Why might firms pay an efficiency wage rather than a market-clearing wage?
What will be an ideal response?
An efficiency wage is better than a market-clearing wage in that it maximizes effort per dollar of wage income paid to labor. This means that labor productivity per dollar spent on labor is maximized, which means that labor cost per unit of output is minimized. The gift-exchange motive and the shirking model provide two explanations for why an efficiency wage that is above the market-clearing wage may increase productivity per wage dollar. The gift-exchange motive suggests that workers who believe their employer is treating them fairly will want to do a good job. The shirking model views the wage as the reward that workers risk losing if they are so unproductive that they get fired; a higher wage increases productivity by increasing the expected cost of shirking (i.e., having low productivity).
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A point on the production possibilities frontier reflects an
A) attainable point with full employment of all resources. B) attainable point without full employment of all resources. C) unattainable point with full employment of all resources. D) unattainable point without full employment of all resources. E) None of the above answers is correct.
Refer to Figure 2-1. ________ is (are) unattainable with current resources
A) Point A B) Point B C) Point C D) Points A and C