6. Suppose that efficiency wages become more common in the economy. Imposing efficiency wages
a. increases the quantity demanded and decreases the quantity supplied of labor.
b. decreases the quantity demanded and increases the quantity supplied of labor.
c. increases the quantity demanded and decreases the quantity supplied of labor.
d. decreases the quantity demanded and increases the quantity supplied of labor.
7. Efficiency wages create a labor
a. surplus and so increase unemployment.
b. surplus and so decrease unemployment.
c. shortage and so increase unemployment.
d. shortage and so decrease unemployment.
8. Efficiency wages
a. increase frictional unemployment by keeping wages above equilibrium.
b. decrease frictional unemployment by keeping wages at equilibrium.
c. increase structural unemployment by keeping wages above equilibrium.
d. decrease structural unemployment by keeping wages at equilibrium.
9. Efficiency wages create a
a. shortage of labor and so reduce unemployment.
b. shortage of labor and so raise unemployment.
c. surplus of labor and so reduce unemployment.
d. surplus of labor and so raise unemployment.
10. Efficiency-wage theory suggests that paying
a. low wages might be profitable because they raise the efficiency of a firm’s workers.
b. low wages might be profitable because they lower the efficiency of a firm’s workers.
c. high wages might be profitable because they raise the efficiency of a firm’s workers.
d. high wages might be profitable because they lower the efficiency of a firm’s workers.
11. Efficiency wages contribute to
a. frictional unemployment and the natural rate of unemployment.
b. frictional unemployment but not the natural rate of unemployment.
c. structural unemployment and the natural rate of unemployment.
d. structural unemployment but not the natural rate of unemployment.
12. Efficiency wages
a. may increase productivity.
b. will increase unemployment.
c. may improve worker health.
d. All of the above are correct.
13. Susan is a plant manager in charge of a factory in a relatively poor country. Even though market
wages are low, she decides to raise the wages of her workers. Her decision
a. might increase profits if it means that the wage is high enough for her workers to eat a
nutritious diet that makes them more productive.
b. will help eliminate the excess supply of labor.
c. may cause her workers to reduce the effort they expend at their jobs.
d. All of the above are correct.
14. The efficiency-wage theory of worker health is
a. more relevant for explaining unemployment in less developed countries than in rich countries.
b. more relevant for explaining unemployment in rich countries than in less developed countries.
c. equally relevant for explaining unemployment in less developed countries and in rich countries.
d. not relevant for explaining unemployment.
15. Which of the following is an example of an efficiency wage?
a. a higher wage paid to a more experienced worker
b. a below-equilibrium wage paid by a small business exempt from minimum-wage laws
c. an above-equilibrium wage paid by a firm to reduce turnover costs
d. a wage tied to participation in a government-sponsored job training program
16. Buddy is the owner of a firm that bottles beer in St. Louis, Missouri. There are many other such
firms in the area. Buddy decides that if he pays his workers a wage higher than the going market
wage, his profits will increase. Which of the following is a likely explanation for his decision?
a. The higher the wage, the less often his workers will choose to leave his firm.
b. The higher the wage, the lower will be the costs of obtaining needed supplies.
c. The higher the wage, the more he can charge for his beer
d. The higher the wage, the more he will have to monitor his workers for shirking.
17. The efficiency-wage theory of worker turnover suggests that firms with higher turnover will have
a. higher production costs and higher profits.
b. higher production costs and lower profits.
c. lower production costs and higher profits.
d. lower production costs and lower profits.
18. A firm may pay efficiency wages in an attempt to
a. entice workers to work the night shift rather than the day shift.
b. improve productivity by reducing turnover.
c. reduce costs by attracting the least-skilled workers to apply for job vacancies.
d. All of the above are correct.
19. Which of the following is an example of an efficiency wage?
a. a high wage paid to compensate for dangerous work such as coal mining
b. an above-equilibrium wage offered by a firm to attract a more talented pool of job applicants
c. a wage below the minimum wage but supplemented by customer tips
d. a high wage paid to a college graduate for a high-skill job such as electrical engineering
20. Caroline is the owner of a hair-styling salon and spa. She decides to raise the wages of her
workers even though she faces an excess supply of labor. Her decision
a. might increase profits if it attracts a better pool of workers to apply for jobs at her salon.
b. will increase the excess supply of labor.
c. may increase the quality of her work force.
d. All of the above are correct.
