201ps7Answer Discussionf 12 PDF

Preview

Summary

Problem set 7 with answers and discussion...

Description

Professor C.L. Ballard Fall Semester, 2012 Economics 201, Sections 1 and 2 Answer/Discussion of Problem Set 7 Labor Markets 1. For a business firm that takes the wage rate as given, the demand curve for labor is given by its a. marginal-utility curve. b. marginal-revenue curve. c. marginal-cost curve. d. average-variable-cost curve. e. marginal-revenue-product curve. Answer: e. The marginal revenue product is the additional revenue that a firm will receive as a result of hiring an additional worker, and then selling the additional output that is produced by that worker. Therefore, the marginal revenue product is the marginal benefit to the firm from hiring an additional worker. If the firm takes the wage rate as given, then the wage rate is the marginal cost to the firm from hiring an additional worker. The firm’s best choice is to hire the number of workers at which marginal benefit is equal to marginal cost, which in this case is the number of workers at which marginal revenue product is equal to the wage rate. When the wage rate changes, the firm will choose to hire a different number of workers, but it will always be true that the firm will go to the point at which marginal revenue product is equal to the wage rate. This means that the firm’s labor-demand curve is its marginal-revenue-product curve. 2. If Widget Corporation hires one worker, the firm can produce 10 widgets per hour. If it hires a second worker, it can produce a total of 19 widgets per hour. If it hires a third worker, it can produce a total of 27 widgets per hour. If it hires a fourth worker, it can produce a total of 34 widgets per hour. If it hires a fifth worker, it can produce a total of 40 widgets per hour. What is the marginal product of the third worker (i.e., what is the marginal product of starting with two workers and then adding a third worker)? a. 6 widgets b. 7 widgets c. 8 widgets d. 9 widgets e. 10 widgets Answer: c. The marginal product of the third worker is the additional output that is produced as a result of hiring the third worker. If the firm hires two workers, it produces 19 widgets per hour. If it hires three workers, it produces 27 widgets per hour. Thus the marginal product of the third worker is (27 – 19) = 8 widgets.

1

3. If Widget Corporation hires one worker, the firm can produce 10 widgets per hour. If it hires a second worker, it can produce a total of 19 widgets per hour. If it hires a third worker, it can produce a total of 27 widgets per hour. If it hires a fourth worker, it can produce a total of 34 widgets per hour. If it hires a fifth worker, it can produce a total of 40 widgets per hour. The price of a widget is $2. What is the marginal revenue product of the fifth worker (i.e., what is the marginal revenue product of starting with four workers and then adding a fifth worker)? a. $6 b. $10 c. $12 d. $80 e. Not enough information has been given to answer the question. Answer: c. Marginal revenue product is equal to marginal revenue, multiplied by marginal product. In this case, the price is $2, which means that the marginal revenue is $2. If the firm hires four workers, it produces 34 widgets per hour. If it hires five workers, it produces 40 widgets per hour. Thus the marginal product of the fifth worker is (40 – 34) = 6 widgets. Multiplying the marginal revenue of $2 per widget by the marginal product of 6 widgets, we have the marginal revenue product of the fifth worker, which is ($2/widget)(6 widgets) = $12. 4. If Widget Corporation hires one worker, the firm can produce 10 widgets per hour. If it hires a second worker, it can produce a total of 19 widgets per hour. If it hires a third worker, it can produce a total of 27 widgets per hour. If it hires a fourth worker, it can produce a total of 34 widgets per hour. If it hires a fifth worker, it can produce a total of 40 widgets per hour. The price of a widget is $2. The wage rate for widget makers is $14 per hour. How many workers should Widget Corporation hire? a. 1 b. 2 c. 3 d. 4 e. 5 Answer: d. Following the same procedure described in the answer to the previous question, we find that the marginal revenue product of the fourth worker is $14. The firm’s best choice is to hire the number of workers at which the marginal revenue product is equal to the wage rate. Since the wage rate is also $14, the firm’s best choice is to hire four workers. 5. Albert’s wage rate increases. In response to this increase in the wage rate, the substitution effect would cause Albert to work _________, and the income effect would cause him to work _________. a. more, more b. more, less c. less, more d. less, more e. People in Liechtenstein are the only ones who can figure out a question like this. Answer: b. The wage rate is the opportunity cost of leisure. When the wage rate increases, leisure becomes more expensive. The substitution effect says that people will want to substitute away from things that have become more expensive. Thus when the wage rate goes up, the substitution effect means that (all else equal) people will substitute away from leisure. This means that they will engage in less leisure, which means that they will work more. However, the income effect goes in the opposite direction. When the wage rate goes up, the consumer/worker is “richer.” Since leisure is a normal good, a person with higher income will tend (all else equal) to consume more leisure. In other words, the income effect of an increase in the wage rate is that the worker will work less. 2

