Question

Efficiency wage theory suggests that A) workers will be paid less than their reservation wage. B) productivity might drop if the wage rate is too low. C) the government can only set tax rates so high before people will prefer not to work. D) unskilled workers will have a lower turnover rate than skilled workers. E) firms will be more resistant to wage increases as the labor market tightens.

Answer 1

The correct answer is option B.

Step-by-step explanation:

The efficiency wage theory states that higher wages will cause the labor productivity or marginal revenue product to increase.

When a worker will be getting high wages he will have incentive to work better to retain his job. With higher wages workers will also be able to afford better health care and food and this will help them work more efficiently.

At lower wages, the productivity will be lower. This is because workers will not have the incentive to work harder at lower wages.