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      Question

      Which labor market outcome is consistent with the

      Efficiency Wage Theory?
      A A firm pays a low wage to attract only high-risk, high-return workers. Correct Answer Incorrect Answer
      B A firm pays a wage above the market-clearing wage to reduce worker turnover and shirking. Correct Answer Incorrect Answer
      C A firm pays a wage equal to the marginal factor cost of labor to maximize labor utility. Correct Answer Incorrect Answer
      D Wages are perfectly flexible, leading to zero involuntary unemployment in the long run. Correct Answer Incorrect Answer

      Solution

      Efficiency Wage Theory posits that productivity (effort) is positively related to the wage paid. Firms may find it profitable to pay a wage above the market-clearing level for several reasons: · Reduced Shirking: Higher wages increase the opportunity cost of being fired, incentivizing workers to exert more effort. · Reduced Turnover: Workers are less likely to quit, saving the firm recruitment and training costs. · Improved Quality: Higher wages attract a better pool of applicants. Crucially, this can lead to involuntary unemployment because the high wage rate (set by the firm) creates a labor surplus.

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