3) Which of the following economists is best known for exploring the application of economic
analysis to human resources issues?
A) Edward Lazear
B) Claudia Goldin
C) David Hammermesh
D) Alan Krueger
4) The parent company of Safelite AutoGlass, the nation’s largest installer of auto glass, changed
the system it used to pay its glass installers in the mid-1990s. How did Safelite change its
compensation system and what was the result?
A) Safelite ended its system of paying workers on the basis of how many windows they repaired
and replaced it with a system that paid workers hourly wages. As a result, productivity and
worker morale improved.
B) Safelite ended its system of paying workers hourly wages and replaced it with a system that
determined wages on the basis of how many windows were repaired. As a result, productivity
and worker morale suffered. Eventually, Safelite returned to its previous compensation system.
C) The new system has not been in place long enough to determine whether it is an improvement
over the previous compensation system.
D) Safelite ended its system of paying workers hourly wages and replaced it with a system that
determined wages on the basis of how many windows were repaired. As a result, productivity
and worker morale improved.
5) Edward Lazear analyzed data provided by the Safelite Group, the nation’s largest installer of
auto glass, after the company changed the way it paid its glass installers beginning in the mid-
1990s. Instead of paying workers hourly wages, Safelite began to pay workers on the basis of
how many windows they installed. Which of the following describes what Lazear concluded
from his analysis of Safelite’s data?
A) Although workers installed more windows under the new system, Lazear found that there was
also an increase in the number of workmanship-related defects. Lazear attributed this to workers
taking short-cuts in order to earn higher wages. As a result, productivity did not improve and
Safelite went back to paying hourly wages.
B) Lazear found that worker productivity increased with the new system; about half of the
increase in productivity was due to workers who continued with the company and half was due
to new workers being more productive than those who left the company.
C) Although worker productivity improved, the increase in hourly wages resulted in a significant
decline in Safelite’s profits.
D) Because of a principal-agent problem, worker productivity was not affected by the new
compensation system. However, Lazear attributed this to management problems that had nothing
to do with Safelite’s compensation system.
6) Which of the following is not a reason for firms to choose a salary system rather than a
commission system to compensate their employees?
A) Research has shown that most companies will find that a salary system will be more
profitable than a commission system.
B) It is often difficult to attribute output to particular workers.
C) If workers are paid on the basis of the number of units of output they produce, they may
become less concerned about quality.
D) Commission compensation systems are riskier for employees than a salary system, and many
workers dislike risk.
7) If it is difficult for a firm to attribute the output it produces to a particular worker then
A) its employees are likely to form a union.
B) a commission system of compensation will be preferable to a salary system.
C) a salary compensation system will be preferable to a commission system.
D) a piece-rate system of compensation will be preferable to a salary system.
8) Workers who dislike risk
A) prefer to be paid monthly rather than weekly or daily.
B) prefer a piece-rate compensation system to a salary system.
C) prefer a salary system to a commission compensation system.
D) prefer to be paid a salary rather than a wage.
9) The application of economic analysis to human resources issues is called personnel
economics.
10) A firm might prefer to choose a salary system rather than a commission or piece-rate system
of compensation when there are concerns about output quality.
11) One reason why firms would choose a salary system rather than a commission compensation
system is that their employees might become less concerned about the quality of their work.
12) Companies often find it to be more profitable to use a commission or piece-rate system of
compensation rather than a salary system, yet many firms continue to pay their workers salaries.
List three reasons why a firm would choose a salary system of compensation.
13) Wally, Vijay, Sandra and Consuela make up a software development team at Javasoft. The
firm is considering implementing one of two incentive compensation schemes. In scheme A,
each programmer receives an annual bonus if he or she meets all individual programming
deadlines. In scheme B, members of the team share equally in a joint bonus if the team meets all
of its product delivery deadlines. All four employees are equally talented but Wally is a slacker
who does as little work as he can get away with. Which scheme might team members prefer?
Which scheme will management prefer?
