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Self-test Questions
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1When a nation in the Eurozone experiences a negative shock to its competitiveness, restoring competitiveness requires adjustment in labour costs.
A)TRUE
B)FALSE


2The behaviour of unemployment since the 1970s has been quite similar in all euroland economies.
A)TRUE
B)FALSE


3The labour force consists of people who have jobs and those who are actively looking for one. The unemployment rate is the ratio of the number of people who have no job but are looking for one to the number of people in the labour force.
A)TRUE
B)FALSE


4Most of the structural funds are spent on so called Objective 1 regions since these are the regions dominated by declining industries.
A)TRUE
B)FALSE


5The demand curve for labour is a downward sloped curve since:
A)large firms which hire many workers are able to force down the real wage.
B)people require a higher real wage in order to work more.
C)the number of people who take early retirement is lower when real wages are high.
D)None of the above.


6The supply curve for labour is upward sloped since:
A)large firms which hire many workers are able to force down the real wage.
B)people require a higher real wage in order to work more.
C)the number of people who take early retirement is lower when real wages are high.
D)None of the above.


7Consider the following reasons for labour market institutions preventing the labour market from acting like a perfect market.
  • (i) The possibility for one side of the market to exercise excessive power.
  • (ii) A serious information asymmetry.
  • (iii) Firms care about profit rather than the welfare of workers.
  • (iv) Individual workers are highly vulnerable to uncertainty.
  • (v) The European Central Bank can only set one interest rate for all of euroland.
  • (vi) Many individual skills are acquired on the job, so individual firms may not sufficiently invest in their workers’ human capital.
Which of these are correct?
A)All of them.
B)(i), (iv) and (v).
C)(i), (ii), (iv), and (vi).
D)(ii), (iv), and (vi).
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8Consider the simple labour market depicted in the diagram. Which of the following is true?
A)The supply of labour is upward sloping since firms are willing to pay higher wages for more skilled workers.
B)A perfectly free and competitive labour market would set the real wage to w' and the employment level to L.
C)If the real wage ends up as w in this market, the difference between L' and L shows the level of unemployment.
D)A perfectly free and competitive labour market would set the real wage to w and the employment level to L'.The supply of labour is upward slope since firms are willing to pay higher wages for more skilled workers.


9Again consider the simple labour market depicted in the diagram. Which of the following is true?
A)If labour market institutions result in the real wage being set at w', the amount of labour employed will be L.
B)If labour market institutions result in the real wage being set at w', the amount of labour employed will be L''.
C)If labour market institutions result in the real wage being set at w', the level of unemployment will be the difference between L'' and L.
D)Both a. and c. are correct.


10If the real wage ends up being higher than the market-clearing level, then:
A)some people will be unemployed, but the ones who find jobs are happy that their wage is higher.
B)firms will not have an incentive to invest in productivity enhancing technology.
C)domestic firms cannot be competitive with foreign firms.
D)the unemployment rate will rise continuously.
The diagram shows a simple labour market. Use the diagram to answer the questions; in particular refer to the labels in the diagram. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077111192/117919/ch17q12eq01.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (27.0K)</a>



11Suppose the demand for labour shifts out from D to D'. In a perfectly free, competitive labour market the equilibrium would shift from to .


12If the real wage is w then the level of employment desired by people is , and if the real wage is w' then the level of employment desired by people is , but the the level of employment desired by firms is ; thus if raising wages from w to w' increases unemployment, it is partly due to decrease in the number of jobs and partly due to an increase in the labour force.


13If the demand for labour shifts out from D to D', but the real wage remains unchanged, then level of employment desired by firms would be shown by point and the labour force would be .
Assume for simplicity that the world food price is unchanged by changes in EU policies (i.e. it stays at <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077111192/117919/ch17q16eq01.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> regardless). Consider a situation in which the EU’s food supply curve is initially given by the curve marked Supply, but due to technological progress and investment encouraged by high and guaranteed prices, the supply curve shifts out to the curve marked Supply’. In answering the questions refer to the labels in the diagram.



14Prior to the supply curve shift, the EU could enforce the price floor with a tariff equal to while after the shift it can only enforce the price floor by buying a quantity of food equal to . Prior to the shift enforcing the price floor made a contribution to the EU budget equal to while after the shift the price floor cost the EU budget , assuming that the food the EU buys is not resold.


15Prior to the supply shift, the net welfare cost of the price floor was .


16After the supply shift, the welfare impact of the price floor compared to free trade is for EU consumers, for EU producers, and for EU taxpayers.


17If the EU sells the food it buys post-supply shift on the world market, the world price will and this will foreign food producers.





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