Which of the following statements regarding wage differences in industries and firms is not true?

Minimum wages have been defined as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”.1

This definition refers to the binding nature of minimum wages, regardless of the method of fixing them. Minimum wages can be set by statute, decision of a competent authority, a wage board, a wage council, or by industrial or labour courts or tribunals. Minimum wages can also be set by giving the force of law to provisions of collective agreements.

The purpose of minimum wages is to protect workers against unduly low pay. They help ensure a just and equitable share of the fruits of progress to all, and a minimum living wage to all who are employed and in need of such protection. Minimum wages can also be one element of a policy to overcome poverty and reduce inequality, including those between men and women, by promoting the right to equal remuneration for work of equal value.

Minimum wage systems should not be seen or used in isolation, but should be designed in a way to supplement and reinforce other social and employment policies. Several types of measures can be used to tackle income and labour market inequality, including pro-employment policies, social transfers, and creating an enabling environment for sustainable enterprises.    

The purpose of a minimum wage, which sets a floor, should also be distinguished from collective bargaining, which can be used to set wages above an existing floor. Figure 1 shows a hypothetical wage distribution with a "minimum wage zone" and a "collective bargaining zone" which can be used to establish minimum standards and to set wages above an existing floor.

Figure 2 illustrates that the effectiveness of minimum wages depends on many factors, including the extent to which they afford protection to all workers in an employment relationship, including women, and youth and migrant workers, regardless of their contractual arrangements, as well as all industries and occupations in the economy (coverage); whether they are set and adjusted at an adequate level that covers the needs of workers and their families, while taking into account economic factors (level); and whether employers comply with minimum wage regulations (compliance).

Figure 1. The distribution of wages (hypothetical wage distribution of a population of 56 wage-earners)

We see the full range of market wages, including a relatively small proportion of workers with extremely low pay on the left end of the wage distribution. For example, 1 employee has a wage of 1$, 2 employees are paid 3$, while 5 employees receive wages of 8$.

The yellow circle called the “minimum wage zone” shows that a minimum wage should in principle remain targeted at the lowest-paid employees, to eliminate “unduly low pay”; the blue circle is the “collective bargaining zone” and illustrates the principle that collective bargaining can be used to set wages above an existing floor.

1 ILO: General Survey concerning the Minimum Wage Fixing Convention, 1970 (No. 131), and the Minimum Wage Fixing Recommendation, 1970 (No. 135), Committee of Experts on the Application of Conventions and Recommendations, 2014.
2 ILO: Advances and Challenges in Labour Protection. Conditions of Work and Equality Department Policy Brief.

Answer the following questions and then press 'Submit' to get your score.

Question 1

Which of the following statements about profit maximization is true?

a) It is something that all firms actually do.

b) It is something which economists believe that all firms actually do.

c) It is what economists believe is the most common aim of firms.

d) It means that no firms ever make losses.

Question 2

Which of these statements about UK firms in 2009 is false? (Note: you do not need to learn these facts to understand any later material, but hopefully you will find them interesting.)

a) More than 99% of firms have fewer than 50 employees.

b) Less than 1% of firms have 250 or more employees.

c) Between them, firms with fewer than 50 employees account for under 50% of the total turnover (that is total sales) of all firms.

d) Between them, firms with 250 or more employees account for under 50% of the total turnover of all firms.

Question 3

Which of the following statements about firms is false?

a) All firms must pay corporation tax on their profits.

b) Both sole proprietorships and partnerships have unlimited liability.

c) All companies have limited liability.

d) Internal finance arises when a company finances new assets by using past profits.

Question 4

Which of the following statements about the principal-agent problem is false?

a) It is the risk that a principal who hires or employs an agent to perform a task may find that the task is done poorly.

b) It is least likely to arise in cases where there is asymmetric information.

c) It may be reduced in the case of a company if its directors are given bonuses that relate to the company's profits.

d) It may be reduced in the case of a company if its directors fear their company may be subject to competition for corporate control.

Question 5

Which of the following statements about types of market or industry is false?

a) There are many firms in both perfect competition and monopolistic competition.

b) Costs must be kept as low as possible in both monopolistic competition and monopoly.

c) There may be homogeneous products in both perfect competition and oligopoly.

d) There are barriers to entry in both oligopoly and monopoly.

Question 6

Which of the following statements about barriers to entry is false?

a) They help to make a market contestable.

b) They may include a fear of sunk costs.

c) They may include a lack of know-how.

d) They may include the well-known brand names of existing firms.

Question 7

Which of the following statements about firms in different types of market is false?

a) A perfect competitor has no influence over the price of its product.

b) A monopolistic competitor may engage in non-price competition.

c) An oligopolist may monitor the prices and products of all the other firms in its market.

d) A monopolist must be a large firm.

Question 8

Suppose you give up a job and use some savings to buy a small bus which you drive on a remote rural route. Which of the following costs of your firm is an explicit cost?

a) The depreciation on the bus.

b) The wage of the job you gave up.

c) The fuel you buy for the bus.

d) The interest you earned on your savings before you used them to buy the bus

Question 9

To see whether a firm is making an economic profit, which of he following should be deducted from its revenue?

a) Its explicit costs only.

b) Its explicit costs plus depreciation.

c) Its implicit costs only.

d) Its explicit costs and its implicit costs.

Question 10

Which of the following statements is false?

a) A five-firm concentration ratio assesses firms' sizes with reference to the number of employees, and shows the percentage of total employment in an industry accounted for by the five firms with the most employees.

b) The firms in an industry with a high concentration ratio may, nevertheless, find themselves in a highly competitive environment.

c) Economic profits in a contestable market attract new entrants.

d) In deciding whether to produce inputs or buy them, firms take account of transactions costs.