21. Emeril is the owner of a restaurant. He decides to raise the wages of his workers even though he
faces an excess supply of labor. His decision
a. might increase profits if it attracts a better pool of workers to apply for jobs at his restaurant.
b. will reduce the excess supply of labor.
c. is an example of the benefits of a minimum-wage law.
d. All of the above are correct.
22. Michael decides to hire some additional workers for his roofing company. The equilibrium wage is
$17 per hour. Efficiency wage theory suggests that it is reasonable for Michael to offer
a. $17 per hour.
b. less than $17 per hour because some people would be willing to work for less.
c. less than $17 an hour to prevent shirking.
d. more than $17 per hour in order to attract a better pool of applicants.
23. Rafael is the newly-appointed plant manager for a company that manufactures head phones.
Rafael’s senior supervisors told him that the output the firm produces, given the number of
workers employed, indicates that some workers may be shirking. According to efficiency wage
theory, what should he do?
a. pay all workers more than the equilibrium wage rate
b. pay all workers below the equilibrium wage rate to make up for the loss from shirking
c. make sure that workers are getting paid exactly the equilibrium wage rate
d. fire the workers with the most seniority
24. A firm may pay efficiency wages in an attempt to
a. reduce incentives to shirk.
b. reduce turnover.
c. attract a well-qualified pool of applicants.
d. All of the above are correct.
25. Which of the following is not a reason that paying efficiency wages may increase a firm’s profit?
a. Efficiency wages increase worker health and therefore increase worker productivity.
b. Efficiency wages decrease worker turnover and therefore decrease hiring and training costs.
c. Efficiency wages decrease worker shirking and therefore increase worker productivity.
d. Efficiency wages are below the equilibrium wage rate but still attract a sufficient number of
workers.
26. Ariana is the CEO of a corporation that hires nonunion labor. According to the theory of
efficiency wages, if she decides to pay her workers more than the competitive equilibrium wage,
then
a. the profits of her firm might increase.
b. she will face a shortage of labor.
c. the turnover of her workers may increase.
d. None of the above is correct.
27. Three employers have justified their actions as follows. Whose logic is not consistent with the
logic of efficiency wage theory?
a. Instead of spending money on an electronic timing system that monitors worker hours, Tom
spends an equivalent amount of money on higher wages.
b. Dick pays his workers less than the equilibrium wage so that they will not have the time or
money to look for work somewhere else.
c. Harry pays his workers in a developing country more than the going wage hoping that they will
get a better diet and so be more productive.
d. None of the above is consistent with the logic of efficiency wage theory.
28. In which of the following situations should a firm pay efficiency wages?
a. A hiring manager can easily judge the quality of applicants, and after workers have worked for
the firm a while, they tend not to look for other jobs.
b. A hiring manager can easily judge the quality of applicants, and after workers have worked for
the firm a while, they tend to look for other jobs.
c. A hiring manager cannot easily judge the quality of applicants, and after workers have worked
for the firm a while, they tend to look for other jobs.
d. A hiring manager cannot easily judge the quality of applicants, and after workers have worked
for the firm a while, they tend not to look for other jobs.
29. According to the theory of efficiency wages, if a firm stops paying efficiency wages it is likely to
see a(n)
a. increase in the number of job applicants and an increase in how long workers stay on the job.
b. increase in the number of job applicants and a decrease in how long workers stay on the job.
c. decrease in the number of job applicants and an increase in how long workers stay on the job.
d. decrease in the number of job applicants and a decrease in how long workers stay on the job.
30. Sectoral changes in demand
a. create frictional unemployment, while firms paying wages above equilibrium to attract a better
pool of candidates creates structural unemployment.
b. create structural unemployment, while firms paying wages above equilibrium to attract a better
pool of candidates creates frictional unemployment.
c. and firms paying wages above equilibrium to attract a better pool of candidates both create
structural unemployment.
d. and firms paying wages above equilibrium to attract a better pool of candidates both create
frictional unemployment.
