Extra, Review

Question 0

What would happen to the quantity of labor demanded if the wage rate were increased?

1st
-higher wages imply higher costs and, usually, higher product prices. Because consumers respond to higher prices by buying less, employers would tend to reduce their levels of output and employment (other things being equal)

This decline in employment is called a…?

Answer 0

Scale effect

The effect on desired employment of a smaller scale of production

Question 1

What would happen to the quantity of labor demanded if the wage rate were increased?

2nd
-as wages increase, employers have incentives to cut costs by adopting a technology that relies more on capital and less on labor.

-desired employment would fall because of a shift toward a more capital-intensive mode of production

This second effect is termed..?

Answer 1

Substitution effect

Because as wages rise, capital is substituted for labor in the production process

Question 2

If the relative prices of capital do not change, there is no ….?

Answer 2

Substitution effect

Question 3

The scale effect of s fall in capital prices thus tends to increase the…?

Answer 3

Demand for labor at each wage level

Question 4

A fall in capital prices=?

Answer 4

Substitution effect

Whereby firms adopt more capital-intensive technologies in response to cheaper capital

Left shift in demand

Question 5

A fall in capital prices generates 2 opposite effects on the demand for labor:

The scale effect will push the labor demand curve…?

While the substitution effect will push it to the…?

Answer 5

To the right

Left

Either effect could dominate! Therefore we don’t have a clear-cut prediction in economics on what falling capital prices will do to labor demand

Question 6

Change in wage=

Answer 6

Movement

Other forces=shift