Economics 370 - Economics of Labor University at Albany - Midterm 1 review

Explain why: The quantity of labor supplied increases; the quantity of labor demanded decreases When: the wage rate increases Cover: 1. Cost of leisure 2. marginal revenue product of that labor 3. Firms reaction to marginal revenue product of that labor

-As the wage rate increases, -the cost of leisure increases and people provide more labor and have less leisure. -When the wage rate increases, - the wage is greater than the marginal revenue product of that labor, -so firms will reduce the amount of labor they want to use.

Explain why: Employment and wages decrease. when: Cheese and bread are complementary goods, and the price of cheese has increased. Cover: 1. Demand of labor 2. Complementary good relationship

-Employment and wages decrease because the demand for labor used to bake that bread decreases. -When the price of a complementary good increases, the demand for the good's complement decreases, -and the demand for labor is derived from the demand for the good that labor produces.

Why is it likely that a Used cars in a society that values new goods likely has a income elasticity of -2?

-If a society values new goods more than used goods, - they are likely to decrease their purchases as incomes increase.

Explain how: The price of shark repellent decreases. when: price of good cause employment in this industry to decrease Cover: 1. each firm's marginal revenue product of labor

-If the price of shark repellent decreases, -each firm's marginal revenue product of labor decreases, -which decreases the demand for labor. - When the demand for labor decreases, employment decreases

Indications of a firm selling in a perfectly competitive market and hires labor in a perfectly competitive market.

-We can tell that a firm sells in a perfectly competitive market because the price it sells the good for never changes. -We can also tell that it hires labor in a perfectly competitive market because it has no control over the market price of labor.

Comment on the following quotation: "One way that a minimum wage could result in expanded employment is if the government sets the minimum below the market equilibrium wage." Is this effective?

A below-market equilibrium minimum wage is ineffective.

Comment on the following quotation: "One way that a minimum wage could result in expanded employment is if the government sets the minimum below the market equilibrium wage."

A below-market equilibrium minimum wage is ineffective. With wages below equilibrium, the competition for employees among employers will drive the wage up toward the market-clearing level. Thus, a below-market minimum wage will not be binding (that is, firms will voluntarily pay more than the minimum wage to their workers).

The income elasticity of demand for healthcare in Artland is 2.52. In 2001 the quantity demanded of healthcare decreased by 25% What change in national income in Artland causes this decrease in healthcare?

Artland's national income decreased by 10 percent.

a. Diminishing marginal returns begins with which employee? Number of Workers Total # of Pots Produced Per Day 0 0 1 6 2 13 3 18 4 21 5 23 6 22

Diminishing marginal returns begins with the 3rd employee

Cheese and bread are complementary goods, and the price of cheese has increased. What happens in the labor market for bread bakers as a result?

Employment and wages decrease.

Cheese and bread are complementary goods, and the price of cheese has increased. What happens in the labor market (Employment and wages) for bread bakers as a result?

Employment and wages decrease.

If a labor market changes from being competitive to a monopsony, what will happen to employment and wages?

Employment decreases and wages decrease.

A person's nominal wage is his/her real wage divided by some index of prices. T or F

F

Explain why The unemployment rate decreases when an unemployed worker drops out of the labor force.

For example, suppose that initially the number of unemployed workers is 3 and the number of people in the labor force is 9. Because the unemployment rate is the number unemployed divided by the labor force, the unemployment rate is 33.3 (3/9) percent. If one of the unemployed workers drops out of the labor force then the number unemployed would be 2 and the size of the labor force would be 8. Consequently, the unemployment rate drops to 25 (2/8) percent.

Why does immigration lead to to increase the supply of labor

Higher immigration increases the supply of labor because more workers are available.

Suppose a pot sells for $20 each. What is the marginal revenue product of labor of the second worker? Number of Workers Total # of Pots Produced Per Day 0 0 1 6 2 13 3 18 4 21 5 23 6 22

If a pot sells for $20, the marginal revenue product of labor for the second worker is: $20 ∗ (13 − 6) = $140

If Industry A can substitute capital for labor easily and Industry B cannot, then (other things equal)

Industry A's own-wage elasticity of demand will be higher than Industry B's.

How to calculate the marginal revenue product of labor for a firm with a formula?

Marginal revenue product of labor(MRPL​)=marginal revenue(MR)×marginal product of labor(MPL​)

Are the following statements positive or normative? Why? Employers should not be required to offer pensions to their employees.

N

Are the following statements positive or normative? Why? The military draft compels people to engage in a transaction they would not voluntarily enter into; it should therefore be avoided as a way of recruiting military personnel.

N

Is the following statement positive or normative? Why? The military draft compels people to engage in a transaction they would not voluntarily enter into; it should therefore be avoided as a way of recruiting military personnel.

