as its marginal cost curve) is completely elastic (flat). Because the marginal revenue curve is downward sloping, it will meet a lower, flat, marginal cost curve to the right of the higher marginal cost curve, i.e., with higher employment. If the employer is a monopsonist, the marginal cost curve will be above the wage, and if a drop in the wage simultaneously makes labor supply less elastic, the marginal cost curve could actually shift up, lowering employment. All this is true regardless whether the product market is perfectly or imperfectly competitive.

22. b  The elasticity of labor demand is ∂L/∂w(w/L) = -3(w/L). At an output of nine, i.e., a wage of two, this is equal to -6(2/9) = -2/3.

23. a  Whenever the demand for labor is inelastic, the employment drop due to a rise in the wage is smaller (in percentage terms) than the rise in the wage. Therefore, the wage bill (wage times employment) rises when the wage rises. Similarly, it falls when the wage falls. This is true regardless whether the product market is perfectly or imperfectly competitive.

24. d  The listed features characterize conditions when labor demand is more elastic.

25. b If firms have imperfect information about workers availability, then the labor market may be monopsonistic, as in the case of search models; if they have imperfect information about worker productivity, then firms may have to pay based on expected output rather than actual output, as in matching models. Either way, two identical workers may end up with different wages, meaning that the law of one price fails.

26. b  The law of one wage states that identically productive workers should receive the same wage at any employer. Workers with different skill levels or work effort might not be identically productive, but a wage difference based purely on industry would violate this law.

27. a  The first condition must hold for the distribution of wages to be stable. The wage is not in general equal to the marginal product, because firms have monopsony power. The number of hires that firms wish to make must equal the number of workers accepting, but this is not the same as the number of firms looking for workers or the number of workers looking for jobs.

28. d  In equilibrium, the number of hires equals the number of quits, i.e., s(w)=lq(w). Therefore, if s(w) = 25 and q(w) = 1/5, then l = 125.

29. d  If there is an efficiency wage in part of the economy, some workers may get the wage and others may not. There may be unemployment because firms may not wish to lower the wage to hire willing workers because it would make the threat of losing the job less severe and thereby lower worker effort. When there is unemployment in equilibrium, markets are not clearing because there is excess supply.

30. c  If there is a binding nutrition wage, then firms cannot lower the wage or else workers will not receive the nutrition to work harder. If firms would otherwise wish to lower the wage (i.e., the nutrition wage is binding), then it means that they would get additional workers from doing so. If the nutrition wage covers the entire labor market, then the workers they would get must come from unemployment, so there must be unemployment.

31. c  The marginal cost of x must equal the marginal willingness to pay for x; in this particular case, the wage is irrelevant. The marginal cost is four; the marginal willingness to pay is the derivative of q with respect to x, i.e., x/2. Therefore, 4 = x/2, or x = 8.

32. c  The firm's marginal willingness to pay for x indicates the amount that a firm would be willing to lower the wage by in exchange for increasing x and still be equally well off. “Equally well off” for a firm means earning the same profit, so this is given by the isoprofit line. The isoprofit line is equal to the isocost line only if providing x does not affect the firm's output.

33. c  In a standard perfectly competitive labor market, non-wage job characteristics do not vary across firms. Therefore, there is no premium for work effort. All workers in both models have the same earnings opportunities; however, in the standard perfectly competitive labor market, this implies that all workers earn the same wage, whereas in a compensating differentials model, workers may use this opportunity to choose different non-wage job characteristics. Both models will fail if worker effort is so difficult to observe that it affects the pay structure.

34. c  Internal labor markets will appear where the production process is more difficult to understand, because firms need managers who have experience doing low-level tasks at the firm. Internal labor markets are designed to combat opportunism due to specific knowledge that workers have about their individual job. All of these aspects of the production process will lead to higher specific human capital requirements.

35. a  If payments by high-wage industries are due to unobservable skills, then we should expect that workers will take those skills with them when they move to low-wage industries and be compensated, thereby having a smaller wage difference than the average between-industry difference. Lower quit rates and longer job durations are a sign that workers do not want to leave their jobs, suggesting that jobs in lower-paying industries must be less rewarding. If high-paying industries pay highly for all occupations, it is a sign that the skills required for the task are not relevant to the pay premium.

