Test on Labor Economics: Compensation and Incentives

Question 1: Do firms commonly implement a "reverse of a delayed-compensation scheme" where workers are initially overpaid and then have their wages slowly lowered over time to less than their marginal product?

A. Yes

B. No

Explanation: A "reverse of a delayed-compensation scheme" is prevented because workers would leave the job as soon as the firm tried to pay them less than their value of marginal product.

Question 2: The efficiency wage model finds support from the observation that different economic sectors pay varying wage levels. This difference in pay across sectors is interpreted as evidence for the existence of what?

A. compensating differentials

B. dual labor markets

C. constant unemployment rates

D. delayed-compensation contracts

Explanation: The study materials state that 'One piece of evidence in favor of the efficiency wage model is that some sectors of the economy pay relatively high wages, whereas other sectors pay lower wages. This supports the efficiency wage model as it seems to provide evidence of what? A) Dual labor markets exist.'

Question 3: Installing monitoring equipment is a compensation strategy that directly motivates workers to put forth more effort.

A. Yes

B. No

Explanation: Installing monitoring equipment helps prevent shirking, but it is not typically considered an incentive compensation strategy that directly motivates workers to put forth more effort in the same way as bonuses or profit-sharing schemes. The study materials list it as something 'not likely to help a firm motivate its workers to put forth more effort' compared to other options like providing competitive year-end bonuses or implementing a profit-sharing scheme.

Question 4: A piece rate compensation system underemphasizes the quantity of output produced.

A. Yes

B. No

Explanation: A piece rate compensation system does not underemphasize the quantity of output produced; rather, it typically incentivizes greater quantity of output as pay is tied directly to the amount produced. Question 10 indicates that statement A is not likely to be true about piece rates.

Question 5: Which type of compensation scheme can lead to free-riding?

A. profit sharing

B. competitive individual bonuses

C. piece rate pay

D. tournaments

Explanation: Free-riding can result from profit sharing, as stated in the study materials. Compensation schemes that provide competitive individual bonuses or are based on individual output (like piece rates or tournaments) are less likely to experience free-riding because individual performance is more directly tied to reward.