Normative

STUDY PROBLEM SET 2 QUESTION 7

STUDY PROBLEM SET 2 QUESTION 7

Both workers and employers are taxed: workers pay an income tax, for example, and employers face various payroll taxes (e.g., unemployment insurance). In general, no matter whether the worker or the employer is taxed, both bear a portion of the tax burden. t or f

T

For a given increase in the minimum wage, which of the following would likely result in a larger decrease in teenage employment?

Teenage workers are close substitutes with older workers who are paid more than the minimum wage.

What is true about a monopsony labor market, in regards to marginal factor cost of labor and the wage rate ?

The marginal factor cost of labor is greater than the wage rate

A firm produces and sells novelty hats in an oligopoly market and hires labor in a perfectly competitive labor market. What must be true about the labor this firm hires regarding The marginal revenue product of labor and the wage rate.?

The marginal revenue product of labor equals the wage rate.

Peculiarities of the unemployment rate. The unemployment rate is defined as the percentage of the labor force that is unemployed at any particular point in time. What happens to the unemployment rate when an unemployed worker drops out of the labor force?

The unemployment rate decreases when an unemployed worker drops out of the labor force.

What kind of goods would most likely have an income elasticity of -2?

Used cars in a society that values new goods

1985 1995 2014 Average wage $7.00 $10.00 $20.00 CPI (base 1995) 80 100 200 i. Assume 2014 is the base year, convert the nominal wages to constant dollar wages.

Using 2014 as the base year, and converting the 1985 nominal wage to the real wage: $7 /80 × 200 = $17.50 Using 2014 as the base year, and converting the 1995 nominal wage to the real wage: $10/ 100 × 200 = $20 Real wage has remained unchanged between 1995 and 2014 in terms of 2014 dollars. Compare this with result in (a).

. If the salaries of college professors decrease and other conditions remain the same, then

a college will move to the right along its labor demand curve for college professors.

When is it the case that the value of a firm's marginal product of labor (VMPL) equals the marginal revenue product of labor (MRP_L).

a perfectly competitive market

Consider two characteristics of a monopsony labor market: 1.the number of firms hiring 2. firms' hiring incentives. What describe these two characteristics?

a single firm hiring labor that must adjust the wage it pays

The Labor force consists of

all individuals aged 16 or older who are employed or unemployed

For a perfectly competitive market in which labor is hired to produce cell-phone cases, what change in demand for cell phone cases leads to an increase in the demand for that labor?

an increase in the demand for cell-phone cases

What creates a labor supply curve?

an individual maximizing utility in choosing between labor and leisure

An increase in quasi-fixed costs would probably lead to a(n) ________ in the number of employees hired and a(n) _________ in the number of overtime hours worked.

decrease; increase

Legislation requiring employer-provided health insurance for part-time workers would probably, if the scale effect is negligible, ________ the employment of part-time workers and ________ the overtime of full-time workers.

decrease; increase

As the firm increases its employment in the short run, the marginal product of labor will eventually decline because

each additional worker has a smaller share of capital with which to work.

A quasi-fixed cost of labor is a cost that

is proportional to the number employees hired.

A competitive firm maximizing profit in the long run hires capital and labor so that

its marginal product of labor (MPL) equals wage (or the difference between them is as small as possible). its marginal product of capital (MPK) equals the per unit cost of capital (or the difference between them is as small as possible). the ratios of the marginal products of inputs to their prices are the same across all inputs.

If labor is a small percentage of the total costs of an industry, then the own wage elasticity of labor demand will tend to be

low in magnitude.

If the wage rate decreases, what is the most likely outcome?

people decrease the quantity of labor supplied; firms increase the quantity of labor demanded.

The own-wage elasticity of demand measures

percentage change in quantity of labor demanded divided by percentage change in wages.

If the firm hires to a point where marginal expense of labor is less than the marginal revenue product of labor, then how could profits increase?

profits could be increased by increasing employment.

A mandated increase in overtime pay is likely to

reduce the number of workers employed if higher costs cause a large scale effect and a small substitution effect.

An influx of 1 million additional civilian workers would cause what shift

shift the labor supply curve (very slightly) to the right. Using the number from your text of approximately 143.6 million employed workers in the US, and an own-wage elasticity of -1, we can estimate the percentage change in wage So an influx of 1 million workers would decrease the wage by about 0.7%. This is arguably small, so you could disagree with Professor Pessimist who says the influx will have "grave consequences" for the typical American worker

What is the marginal revenue product of labor (MRP_L)?

the additional revenue a firm earns if it uses one more unit of labor. The marginal product of labor is the additional output from one more unit of labor. If we multiply that additional output by the price it sells for, we get MRP_L

The marginal revenue product of labor in a coal mine is MRPL = 20 - L, where L = the number of workers. If the wage of miners is $5 per hour, then how many workers will the mine hire?

the coal mine will hire 15 workers

What happens to employment and wages if the preference for leisure increases at the same time worker productivity decreases?

the effect on wages is indeterminate; employment decreases

If supply decreases while demand is constant

the equilibrium wage will increase and the equilibrium employment will fall.