36. c  Firms would never pay workers above their marginal productivity; if some firms hire only Kazakh workers, and others hire only Uzbek workers, then neither type of firm has any difficulty paying its workers their marginal productivity, which is equal to the market wages. This is more preferable to the workers than any wage that is below the marginal productivity, and it is preferable to Uzbek workers over an equally well-paying job where they have to work with Kazakh workers.

37. c  If a firm pays efficiency wage, it can generally discriminate without penalty, but discrimination does not actually increase profits. Markets with compensating differentials are competitive markets, so wage discrimination will lower profits. A firm with monopsony power will maximize profits when it pays a lower wage to a group of workers with lower labor supply elasticity.

38.     If a firm is a monopsonist, it will hire a quantity of workers where its marginal revenue is equal to its marginal costs. Assuming two groups of workers are perfect substitutes, their marginal revenue will be identical, so their marginal cost will also be identical. The group with a lower labor supply elasticity will have a larger difference between the wage and the marginal cost; its wage will therefore be lower.

39. c  Statistical discrimination assumes that one group is less observable. It is profitable for employers, but so is job segregation due to employee prejudice. Both models will result in equal wages for equally productive workers; one group will earn less under statistical discrimination, but this is because it is poorly matched and therefore less productive.

40. b  Both sets of workers have equal opportunities in the labor market, so there is no discrimination against either as a group. However, high-ability Trogladites will suffer because they are lumped in with other Trogladites, rather than with other high-ability workers, when their pay is determined.

41. b  In a perfectly competitive market, if there is wage discrimination, then one group of workers is not being paid its marginal product, which will lower profits. This is not the case with an efficiency wage, because some workers will earn the efficiency wage, some will not, and both will be paid their marginal products. Efficiency wages allow employers to discriminate without lowering profits if they are prejudiced, but does not raise profits if employers are not prejudiced. Putting workers from one group into the efficiency wage jobs and workers from another group into non-efficiency-wage jobs will create occupational segregation.

42. b  If labor demand is elastic, then at the employment level where everyone currently in the city has a job, the wage bill will be higher than it was with the wage rigidity. Therefore, the expected urban wage is higher than it was with the wage rigidity, which will pull people from the countryside into the city, putting downward pressure on the urban and rural wages.

43. d  The present value of earning x per year starting next year when the interest rate is i is x/i. Here, the person is earning rw=50 per year, and the interest rate is 0.05, so the present value is 50/0.05 = 1000.

44. c  Both the private cost and the private return are below their social counterparts. As a result, the private cost and return could intersect each other at a point that is below where the social cost and return intersect, but it could be to the left or to the right.

45. a  If both the cost curve and the demand curve shift out together, then the quantity will shift out, but the price (i.e., the return) will not clearly shift up or down.

46. c  The ratio of the wage that a firm pays to its workers' marginal products will be larger for workers whose labor supply is less elastic. This means that workers with a primary education will suffer a larger wage penalty, and therefore the difference between wages will be larger than the difference in productivity. There is not enough information to know which group will have higher employment.

47. a  According to job signaling theory, the purpose of education is to signal worker ability. It is therefore a waste of resources if there is a cheaper way to signal ability. It may increase productivity if a proper signal of ability helps firms match workers better to a job.

48. d  If firms have monopsony power, any wage increase due to specific training will affect the marginal probability of quitting with respect to the wage, which in turn will affect labor supply elasticity. The marginal probability of quitting depends in a non-generic way on the overall distribution of wages; therefore, the relationship between the wage increase and the marginal cost increase is uncertain.

49. b  According to job matching models, workers who are not well matched to a job are less productive. Eventually they and the firm discover this, and they look for and find a more productive match elsewhere. Therefore, the average worker with long tenure is likely a better match, produces more on average, and is paid more, even though the experience on the job has not made the worker more productive.

50. d  Back-loading wages toward the end of a job makes workers not want to lose a job because they will miss the premium wage payments that come toward the end of a job. This will prevent workers from quitting (though in a perfectly competitive labor market, only an infinitesimal wage gain is necessary for this); it will make them afraid of losing their jobs, which in turn may increase work effort because workers may get fired if they fail to do their work.

51. a  If education and job training are complements, then people with more education will have a higher return to training, which means that they can invest in training with a shorter period left in their careers and still receive an adequate return. It does not matter if the training produces general or specific capital.