HW 13

Mountain Breeze supplies air filters to the retail market and hires workers to assemble the components. An air filter sells for $26, and Mountain Breeze can buy the components for each filter for $1. Sandra and Bobby are two workers for Mountain Breeze. Sandra can assemble 60 air filters per month and Bobby can assemble 70. If the labor market is perfectly competitive, how much will Sandra and Bobby be paid? Instructions: Enter your responses as whole numbers. Sandra will be paid $__________ per month. Bobby will be paid $___________per month.

$1,500 per month. $1,750 per month. Explanation Sandra's marginal product is 60 air filters per month, and the value of her marginal product (VMP) is (60 air filters per month)($25 per filter) = $1,500 per month. Similarly, Bobby's VMP is (70 air filters per month)($25 per filter), or $1,750 per month. Since the labor market is competitive, Sandra and Bobby will be paid their respective VMPs each month.

Malik, a high school senior, is offered a job walking his neighbor's dog for an hour each Friday afternoon. His reservation wage for this task is $6. a. If Malik's neighbor offers him $15 per hour, how much economic surplus will Malik enjoy each week as a result of accepting this job? Malik's economic surplus is $_______ per hour. b. Now suppose that Malik's parents announce that he will have to split his earnings evenly with his two younger siblings. Will Malik still accept the job? Malik _____________ accept the job. c. The answers to parts a and b illustrate a problem inherent in all income redistribution programs. Which of the following is correct?

a. $9 per hour. b. will not c. By reducing Malik's incentive to work and generate an economic surplus, the overall income available to the economy is reduced. Explanation a. When Malik is offered the dog-walking job for $15 per hour, he accepts the position and enjoys an economic surplus of $15 − $6 = $9. b. If the $15 were split equally between Malik and his two younger siblings, each would receive $5. Since Malik's reservation wage is $6, accepting the job would mean a negative surplus for Malik of $5 − $6 = −$1, so he will not accept the job. c. The income-sharing arrangement in part b is an extreme form of income redistribution. Such measures reduce the amount of income available by reducing Malik's incentive to accept employment that would have generated an economic surplus.

Carolyn owns a soda factory and hires workers in a competitive labor market to bottle the soda. Her company's weekly output of bottled soda varies with the number of workers hired, as shown in the following table: Number of workers:0,1,2,3,4,5 Cases/week:0,200,360,480,560,600 a. If each case sells for $10 more than the cost of the materials used in producing it and the competitive market wage is $1,000 per week, how many workers should Carolyn hire? _______ workers How many cases will be produced per week? ____________ cases of soda b. Suppose the Soda Bottlers Union now sets a weekly minimum acceptable wage of $1,500 per week. All the workers Carolyn hires belong to the union. How does the minimum wage affect Carolyn's decision about how many workers to hire? Carolyn would _______ employment to ________ workers. c. If each case now sells for $15 more than the cost of the material used in producing it and the competitve market wage is still $1,000 per week, how many workers will Carolyn hire now? __________ workers

a. 3 workers 480 cases of soda b. cut back; 2 workers. c. 4 workers Explanation a. Carolyn will hire workers as long as the VMP of a worker is greater than or equal to the market wage. The relevant VMP entries are shown in the fourth column of the table below: Number of workers:0,1,2,3,4,5 Cases per week:0,200,360,480,560,600 Marginal product of labor (cases per worker):200,160,120,80,40 VMP (dollars per worker):2000,1600,1200,800,400 The market wage is $1,000 per week, so Carolyn will hire 3 workers and produce 480 cases of soda. b. Since Carolyn must pay each worker $1,500 per week, she will cut back employment from 3 workers to 2 workers since the VMP of the 2ndworker is $1,600 while the VMP of the 3rdworker is $1,200. c. Total revenue and VMP will both rise by 50 percent, as shown in the table below: Number of workers:0,1,2,3,4,5 Cases per week:0,200,360,480,560,600 Marginal product of labor (cases per worker):200,160,120,80,40 VMP (dollars per worker):3000,2400,1800,1200,600 At a wage of $1,000 per week, Carolyn will hire 4 workers.