17.6 The Markets for Capital and Natural Resources
1) Marginal productivity theory implies that in a perfectly competitive market economy, a
worker will receive income
A) equal to the value of her marginal contribution to the production process.
B) that is greater than the value of her marginal contribution to production process.
C) that is less than the value of her marginal contribution to the production process.
D) greater than, less than, or equal to the value of her marginal contribution to the production
process, depending on her ability to negotiate with employers.
2) Compared to a competitive market, a firm that has a monopsony in a labor market would
A) hire fewer workers and pay higher wages.
B) hire more workers and pay lower wages.
C) hire fewer workers and pay lower wages.
D) hire more workers and pay higher wages.
3) The labor market in Major League Baseball features
A) a monopoly by the League in employing professional baseball players that is offset by the
players’ membership in a labor union.
B) a monopsony by the League in employing professional baseball players that is offset by the
players’ membership in a labor union.
C) an oligopoly by the League in employing professional baseball players that is offset by an
oligopsony by the players in the labor market.
D) monopolistic competition between the teams and professional baseball players.
4) The marginal productivity theory of income distribution was developed by
A) Edward Lazear.
B) George Akerlof.
C) William Stanley Jevons.
D) John Bates Clark.
5) The marginal productivity theory of income distribution states that
A) as more and more units of labor are added to a fixed quantity of capital, eventually labor’s
contribution to a firm’s income will decrease.
B) income distribution is determined by the marginal productivity of the factors of production
that individuals own.
C) factors of production in short supply command higher prices than those available in abundant
quantities.
D) capital owners receive the bulk of a nation’s income because capital-intensive production
generates productivity gains.
6) A firm chooses its profit-maximizing quantity of capital by
A) comparing the marginal revenue product of capital with the rental price of capital.
B) comparing the price of capital with the price of labor.
C) examining the total cost of capital equipment.
D) determining the rate at which the firm can borrow funds to purchase plant and equipment.
7) The demand for capital is similar to the demand for labor in that
A) the marginal product of labor is derived from the marginal product of capital.
B) the marginal revenue product curve for labor is the same as the marginal revenue product
curve for capital.
C) both are derived demands.
D) both are inelastic at high prices and elastic at low prices.
8) In general, the supply curve for a natural resource
A) is vertical.
B) is horizontal.
C) slopes downward to reflect decreasing available quantities over time.
D) slopes upward.
9) The price of a factor of production that is in fixed supply is called
A) economic rent.
B) economic profit.
C) a compensating differential.
D) opportunity cost.
10) If you were to ask your employer for a raise, which of the following would be your most
effective argument?
A) “I have a job offer at another firm that will pay me more than my current wage.”
B) “I am willing to work more hours each week.”
C) “Increases in my productivity have resulted in greater revenue and profits for your business.”
D) “My marginal product is greater than my current wage.”
11) There are 345 Division 1-A college basketball programs. If the NCAA chose to increase the
number of basketball programs from 345 to 400, the labor supply curve for Division 1-A head
basketball coaches would
A) go from being upward sloping to being vertical.
B) go from being vertical sloping to being upward sloping.
C) remain upward sloping.
D) remain vertical.
12) There are 345 Division 1-A college basketball programs. If the NCAA chose to increase the
number of basketball programs from 345 to 400, the labor supply curve for Division 1-A head
basketball coaches would ________ and the labor demand curve would ________.
A) shift to the right; shift to the left
B) shift to the left; not change
C) not change; shift to the right
D) shift to the right; shift to the right
13) A monopsony is a term used to refer to a firm that is the sole seller of a good or service.
14) A monopsony restricts the quantity of a factor demanded to force down the price of the
factor and increase profits.
15) Economic rent refers to the price of a factor of production which is fixed in supply.
16) In equilibrium, what determines the price of capital and what determines the price of natural
resources?
17) How will a government-imposed minimum wage affect the equilibrium level of employment
in a competitive labor market and in a monopsony labor market?
18) The total amount of copper in the earth is not increasing. Does this mean that in the market
for copper, the supply curve is perfectly inelastic? Explain.