Question

1) Suppose there are diminishing returns to labor. If the _____ of labor hired by a firm increases, holding everything else constant, the _____ labor will _____.

A.	price (wage); demand for; increase
	B.	quantity; marginal product of; fall
	C.	quantity; marginal product of; rise
	D.	quantity; value of the marginal product of; rise

2)Which factor would cause people to work more (shift the market labor supply curve to the right)?

A.	a reduction in non-wage income
	B.	an increase in wages in alternative jobs using the same skills
	C.	an increase in the market wage rate
	D.	a more stringent immigration policy

3)Which labor supply curves will bend backward at high wages?

A.	neither the individual nor the market labor supply curve
	B.	only the market labor supply curve
	C.	both the individual and market labor supply curve
	D.	only the individual labor supply curve

Answer 1

1. It is given that there are diminishing returns to labor. Therefore, the marginal product of each additional labor hired decreases as the number of labor employed increases.

If the quantity of labor hired by the firm increases, the marginal product of labor will fall

Ans: b. quantity; marginal product of; fall

2. A reduction in non-wage income causes the total income of labor to fall. In order to maintain the same standard of living, the labor increase their labor supply. Hence, Supply curve shifts to its right.

An increase in wages in alternative jobs causes the labor supply for the current jobs to decrease. Supply curve shifts left.

When wage rate increases, the quantity of labor supplied increases. Movement along the supply curve upwards.

A more stringent immigration policy - Causes the supply of labor to decrease as the number of migrants decreases. - Supply curve shifts left

Ans: A. a reduction in non-wage income

3. AT high wage rate, the income effect dominates the substitution effect. Leisure being a normal good, becomes more demanded and hence the quantity of labor supply decreases as wage rate increases. This results in a backward bending supply curve. This occurs at the individual level and since market supply curve of labor is derived from the individual supply curves, the market labor curve is also backward bending.

Ans:C. both the individual and market labor supply curve