CBE Labor Economics 2 — Questions and Answers
Question 1: Which concept describes the wage premium workers receive for accepting jobs with higher risk of injury or death?
- Efficiency wage
- Compensating differential (Correct answer)
- Monopsony premium
- Reservation wage
Correct answer: Compensating differential
Compensating differentials are wage premiums that offset undesirable job characteristics such as physical danger.
Question 2: The labor force participation rate is calculated as the labor force divided by:
- Total population
- Working-age population (Correct answer)
- Number of employed persons
- Number of unemployed persons
Correct answer: Working-age population
The LFPR equals the labor force (employed + actively seeking work) divided by the civilian noninstitutional population aged 16+.
Question 3: Under a perfectly competitive labor market, a firm's optimal hiring rule is to employ workers until:
- Marginal revenue product equals the market wage (Correct answer)
- Average product of labor is maximized
- Total labor cost equals total revenue
- Marginal cost of output equals average revenue
Correct answer: Marginal revenue product equals the market wage
Profit maximization requires hiring until MRP = W, because any additional worker beyond this point costs more than they produce.
Question 4: A decrease in the price of a complement to labor (e.g., machinery that works alongside workers) will most likely:
- Decrease labor demand
- Increase labor demand (Correct answer)
- Have no effect on labor demand
- Reduce the equilibrium wage
Correct answer: Increase labor demand
Cheaper complementary inputs raise labor's marginal productivity, shifting the labor demand curve rightward.
Question 5: Which theory of wage determination holds that wages reflect the marginal revenue product of labor in competitive markets?
- Efficiency wage theory
- Bargaining theory
- Marginal productivity theory (Correct answer)
- Segmented labor market theory
Correct answer: Marginal productivity theory
Marginal productivity theory states that in competitive equilibrium wages equal the value of the marginal product of labor.
Question 6: The reservation wage is best defined as:
- The minimum wage set by law
- The wage below which a worker will not accept employment (Correct answer)
- The average wage in an industry
- The wage at which labor supply is perfectly elastic
Correct answer: The wage below which a worker will not accept employment
A worker's reservation wage is the lowest wage offer they would accept, making them indifferent between working and not working.
Question 7: If the own-wage elasticity of labor demand is −0.4, a 10% increase in wages will reduce employment by approximately:
- 0.4%
- 4% (Correct answer)
- 10%
- 40%
Correct answer: 4%
Elasticity of −0.4 means a 10% wage increase causes a 0.4 × 10% = 4% employment decline.
CBE Labor Economics 2
Which concept describes the wage premium workers receive for accepting jobs with higher risk of injury or death?