Econ Ch 17

The president of the United States receives an annual salary of $400,000, while some top-performing baseball players earn more than $30 million annually. a. Based on marginal productivity theory, what does this say about their contributions to society? b. What qualifications to your answer might you suggest about their relative contributions, and what do your adjustments have to say about marginal productivity theory?

a. Some top-performing baseball players contribute more to society. b. We need to recognize that neither market is perfectly competitive and institutional factors enter into the decision about what to pay. For example, being a U.S. president is considered to be a service to one's country and presidents get many nonwage perks, such as Air Force One and the White House.

According to a study by economists Muriel Niederle and Lise Vesterlund, women are less willing to participate in competitive environments. a. What is the potential impact on the number of women in high-level management positions? b. If this were the cause of fewer women working in high-level management, would you characterize it as discrimination? If so, what type? If not, why not?

a. There are fewer women in high-level management positions because these positions are often highly competitive. b. This may or may not be discrimination. It may be institutional discrimination if women are socialized to prefer less competition, but if women are genetically predisposed to compete less, then it may not be discrimination.

Explain each of the following phenomena using the invisible hand or social or political forces: a. Firms often pay higher than market wages. b. Wages don't fluctuate much as unemployment rises.

a. This is an example of social forces modifying the result of the invisible hand. Firms pay above-market wages because they want to establish close personal ties with their workers. Doing so can lead employees to work at maximum efficiency, and the gain in efficiency may exceed the additional cost. If so, it is known as an efficiency wage. b. This is an example of social and political forces modifying the result of the invisible hand. Firms do not change wage rates much when demand fluctuates, both to keep good social relations with workers and, in some instances, to avoid violating contracts that determine wage rates.

Generally, it is easiest to eliminate discrimination that is based on

individual characteristics that do not affect job performance.

It is easiest to eliminate discrimination based on

irrelevant individual characteristics.

Marginal income tax rates affect the quantity of labor supplied because after-tax income is

the opportunity cost and what you give up by not working

If the opportunity cost of leisure decreases, a person is likely to

work less

The labor supply curve is

upward sloping

Which of the following are reasons a U.S. company would continue to produce in the United States even if U.S. wages were higher?

-Potential trade restrictions -Tariffs and subsidies -More productive workers -Lower transportation costs

Which of the following affect the elasticity of market supply of labor?

-The structure of the labor market -Individual's opportunity cost of working -The number of people willing to enter the market as wages rise

The elasticity of demand for labor is influenced by the

-degree to which marginal productivity falls with an increase in labor demanded. -cost of substitution in production. -possibility of substitution in production.

The elasticity of demand for labor is influenced by

-the elasticity of demand for the firms' good. -the relative importance of labor in the production process.

True or false: The marginal factor cost curve is above the supply curve of labor in a market with a monopsony because a monopsonist takes into account the fact that hiring another worker will decrease the wage rate it must pay all workers.

False, hiring another worker will increase the wage rate that the monopsonist must pay other workers.

Refer to the graph shown for a monopsonist. What is the equilibrium quantity of labor?

Q2

Higher-than-equilibrium wage leads to

an excess supply of labor.

A market with only a single seller and a single buyer is called a

bilateral monopoly

In a small town, there is only one factory where residents can find jobs. All of the residents belong to a labor union, which negotiates on their behalf as a single supplier of labor. This situation is best characterized as a

bilateral monopoly

Laws mandating similar pay for similar work are called

comparable worth laws

Entrepreneurship is best thought of as a type of

creative labor

If the wage rate increases, the quantity of labor demanded will tend to

decrease

A market in which a single firm is the only buyer is called a

monopsony

The incentive effect in the labor market takes into account

nonmarket and market activities

The incentive effect refers to how much a person will change his or her

quantity of labor supplied in response to a change in the wage rate.

Labor markets are significantly affected by

social, economic, and political forces

An example of monopsony is a market in which

a single firm is the only buyer.

How is opportunity cost related to the supply of labor?

The opportunity cost of working one more hour is the loss of one hour spent on nonmarket activities. This means that the quantity of labor supplied would decrease if the value of nonmarket activities increased.

Which type of discrimination is easier to address legally—demand side or institutional? Explain your answer.

Demand side because firm behavior is easier to monitor and, socially, people tend to favor laws regulating firms when they are discriminatory.

True or false: Because most labor markets are perfectly competitive, economic forces largely determine wages.

False, most labor markets are not perfectly competitive. Instead, they are influenced heavily by social and political forces.