Stone Inc. owns a clothing factory and hires workers in a competitive labor market to stitch cut denim fabric into jeans. The fabric required to make each pair of jeans costs $5. The company's weekly output of finished jeans varies with the number of workers hired, as shown in the following table: Number of workers: 0,1,2,3,4,5,6 Jeans (pairs per week): 0,25,45,60,72,80,85 a. If the jeans sell for $35 a pair and the competitive market wage is $250 per week, how many workers should Stone hire? ________ workers How many pairs of jeans will the company produce each week? _________ pairs of jeans b. Suppose the Clothing Workers Union now sets a weekly minimum acceptable wage of $230 per week. All the workers Stone hires belong to the union. How does the minimum wage affect Stone's decision about how many workers to hire? Stone's decision ___________ be affected by the minimum wage. c. If the minimum wage set by the union had been $400 per week, how would the minimum wage affect Stone's decision about how many workers to hire? The number of workers employed would be ____________ to______ workers. d. If Stone again faces a market wage of $250 per week but the price of jeans rises to $45, how many workers will the company now hire? ________ workers

a. 4 workers 72 pairs of jeans b. will not c. reduced; 3 workers. d. 5 workers Explanation a. After deducting the $5 cost of the fabric, the company receives $30 from the sale of each pair of jeans. The marginal product of labor and the value of the marginal product of labor are shown in the following table: Number of workers:0,1,2,3,4,5,6 Jeans (pairs per week):0,25,45,60,72,80,85 Marginal product of labor (pairs per worker):25,20,15,12,8,5 VMP ($ per week):750,600,450,360,240,150 Since the market wage is $250 per week, it is not worthwhile to hire the fifth worker, whose VMP is only $240 per week. The firm should therefore hire 4 workers and produce 72 pairs of jeans per week. b. A minimum wage of $230 per week will not affect the hiring decision of Stone Inc. since the equilibrium wage is higher than the minimum wage. c. A union wage of $400 per week does affect the hiring decision of Stone Inc. since the union wage is higher than the market wage. A firm will hire workers as long as the VMP is greater than or equal to $400, which in this case means that Stone Inc. will only hire 3 workers. d. The increase in the price of jeans raises the VMP for every worker. The marginal product of labor and the higher value of the marginal product of labor are shown in the following table: Number of workers:0,1,2,3,4,5,6 Jeans (pairs per week):0,25,45,60,72,80,85 Marginal product of labor (pairs per worker):25,20,15,12,8,5 VMP ($ per week):1000,800,600,480,320,200 In this case, Stone Inc. will hire 5 workers.

Suppose the equilibrium wage for unskilled workers in New Jersey is $16 per hour. How will the wages and employment of unskilled workers in New Jersey change if the state legislature raises the minimum wage from $8.85 per hour to $15 per hour? Wages of unskilled workers will Employment of unskilled workers will

not change not change Explanation An increase in the minimum wage will have no effect on wages or employment as long as the minimum wage remains below the equilibrium wage.

Consider an economy with two industries, industry A and industry B, with the following labor demand curves. The horizontal axis labeled employment of 1,000s of workers per day ranges from 0 to 6 in increments of 1. The vertical axis labeled wages in doller per hour ranges from 0 to 12 in increments of 1. A line labeled D-subscript A = V M P-subscript A begins at the point (0, 12) goes down to the right and ends at the point (6, 0). The horizontal axis labeled employment of 1,000s of workers per day ranges from 0 to 12 in increments of 1. The vertical axis labeled wages in dollar per hour ranges from 0 to 12 in increments of 1. A line labeled D-subscript B = V M P-subscript B begins at the point (0, 12) goes down to the right and ends at the point (12, 0). a. Suppose the skills needed to perform the work in the two industries are identical, and the supply of labor to the two industries is fixed at 6,000 workers per day. What will be the equilibrium wage, and how many workers will work in each industry? (Hint: Using the graphs, determine the wage at which the combined quantity of workers demanded is equal to the fixed quantity supplied of 6,000). Equilibrium wage: $________ per hour Number of workers in industry A: __________ Number of workers in industry B: ____________ b. Now suppose the workers in industry A unionize and refuse to work for anything less than $10 per hour. How many workers will work in each industry, and what will be the resulting wage gap between the two industries? Number of workers in industry A: ____________ Number of workers in industry B: _______________ Wage gap between industry A and industry B: $__________ per hour Is this arrangement efficient?

a. Equilibrium wage: $8 per hour Number of workers in industry A: 2,000 Number of workers in industry B: 4,000 b. Number of workers in industry A: 1,000 Number of workers in industry B: 5,000 Wage gap between industry A and industry B: $3 per hour No, because the value of the marginal product of labor is higher in industry A than industry B. Explanation a. The wage has to be equal in the two industries, otherwise workers will have an incentive to switch industries. In addition, since the quantity of workers supplied is fixed at 6,000, the total quantity demanded must equal to 6,000 as well. Note that when the wage in the two industries equals $8 per hour, the quantity demanded per day is 2,000 in industry A and 4,000 in industry B. Since 2,000 + 4,000 = 6,000, this is the labor market equilibrium. b. If the wage in industry A is $10 per hour, then the quantity of workers demanded in industry A will fall to 1,000. The remaining 5,000 workers will work in industry B, implying that the wage in industry B will equal $7 per hour. Thus, there will be a $3 wage gap between the two industries. This arrangement is not efficient since the last worker hired in industry B only generates $7 worth of revenue, but if that worker were to shift to industry A he or she would generate $10 worth of revenue. Total surplus is maximized when the value of the marginal product of labor is the same in both industries.

