Suppose a Firm Overpays Its Workers at the Start of the Job

question 10

Multiple Choice

Suppose a firm overpays its workers at the start of the job, and then the firm slowly lowers wages over time until eventually the firm pays the workers considerably less than the worker's marginal product of labor. What prevents this "reverse of a delayed-compensation scheme" from being implemented?

• A) Workers prefer wages to increase over time.
• B) The firm would fire the worker as soon as the worker's value of marginal product exceeded the worker's wage.
• C) Workers would leave the job as soon as the firm tried to pay the worker less than his or her value of marginal product.
• D) The firm would need to enforce a mandatory retirement age, which is illegal in the United States.
• E) The workers would never have an incentive to invest in general training.

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Definitions:

Perfect Prediction

A situation where a model or analysis predicts the outcome with 100% accuracy, with no errors.

Regression Equation

An equation that describes the line of best fit through a dataset, used to predict the outcome variable.

Regression Line

A line of best fit through a dataset, used to predict the value of a dependent variable based on the value of an independent variable.

Standard Error

An estimate of the standard deviation of a sampling distribution, often used in inferential statistics.