Question

The Campus Collective company, which creates unique apps for colleges, has recently lost three large university clients that made up 40% of its total revenue. This has hit the company hard and management finds it necessary to reduce staff or wages. The economy also appears to be headed toward a recession and gaining more clients will most likely be harder to accomplish. Because it is a smaller company everyone knows each other and knows there are tough choices ahead. Management brings up the idea of an across the board wage reduction so that no one be let go, but some employees don’t believe that a wage cut will be equally applied to all. The employees are also not sure if other people working their same jobs in the economy are getting reduced wages. They start to argue against wage reduction and things get a bit heated. Which of the following theories best illustrate this wage stickiness scenario?

Implicit contract theory

Insider-outsider model

Relative wage coordination argument

How may low inflation actually assist labor markets adjust towards equilibrium?

It increases the living standard of workers by diminishing their fixed debt.

It forces more frequent renegotiation of labor contracts.

It allows for the gradual downward adjustment of real wages.

If economists design a way to eliminate the substitution bias in CPI calculations, how is the CPI likely to change as a result?

The CPI will grow at a faster rate.

The CPI will not be affected by this change.

The CPI will grow at a slower rate.

If economists design a way to eliminate the new goods bias in CPI calculations, how is the CPI likely to change as a result?

The CPI will grow at a faster rate.

The CPI will not be affected by this change.

The CPI will grow at a slower rate.

Answer 1

Answer:

1- this wage stickiness scenario will be best illustrated by :

c. relative wage coordination argument

2- low inflation actually assist labor markets adjust towards equilibrium:

It allows for the gradual downward adjustment of real wages

the equilibrium is adjusted by the adjustment of real wages with the inflation rate

3- If economists design a way to eliminate the substitution bias in CPI calculations, the CPI will likely to:

The CPI will grow at a slower rate

because when price of a good increases consumers substitute that good with the low priced good.

4- If economists design a way to eliminate the new goods bias in CPI calculations, the CPI will likely to:

The CPI will not be affected by this change
because the new products are not included in the index immediately.