Question

Assuming no change in the effort curve of employees, the efficiency wage model implies that:

A.) the real wage exceeds the marginal productivity of labor.
B.) the real wage is procyclical.
C.) the real wage is rigid and equals the efficiency wage.
D.) an increase in the marginal productivity of capital will increase the real wage.

Answer 1

The correct answer is C) the real wage is rigid and equals the efficiency wage, as it reflects the practice of paying a wage higher than the market level to boost productivity and decrease employee turnover.

Step-by-step explanation:

The efficiency wage model suggests that employers pay a wage that exceeds the equilibrium market level to increase worker productivity and reduce turnover.

This strategy assumes that higher wages motivate workers to perform better and remain with the company longer, reducing the costs associated with hiring and training new employees. Therefore, the correct answer to the student's question is C) the real wage is rigid and equals the efficiency wage.

This implies that the wage is set above the market-clearing level to increase productivity and is not easily adjustable downward due to the potential negative impact on worker morale and productivity.