Suppose the demand and supply curves for unskilled labor in the Corvallis labor market are as shown in the figure below. a. By how much will the imposition of a minimum wage at $12 per hour reduce total economic surplus? Instructions: In the graph below, use the point tool to indicate the wage and employment combination that would result with a $12 per hour minimum wage 'Wmin'. Then shade the areas of the resulting employer surplus 'Employer', worker surplus 'Worker', and the reduction in total surplus 'Loss' by clicking the provided tools and dragging the corners of the shaded areas into the appropriate places. Total economic surplus would be $________ per day without a minimum wage, and would be reduced by $______ per day with a minimum wage at $12 per hour. Calculate the amounts by which employer surplus and worker surplus change as a result of the minimum wage. Employer surplus would be _____ by $___________ per day. Worker surplus would be _______ by $____________ per day. b. How much would it cost the government each day to provide an earned-income tax credit under which workers as a group receive the same economic surplus as they do under the $12 per hour minimum wage? (Assume for simplicity that the earned-income tax credit has no effect on labor supply.) The tax credit would cost the government $__________ per day.

a. refer to graph $ 100,000 per day $ 4,000 per day reduced;$ 18,000 per day. increased;$ 14,000 per day. b. $ 14,000 per day. Explanation a. Without a minimum wage, total economic surplus is $100,000 per day ($50,000 for employers and workers), as shown below: Using the figure below, a minimum wage set at $12 per hour reduces employer surplus to the area of the cross-hatched triangle, $32,000 per day, and increases worker surplus to the area of the four-sided shaded figure, $64,000 per day. The minimum wage thus reduces employer surplus by $18,000 per day and increases worker surplus by $14,000 per day. The net reduction in surplus is the area of the shaded triangle shown in the diagram, $4,000 per day. b. With an earned-income tax credit in lieu of a minimum wage, employment will be 10,000 person-hours per day at $10 per hour. Since worker surplus under those conditions is $14,000 per day less than under the minimum wage, the government would have to offer a tax credit worth $1.40 per hour for each of the 10,000 person-hours of employment to match the worker surplus that would occur under the $12 minimum wage.

Suppose the demand and supply curves for unskilled labor in the Corvallis labor market are as shown in the accompanying figure. Suppose employers and workers are risk-neutral, and Congress is about to enact a $12 per hour minimum wage. Congressional staff economists have urged legislators to consider adopting an earned-income tax credit instead. Suppose neither workers nor employers would support that proposal unless the expected value of each party's economic surplus would be at least as great as under the minimum wage. Instruction: In the graph below, use the point tool provided 'Wmin' to indicate the wage and employment combination that would result with a $12 per hour minimum wage. Calculate the amounts by which employer surplus and worker surplus change as a result of the minimum wage. Employer surplus would be _______ by $__________ per day. Worker surplus would be _______ by $___________ per day. Which of the following describes both an earned-income tax credit and a tax that would raise enough money to pay for it that would receive unanimous support from both workers and employers?

reduced; $ 18,000 per day. increased; $ 14,000 per day. A tax of $16,000 levied on employers used to fund an earned-income tax credit of $1.60 per hour. Explanation Without a minimum wage, employers and workers each receive an economic surplus of $50,000 per day. As shown in the diagram below, a minimum wage set at $12 per hour reduces employer surplus to the area of the cross-hatched triangle, $32,000 per day, and increases worker surplus to the area of the four-sided shaded figure, $64,000 per day. The minimum wage thus reduces employer surplus by $18,000 per day and increases worker surplus by $14,000 per day. Based on this information, employers would be willing to pay a tax up to $18,000 to enact the earned-income tax credit rather than the minimum wage. A tax of $16,000 levied on employers could therefore fund an earned-income tax credit of $1.60 per hour × 10,000 hours = $16,000, which is more than the $14,000 increase in worker surplus that the minimum wage would provide. Clearly, this arrangement would make both employers and workers better off than under the minimum wage.