True or false: The range in which wages are likely to be in a bilateral monopoly is between the competitive wages and the wage unions prefer.

False, the wage will likely be between the union-preferred wage and the firm's preferred wage.

True or false: Because wages are significantly influenced by political and social forces, it is not helpful to organize a discussion of labor markets around supply and demand.

False, while government and culture affect supply and demand, the supply and demand model provides a useful framework for discussing the labor market. These other issues can be brought into the analysis.

The town of Oberlin, Ohio, has one hospital. How would you classify this market structure, and what effect will this market structure likely have on wages of nurses in Oberlin compared to a perfectly competitive market structure? Demonstrate your answer graphically. Assume nurses living in Oberlin only want to work in the town's hospital.

In Oberlin, the market structure for hospitals is most like a monopsony. As compared to perfect competition, Oberlin Hospital will hire fewer nurses at a lower wage rate.

Economist Edward Prescott observed that while Americans worked 5 percent fewer hours per week than the French in the 1970s, they worked 50 percent more hours per week in the early 2000s. He found that taxes accounted for nearly all of the difference. What was his likely argument?

Increases in marginal tax rates for large changes in income were significantly higher in the 1970s than in the early 2000s in the United States. Therefore, in the early 2000s, families could take home a larger percentage of their increase in wages than in the 1970s, leading them to work many more hours.

Comparable worth laws require employers to pay the same wage scale to workers who do comparable work or have comparable training. What likely effect would these laws have on the labor market?

These laws would likely politicize the labor market much more than it is currently politicized. It would involve an enormous increase in government involvement and regulation of pay.

Is an increase in the marginal income tax rate reflected by a shift in the after-tax supply of labor or a movement along the supply curve when the pretax wage rate is on the vertical axis? Explain your answer.

An increase in the wage rate increases the opportunity cost of leisure. A person would increase the quantity of labor supplied because the marginal benefit of working has increased

Using the economic decision rule and opportunity cost, explain why an increase in the wage rate increases quantity of labor supplied.

An increase in the wage rate increases the opportunity cost of leisure. A person would increase the quantity of labor supplied because the marginal benefit of working has increased

In the graph shown, which curve represents a typical labor supply curve?

B

Why are social and political forces more active in the labor market than in most other markets?

Because market forces alone cannot explain the differences in wages or unemployment.

A recent study reported that the average male CEO of Fortune 500 firms is 6 feet, about 2.5 inches more than the average male. Why might this be difficult to eliminate through laws that restrict companies from hiring based on height?

Because this is an example of discrimination based on relevant individual characteristics, a firm has an economic incentive to discriminate.

Which of the following are likely reasons a U.S. company would continue to produce in the United States even if wages were higher?

Compatibility of production techniques with social institutions

Does economic theory tell us such a law would be a bad idea?

Economic theory does not tell us that such a law would be a bad idea. That depends on what one's goals are and how one judges the redistributional consequences of the minimum wage.

In 1993 Congress passed the Family and Medical Leave Act (FMLA), which requires firms with more than 50 employees grant a 12-week unpaid leave of absence for family and medical reasons. What is the likely effect on the demand for female employees?

If more women than men take time off because of FMLA, female employees will cost firms more, which decreases the demand for female employees.

Why is it difficult to eliminate discrimination based on individual characteristics that will affect job performance?

Not discriminating on these factors reduces profits to the firm.

Demand-side discrimination can be motivated by

Relevant and irrelevant individual characteristics & group characteristics

Which of the following scenarios is best classified as institutional discrimination?

Required overtime and work schedules that change from week to week.

As telecommunications improve, performers can reach larger and larger audiences. In the past, one could only perform in a concert hall; today one can perform for the entire world. How might that change in technology affect the relative pay of performers?

The best performers of each genre would receive a greater premium because their market base would be larger. Because this reduces demand for local concert halls, pay for mediocre and least-desired performers would decline.

True or false: Demand-side discrimination is based on individual characteristics not relevant to the job.

True

True or false: Eliminating discrimination based on individual characteristics that will affect job performance may raise production costs.

True

True or false: The elasticity of market supply of labor is impacted by the elasticity of individuals' supply curve for labor

True

True or false: The labor market is a type of factor market.

True

True or false: The marginal factor cost curve is always above the supply curve of labor in a market with a monopsony.

True, because a monopsonist must pay all previous workers the higher wage as quantity demanded rises, the marginal factor cost is higher than the supply curve.

