Consider a technological improvement that raises labor's marginal product. Explain why the subsequent effect on the labor market is different when the improvement is temporary as compared to when it is permanent.
What will be an ideal response?
When labor's marginal product rises because of a technological improvement, the demand for labor rises regardless of whether the improvement is permanent or temporary. When workers own capital, the technological improvement (whether permanent or temporary) also raises their nonlabor income, which causes the supply of labor to decrease. These two effects cause the wage to increase, while the effect on employment is ambiguous. However, if the improvement is temporary, there is a third effect-intertemporal substitution. In this case, workers recognize that the higher wage is only temporary, so workers adjust their work and vacation times, increasing their work effort during the present period of high wages and decreasing their future work effort. This intertemporal substitution causes an increase in the supply of labor. If this increase in supply more than offsets the fall in supply caused by the nonlabor income effect, the temporary technological improvement will cause a rise in employment.
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A. marginal cost equals average revenue B. average total cost equals average revenue C. marginal revenue equals average cost D. marginal revenue equals marginal cost
The real interest rate is defined as the:
a. actual interest rate. b. fixed-rate on consumer loans. c. nominal interest rate minus the inflation rate. d. expected interest rate minus the inflation rate.
Currency consists of:
a. coins and Eurodollars. b. paper money and checks. c. coins and paper money. d. paper money and Eurodollars. e. coins and checks.
Payments made to the owners or shareholders of a business out of sources other than current or accumulated retained earnings are known as
a. distributions b. dividend payments c. retained earnings d. salaries e. business expenses