6. Celeste receives an unexpected gift of $500,000 from her long-lost uncle. Which of the following statements is the best description of the response that we would expect from Celeste, in terms of her labor-supply behavior? a. The income effect would cause her to reduce her quantity of labor supplied. b. The income effect would cause her to increase her quantity of labor supplied. c. The substitution effect would cause her to reduce her quantity of labor supplied. d. The substitution effect would cause her to increase her quantity of labor supplied. e. People in Vanuatu are the only ones who have ever heard of an income effect or a substitution effect. Answer: a. Leisure is a normal good. Thus when a person receives a large amount of non-labor income, he or she will desire to consume more leisure, which means that he or she will work less. 7. Ezekiel has a backward-bending labor-supply curve. This means that a. for Ezekiel, the income effect is larger than the substitution effect. b. for Ezekiel, the substitution effect is larger than the income effect. c. Ezekiel’s labor-supply elasticity is negative. d. (a) and (c) are both correct. e. (b) and (c) are both correct. Answer: d. When a labor-supply curve is backward bending, it slopes downward as we move from left to right. In other words, a backward-bending labor-supply actually looks like a demand curve. If the supply curve is shaped this way, an increase in the wage rate leads to a decrease in the quantity of labor supplied. The laborsupply elasticity is the percentage change in the quantity of labor supplied, divided by the percentage change in the wage rate. For a backward-bending labor-supply curve, when the change in the wage rate is positive, the change in the quantity of labor supplied is negative. Dividing a negative by a positive gives us a negative, so that the labor-supply elasticity is negative. Thus choice (c) is correct. Choice (a) is also correct: When the wage rate increases, the income effect leads to a decrease in the quantity of labor supplied, whereas the substitution effect leads to an increase in the quantity of labor supplied. For a backward-bending labor-supply curve, the net effect is a decrease in the quantity of labor supplied, which means that the income effect has to be bigger than the substitution effect. (For an upward-sloping labor-supply curve, with a positive labor-supply elasticity, the substitution effect is larger than the income effect. For a vertical labor-supply curve, with laborsupply elasticity equal to zero, the substitution effect is the same size as the income effect.) 8. For Miranda, the labor-supply elasticity is positive. This means that a. Miranda’s labor-supply curve slopes upward as we move from left to right. b. for Miranda, the substitution effect is larger than the income effect. c. if her wage rate were to increase, Miranda would want to work more. d. all of the above are correct. e. only (a) and (b) are correct. Answer: d. When the labor-supply elasticity is positive, an increase in the wage rate leads to an increase in the quantity of labor supplied. This leads directly to choice (c). The labor-supply curve is upward sloping, so that choice (a) is also correct. When the wage rate increases, the income effect leads to a decrease in the quantity of labor supplied, whereas the substitution effect leads to an increase in the quantity of labor supplied. For an upward-sloping labor-supply curve, the net effect is an increase in the quantity of labor supplied, which means that the substitution effect has to be bigger than the income effect. Thus choice (b) is also correct.

9. In the United States, as in many countries, the median woman earns less than the median man. Since the 1970s, the percentage difference between the earnings of the median woman and the median man has 3

a. increased. b. decreased. c. stayed the same. d. bounced around wildly, in a completely random fashion. e. increased on Mondays and Tuesdays, but decreased on the other days of the week. Answer: b. Since the 1970s, the earnings gap between men and women has decreased, although the gap has been fairly steady in the last several years. Much of this change in the earnings gap is due to the fact that women have had relatively large increases in their education and labor-market experience. Also, labor-market discrimination has probably decreased. 10. The price of a widget increases by 90%. What effect would we expect this to have on the equilibrium wage rate of workers who make widgets? a. The wage rate would increase. b. The wage rate would decrease. c. The wage rate would stay the same. d. All of the above would occur!!!!! e. Not enough information has been given to answer the question. Answer: a. A firm’s demand curve for labor is its marginal-revenue-product curve. The marginal revenue product of labor is the marginal product, multiplied by the marginal revenue. If the price of the output increases, the marginal revenue will increase. Thus when the price of the output goes up, the worker’s marginal revenue product will also go up, and this means that the demand curve for labor will shift to the right. When the demand curve shifts to the right, the equilibrium price (in this case, the wage rate) will increase. 11. Half of the workers in the gizmo industry suddenly disappear. (There is speculation that they were kidnapped by an alien spaceship, but no one is sure of this.) What effect would we expect this to have on the equilibrium wage rate of the other workers in the gizmo industry (i.e., those who did not disappear)? a. The wage rate would increase. b. The wage rate would decrease. c. The wage rate would stay the same. d. All of the above would occur!!!!! e. Not enough information has been given to answer the question. Answer: a. The sudden disappearance of half of the workers can be represented as a decrease in the supply of labor. In other words, the labor-supply curve shifts to the left. When the labor-supply curve shifts to the left, the equilibrium wage rate will increase.

