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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

According to the theory of efficiency wages,

a. firms may find it profitable to pay above-equilibrium wages.

b. an excess supply of labor puts downward pressure on wages.

c. sectoral shifts are the main source of frictional unemployment.

d. right-to-work laws reduce the bargaining power of unions.

To determine

Concept based on theory of efficiency wages.

Explanation

Option (a):

According to the theory of efficiency wages, firms may find it profitable to pay above the equilibrium wages. Offering more wages, that is, more than equilibrium wage will lead to an increase in the productivity, workers’ quality, and workers’ effort. Ultimately, it increases the firm’s total productivity. Therefore, paying more than equilibrium wage is profitable for the firm. Thus, option “a” is correct.

Option (b):

The theory of efficiency wages is related to offering more than equilibrium wage and the profitability of the firm is not about an excess supply of labor and that puts downward pressure on wages...

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