Question

2. Evaluate the following statements and explain whether they are true, false or uncertain: (a) With a perfectly competitive labor and product market, when the marginal product of worker increases, wage will increase. (b) With a monopsony labor market, when the marginal product of worker increases, wage will increase. (c) With a perfectly competitive labor and product market, when the marginal product of worker increases, wage will increase. (d) Using the labor leisure choice model, suppose the commuting time increase from 1 hour to 2 hours, reservation wage will increase. (e) Skilled labor resembles a fixed factor more than unskilled labor.

Answer 1

a) True. The increasing marginal productivity of labour in the perfectly competitive market, the wage rate will increase. Under labour market, the wage rate will determine with respect to the marginal productivity. The productive labour will produce higher level of output and this will increase the total revenue of the firm. Thus this revenue will be distributed among the workers as wage rate.
b) True. Monopsony market is the situation where there is single buyer and he or she will control the market with large number of sellers. The marginal product of labour increase in the monopsony market will leads to the increasing wage rate. Here there is single seller, so the higher productivity will increase the overall production. The higher level of productivity will increase the overall production. The monopsony market tried to increase the supply, thus the revenue will increase.
d) False. The increasing rate of commuting time will reduce the work time and this will reduce the wage rate. Here the workers will give more preference over leisure than work. Thus the production will fall down and the wage rate also comes down.
e) True. The skilled labours are more productive and efficient than the unskilled labours. Thus the skilled labours will give fixed factors than the unskilled one. Thus the skilled labours will contribute more towards the firms than unskilled labours. The skilled labour has high productivity than the unskilled labours.