31. Job search
a. and firms paying wages above equilibrium to improve worker health both create frictional
unemployment.
b. creates frictional unemployment, while firms paying wages above equilibrium to improve
worker health creates structural unemployment.
c. creates structural unemployment, while firms paying wages above equilibrium to improve
worker health creates frictional unemployment.
d. and firms paying wages above equilibrium to improve worker health both create structural
unemployment.
32. Which of the following is not a reason economies experience structural unemployment?
a. job search
b. unions
c. minimum-wage laws
d. efficiency wages
33. Which of the following causes of unemployment is not associated with a wage rate above the
market equilibrium level?
a. efficiency wages
b. job search
c. minimum-wage laws
d. unions
34. If there were no factors keeping wages from reaching equilibrium then there would be no
a. cyclical unemployment.
b. frictional unemployment.
c. structural unemployment.
d. natural rate of unemployment.
35. Minimum-wage laws
a. create frictional unemployment, while firms paying wages above equilibrium to reduce worker
turnover creates structural unemployment.
b. create structural unemployment, while firms paying wages above equilibrium to reduce worker
turnover creates frictional unemployment.
c. and firms paying wages above equilibrium to reduce worker turnover both create structural
unemployment.
d. and firms paying wages above equilibrium to reduce worker turnover both create frictional
unemployment.
36. Which of the following causes of unemployment is associated with a wage rate above the market
equilibrium level?
a. minimum-wage laws
b. unions
c. efficiency wages
d. All of the above are correct.
37. Minimum-wage laws, unions, and efficiency wages contribute to
a. both structural unemployment and the natural rate of unemployment.
b. neither structural unemployment nor the natural rate of unemployment.
c. structural unemployment, but not the natural rate of unemployment.
d. the natural rate of unemployment, but not structural unemployment.
38. Efficiency wages, minimum–wage laws, and unions all keep wages
a. below the equilibrium level, causing a shortage of labor.
b. below the equilibrium level, causing a surplus of labor.
c. above the equilibrium level, causing a shortage of labor.
d. above the equilibrium level, causing a surplus of labor.
39. Minimum-wage laws and unions are similar to each other but different from efficiency wages in
that minimum-wage law and unions
a. cause unemployment, but efficiency wages do not.
b. cause the quantity of labor supplied to exceed the quantity of labor demanded, but efficiency
wages do not.
c. cause wages to be above the equilibrium level.
d. prevent firms from lowering wages in the presence of a surplus of workers.
40. Unions
a. and firms paying wages above equilibrium to improve worker effort both create frictional
unemployment.
b. creates frictional unemployment, while firms paying wages above equilibrium to improve
worker effort creates structural unemployment.
c. creates structural unemployment, while firms paying wages above equilibrium to improve
worker effort creates frictional unemployment.
d. and firms paying wages above equilibrium to improve worker effort both create structural
unemployment.
41. Which famous company executive introduced an innovative pay system that is consistent with the
theory of efficiency wages?
a. Lee Iococca
b. Steve Jobs
c. Mark Zuckerberg
d. Henry Ford
42. In the early 1900s, Henry Ford introduced a
a. high-wage policy, and this policy produced many of the effects predicted by efficiency-wage
theory.
b. high-wage policy, and this policy produced none of the effects predicted by efficiency-wage
theory.
c. low-wage policy, and this policy produced many of the effects predicted by efficiency-wage
theory.
d. low-wage policy, and this policy produced none of the effects predicted by efficiency-wage
theory.
True/False and Short Answer
1. Most people rely primarily on income other than their labor earnings to maintain their standard of
living.
a. True
b. False
2. The amount of unemployment that a country typically experiences is a determinant of its standard of
living.
a. True
b. False
3. Some degree of unemployment is inevitable in a complex economy.
a. True
b. False
4. The amount of unemployment varies little over time and across countries.
a. True
b. False
5. When a country keeps its workers as fully employed as possible, it achieves a higher level of GDP
than if many of its workers were idle.
a. True
b. False
6. The natural rate of unemployment refers to the current unemployment rate.
a. True
b. False
7. An economy’s natural rate of unemployment refers to the amount of unemployment that the
economy normally experiences.
a. True
b. False
8. Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural
rate.
a. True
b. False