Question

A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. In this model, if the firm's cost of monitoring effort falls,

A. The firm will increase its number of factory managers.
B. The number of shirking workers will fall.
C. The efficiency wage will fall.
D. Firm profits will fall.
E. The pool of involuntarily unemployed workers will increase.

Answer 1

The correct answer is C. The efficiency wage will fall.

Step-by-step explanation:

In labor economics, the efficiency wage hypothesis argues that wages, at least in some markets, are determined by more than simply supply and demand. Specifically, it indicates the incentive of business managers to pay their employees salaries greater than the market average to increase their productivity or economic efficiency. This increased labor productivity pays for relatively high wages. This theory plays an important role in the economic analysis of the labor market.