Question

1. Evaluate the following statements and explain whether they are true, false or uncertain: (a) According to the quasifixed labor cost model, when there is a decrease in demand for the product, the firms will not reduce their labor demand. (b) According to the quasifixed labor cost model, marginal revenue product is higher than or equals to wage (c) Using the labor leisure choice model, suppose the commuting time increase from 1 hour to 2 hours, labor supply will increase. (d) A worker who gets a higher paid job in the market is more likely to supply more hours of work. (e) According to the labor leisure choice model, more workers will have L ∗ > 0 when w is higher.

Answer 1

(a)According to the quasifixed labor cost model, when there is a decrease in demand for the product, the firms will not reduce their labor demand.

Statement : False

Reasoning: Quasi-fixed labour costs are those that accrue to labour not due to their work alone i.e. these are non wage costs of labour , thus these are not strictly proportional to the length of time the employee works.They are non-wage labour costs and borne by the firm on a per-worker basis. The main nonwage labour costs are: hiringcosts, training costs and employee benefits.

If the revenue of the firm falls (decrease in demand) it is unlikely that the firm will not attempt to reduce its labour investment including quasi costs by reducing its overall labour demand.

(b) According to the quasifixed labor cost model, marginal revenue product is higher than or equals to wage

Statement : True

Reasoning: Marginal revenue product is the marginal revenue created due to an addition of one unit of resource. The marginal revenue product is calculated by multiplying the marginal physical product of the resource by the marginal revenue generated. It assumes that the expenditures on other factors remain unchanged and helps determine the optimal level of a here the resources being labour and its payment being his wages.Thus the wages are set at a level that the Marginal revenueis either equal or higher than the wages ,as it is the amount of increment in revenue brought by an additional labour.

(c) Using the labor leisure choice model, suppose the commuting time increase from 1 hour to 2 hours, labor supply will increase.

Statement : False

Reasoning: Here labour will not increase as there are more number of unproductive hours in the form of commuting time which cannot be added to work hours of the labour .

(d) A worker who gets a higher paid job in the market is more likely to supply more hours of work:

Statement : Uncertain

Reasoning: The work hours in various industries are government by the employment norms of the government i.e. bound by regulations regarding maximum number of hours a labour can work per day/ week.Also the payment for a particular job depends upon the responsibilities entailed, industry norms and government regulations so it is difficult to say for sure that a worker with higher paid job will supply more hours of work.

(e) According to the labor leisure choice model, more workers will have L ∗ > 0 when w is higher.

Statement: True

Reasoning: This can be explained through the backwards bending supply curve of labour. When the wages for the labour are increased initially the supply of labour increases , i.e. higher wages attract more working hours from labour, but eventually as the wages keep increasing the number of hours of work put in by labour becomes constant and eventually this labour supply curve starts to bend backwards on increasing wages as ,the labour prefers leisure to work at this stage.