True or false: Wages are significantly influenced by political and social forces

True; There are many laws such as minimum wage and anti-discrimination laws that govern labor market issues such as wages.

Refer to the graph shown. The wage for a bilateral monopoly will be between

W0 and W3.

Refer to the graph shown for a monopsonist. What is the equilibrium wage?

W1

Using the concept of opportunity cost, explain why welfare programs might increase the number of poor.

Welfare programs benefit low-income individuals. If an individual receives welfare benefits, the opportunity cost of not working rises, which may cause recipients to work less.

Which of the following scenarios is an example of institutional discrimination?

Women's prime child-bearing age is when most people need to establish themselves in their careers.

a. List three types of demand discrimination. b. Which is the most difficult to eliminate? Why?

a. Discrimination based on relevant individual characteristics, discrimination based on irrelevant individual characteristics, and discrimination based on group characteristics b. Discrimination based on relevant individual characteristics is most difficult to eliminate because this kind of discrimination lowers costs of production and makes a firm more competitive.

This is an example of social and political forces modifying the result of the invisible hand. Firms do not change wage rates much when demand fluctuates, both to keep good social relations with workers and, in some instances, to avoid violating contracts that determine wage rates. a. Why do firms hire children as workers? b. Why do children work? c. What considerations should be taken into account by countries when deciding whether to implement an international ban on trade for products made with child labor?

a. Firms hire children because children's marginal productivity relative to their wage is higher than it is for alternative workers. b. For the same reasons that others work—they and their families need money and work is what is expected of them. c. One must look at the effects of that ban. If the ban will lead to children starving, the ban does them no good; if it allows them to go to school while the firm hires their parents instead, the ban may help the children.

A teen subminimum training wage law allows employers to pay teenagers less than the minimum wage. a. What effect would you predict this law has, based on standard economic theory? b. In analyzing the effects of the law, Professors Card and Kreuger of Princeton University found that few businesses used it and that it had little effect. Why might that have been the case?

a. More teens would be employed because their relative wage is lower compared to non-teens, but they would then lose their jobs after the training period is over. b. It is likely that the administrative costs of participating in the program were higher than the benefits of hiring teens at the lower training wage. Also, social forces would have kept many firms from firing older workers to replace them with cheaper teen labor.

Eight cents of every dollar spent at retail stores in America is spent at Walmart. With such market power, Walmart is able to name the price at which it is willing to buy goods from suppliers. a. Could this happen if Walmart's suppliers were operating in a perfectly competitive market? b. What if it were operating in an imperfectly competitive market, specifically a monopsonistic market? c. What would be the lower limit of the price Walmart could name?

a. No. In a perfectly competitive market, prices are set by a joint decision of all buyers. No one firm sets the price. b. No. No one sets the price in this type of market. The market determines the price. c.

Economists Mark Blaug and Ruth Towse studied the market for economists in Britain and found that the quantity demanded was about 150 to 200 a year, and that the quantity supplied was about 300 a year. a. What did they predict would happen to economists' salaries? b. What likely happens to the excess economists? c. Why doesn't the price change immediately to bring the quantity supplied and the quantity demanded into equilibrium?

a. fall b. Some economists will leave this labor market and either start their own business or accept jobs in other markets or in other countries. This would mitigate the decline in economists' wages. c. In most markets, prices do not adjust downward quickly for institutional reasons.

For a market with a monopsony, the marginal factor cost curve is always

above the supply curve.

When wages decrease, the quantity of labor supplied tends to

decrease

If the demand for labor decreases, the equilibrium wage

decreases

Comparable worth laws are laws that mandate comparable pay for people

doing similar work.

Wages paid above the going market wage to keep workers happy and productive are called

efficiency wages

Labor that involves high degrees of organizational skills, concern, oversight, responsibility, and creativity is called

entrepreneurship

If the government increases the marginal income tax rate, the incentive to work

falls

If the wage rate decreases, the quantity of labor demanded will tend to

increase

When wages increase, the quantity of labor supplied tends to

increase

Firms pay efficiency wages to

increase output per worker.

If the demand for labor increases, the equilibrium wage

increases

When workers negotiate a higher-than-equilibrium wage W2, it creates an excess

supply of labor given by Q2 - Q0.

The marginal factor cost curve is above the supply curve of labor in a market with a monopsony because a monopsonist takes into account the fact that higher another worker

will increase the wage rate that the monopsonist must pay all workers.

If the opportunity cost of leisure increases, a person is likely to

work more.