Question 16 The real wage A is the wage a worker receives before taxes are taken out. B is the actual dollar figure the worker is paid by his or her employer. C represents the true purchasing power of the worker's income after adjusting for the effect of price inflation. D is always higher than the nominal wage.
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Step 1: The real wage is the wage adjusted for inflation. Show more…
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Suppose that the nominal income increase from $1,000 to $1,030, while the rate of inflation during this period is 1.5%. Which of the following statements is true? (a) Real income increased due to higher price levels. (b) Real income decreased due to higher price levels. (c) Real income increased due to nominal wages increasing more than the rate of inflation. (d) Real income increased due to inflation rate being higher than the increase in nominal wages.
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According to the neoclassical theory of distribution, a worker's real wage reflects her productivity. Let's use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers, Pf and Pb be the prices of food and haircuts, and Af and Ab be the marginal productivity of farmers and barbers. A.) For each of the six variables defined above, state as precisely as you can the units in which they are measured. (Hint: Each answer takes the form "X per unit of Y.")
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[5 pts. each] According to the neoclassical theory of distribution, the real wage earned by any worker equals that worker’s marginal productivity. Let’s use this insight to examine the incomes of two groups of workers: farmers and barbers. [a] Over the past century, the productivity of farmers has risen substantially because of technological progress. According to the neoclassical theory, what should have happened to their real wage? [b] In what units is the real wage discussed in part [a] measured? [c] Over the past period, the productivity of barbers has remained constant. What should have happened to their real wage? [d] In what units is the real wage discussed in part [c] measured? [e] Suppose workers can move freely between being farmers and being barbers. What does this mobility imply for the NOMINAL wages of farmers and barbers? [f] What do your previous answers imply for the price of haircuts relative to the price of food? [g] Who benefits from technological progress in farming–farmers or barbers?
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