Sia
Question
Macroeconomics
Posted 4 months ago
What happens to employment and wages in Maxistan if the preference for leisure increases at the same time worker productivity decreases?
Choose 1 answer:
(A) wages decrease; employment increases
(B) wages decrease; employment decreases
(C) wages decrease; the effect on unemployment is indeterminate
(D) wages increase; employment increases
(E) the effect on wages is indeterminate; employment decreases
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Answer from Sia
Posted 4 months ago
Solution
a
Increase in Preference for Leisure: An increase in the preference for leisure implies that workers will choose to work fewer hours or not work at all, given the choice. This will shift the labor supply curve to the left, indicating a decrease in the quantity of labor supplied at any given wage rate
b
Decrease in Worker Productivity: A decrease in worker productivity means that each worker produces less output per hour. This reduces the marginal revenue product (MRP) of labor, which is the additional revenue a firm earns from hiring an additional worker. A lower MRP will lead firms to demand less labor at any given wage rate, shifting the labor demand curve to the left
c
Effects on Wages and Employment: With both the labor supply and labor demand curves shifting to the left, the effect on wages is clearly a decrease as both curves suggest a lower wage rate to clear the market. However, the effect on employment is indeterminate without knowing the relative shifts of the supply and demand curves. If the labor supply curve shifts more than the labor demand curve, employment could increase. If the labor demand curve shifts more than the labor supply curve, employment could decrease
Answer
(C) wages decrease; the effect on unemployment is indeterminate
Key Concept
Labor Market Equilibrium
Explanation
In the labor market, the equilibrium wage and employment levels are determined by the intersection of the labor supply and demand curves. An increase in the preference for leisure and a decrease in worker productivity both shift these curves to the left, leading to a decrease in wages. The effect on employment depends on the relative shifts of these curves, which is indeterminate from the information given.
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