12. Which of the following is an example of a compensating wage-rate differential? a. Workers who are represented by unions earn more than workers with comparable skills who are not represented by unions. 4

b. c. d. e.

College-educated workers earn more than high-school dropouts. The median man earns more than the median woman. The median white man earns more than the median black man. Lumberjacks earn more than workers with comparable skills in other industries, because of the high rate of on-the-job injuries and deaths among lumberjacks. Answer: e. All else equal, when a type of job is dangerous or otherwise unpleasant, the supply of workers to that type of job will be less than it will be to otherwise comparable jobs that are not so unpleasant. As a result of the lower supply of labor for the dangerous or unpleasant type of job, the equilibrium wage rate for that type of job will be higher, all else equal. We say that this is a “compensating” wage-rate differential, because the higher wage rate compensates the workers for the negative characteristics of the job. 13. A minimum-wage law is instituted. The minimum wage is higher than the equilibrium wage for workers in the thingamabob industry. Assume that the minimum-wage law is enforced. This will lead to a decrease in the number of workers who are actually hired in the thingamabob industry. This reduction will be larger if a. the elasticity of demand for workers in the thingamabob industry is larger. b. the elasticity of demand for workers in the thingamabob industry is smaller. c. the elasticity of supply of workers in the thingamabob industry is larger. d. the elasticity of supply of workers in the thingamabob industry is smaller. e. climate change leads to melting of the ice in Greenland. Answer: a. If the minimum wage rate is higher than the equilibrium wage rate, the quantity of labor supplied will be greater than the equilibrium quantity, and the quantity of labor demanded will be less than the equilibrium quantity. The increase in the quantity of labor supplied will have an effect on the number of people who are searching for a job, but it will not have an effect on the number of workers who actually have a job. The number of workers who actually have a job will be determined by the demand curve. That’s because we will only have a labor contract when we have both a willing worker and a willing employer. The decrease in the number of workers will be the difference between the equilibrium number of workers and the number of workers who are hired after the minimum wage is put into place. This will be larger if the labor-demand elasticity is larger.

14. If a minimum-wage law is above the equilibrium wage, and if the law is enforced, there will be a decrease in the number of workers in the affected group who are employed. On the other hand, the workers in the affected group who are able to keep their jobs will earn more than they would have earned without the minimum-wage law. The net effect on the total number of dollars paid to 5

the affected group of workers will depend on the elasticity of demand for these workers. Assume that the demand for these workers is inelastic. What will happen to the total number of dollars paid to the affected group of workers? a. The total number of dollars paid will increase. b. The total number of dollars paid will decrease. c. The total number of dollars paid will stay the same. d. The total number of dollars paid will decrease every summer, stay the same every fall, and increase every winter. e. Not enough information has been given to answer the question. Answer: a. If the minimum-wage law pushes the wage rate above its equilibrium level, the workers who continue to have a job will earn more. By itself, this will increase the total number of dollars paid to the affected group of workers. However, assuming that the labor-demand curve is downward sloping, the increase in the wage rate will lead to a decrease in the number of workers who are able to find a job. By itself, this will decrease the total number of dollars paid to the affected group of workers. The net effect on the total number of dollars paid to the affected group of workers will depend on the elasticity of demand for labor. In this question, we assume that the demand is inelastic. This means that the percentage change in the number of workers is less than the percentage change in the wage rate. In other words, the increase in the wage rate is relatively bigger than the decrease in the number of employed people. As a result, the total number of dollars paid to the affected group of workers will increase. 15. The union spillover effect will tend to _________ the wages of non-union workers, and the union threat effect will tend to _________ the wages of non-union workers. a. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease e. rinse, spin Answer: c. If a union succeeds in pushing the wage rate above its equilibrium level, it may suffer some loss of employment. The workers who are displaced may seek work in the non-union sector. This can be represented as a rightward shift in the supply curve of labor in the non-union sector. As a result of this “union spillover effect,” the wage rate in the non-union sector will decrease. However, the “union threat effect” goes in the opposite direction. Some employers may be willing to raise wages, in the hope of avoiding unionization of their work force. 16. If a labor market has a monopsony, workers will earn _______ than they would have earned in a competitive labor market. a. more b. less c. the same d. more sometimes, less sometimes, and the same sometimes e. an amount that is beyond human comprehension Answer: b. In a competitive labor market, workers will earn a wage rate that is equal to their marginal revenue product. However, if the labor market is monopsonized, the wage rate will be less than the marginal revenue product. This is because the monopsony employer has a lot of market power. It uses its market power in a way that benefits itself, but harms the workers. This is sometimes called “monopsonistic exploitation of labor.”

6...