Historically employment has increased in response to technological change. These researchers predict that modern advances are different because of....

the exponential rate at which technology is improving. They argue that workers will not be able to retrain fast enough and keep up with the pace of technological change.

What is a firm's demand for labor?

the firm's marginal revenue product of labor (MRP_L) curve

Describe a firm's marginal revenue product of capital (MRP_K)? Cover: 1.Formula 2.explination

the marginal product of capital multiplied by the marginal revenue gained MRP_K is the additional amount of output produced when an additional unit of capital is used. Marginal revenue is the additional amount of revenue received when one more unit is sold. Therefore, the marginal revenue product of capital is the additional revenue a firm gets when it uses one more unit of capital and creates more output.

Suppose the price of capital (C) rises. If the scale effect associated with the price change is smaller in magnitude than the substitution effect,

the quantity of labor demanded will increase.

The market for toothbrushes is perfectly competitive and the labor market for workers for this market is also perfectly competitive. Recently the wage rate for toothbrush workers decreased and the number of toothbrush workers employed increased. What change in wage rate to other industry most likely cause of the change in the wage rate and number of workers employed described?

the wage rate in another industry decreased

If the price of capital decreases in an industry and the scale effect dominates,

wages and employment levels will both increase.

If the price of capital decreases in an industry and the scale effect dominates, what happens to wages and employment?

wages and employment levels will both increase.

Why are nurses in a monopsony paid less than they would be paid in a competitive labor market. Cover: 1. relationship between the marginal factor cost of labor and the marginal revenue product of labor 2. how we get wage 3. relationship to competitive labor market.

- In a monopsony labor market they hire the quantity of labor where the marginal factor cost of labor equals the marginal revenue product of labor, - but then pay a wage based on the labor supply curve. -This results in less hiring and lower wages than in a competitive labor market.

What leads us to make predictions about a firm switching from competitive to monopsony

- In a monopsony labor market they hire the quantity of labor where the marginal factor cost of labor equals the marginal revenue product of labor, - but then pay a wage based on the labor supply curve. - This results in less hiring and lower wages than in a competitive labor market.

If the firm hires to a point where marginal expense of labor is less than the marginal revenue product of labor, then

) profits could be increased by increasing employment.

suppose the unemployment rate suddenly rises. What can we infer about the economy, such as job growth and job loss? Explain.

- A rise in the unemployment rate, -for example, could indicate either that employers are less willing to hire (job loss), -or that the labor market is improving and more people are entering the labor force (job growth).

Why do Employment and wages decrease in complementary goods, when one price of good increases

- Employment and wages decrease because the demand for labor used to bake that bread decreases. - When the price of a complementary good increases, -the demand for the good's complement decreases, -and the demand for labor is derived from the demand for the good that labor produces.

Reasoning for hiring in a monopolistically competitive labor market with maximize profit Cover: 1. the marginal factor cost 2. the marginal revenue product of labor

- Someone hiring labor in a monopolistically competitive labor market will hire workers until the cost of hiring an additional worker (the marginal factor cost) equals the value that the worker will provide (the marginal revenue product of labor). -However, the worker will be paid less than the marginal factor cost of labor, which means the worker is paid less than their value to the employer.

Explain how: the wage rate in another industry decreased when: wage rate to other industry causes the change in the wage rate and number of workers employed Cover: 1. supply of labor 2. Labor market decision of workers

- The change in wages and quantity of labor supplied occurs when the supply of labor increases. - If workers in other labor markets have declining wages, - they will shift from other labor markets to the market for labor used to make toothbrushes.

Explain how: an increase in the demand for the good that labor produces when: change in demand for a good leads to an increase in wages and employment in the labor market Cover: 1. Demand for labor

- The demand for labor is a derived demand, -which means that the demand for labor is affected the same way the demand for the good that labor is produced is affected. -When the demand for labor increases, output and employment increase.

The market for factory labor in a town had been competitive, but All of the factories got together and merged into a single firm. As a result, there is now a single firm hiring labor in this market. What can we predict about this market regarding employment and wages ?

- The firm will hire fewer workers and pay a lower wage.

Explain why in a perfectly competitive market the value of a firm's marginal product of labor (VMPL) equals the marginal revenue product of labor (MRP_L).

- VMPL equals MRP_Lt when the marginal revenue from one more unit sold is the price of the good, - and that price never changes. -This describes a perfectly competitive market because the firm can sell as much as it wants at the market price.

Explain how: an increase in the demand for cell-phone cases When: change in demand for cell phone cases leads to an increase in the demand for that labor? Cover: 1. price of good 2. the marginal revenue product of the labor used to make that good for all firms

- When the price of a good increases, -the marginal revenue product of the labor used to make that good increases for all firms - The market demand for labor is the sum of all firms' marginal revenue product of labor, - so the market demand increases.

Reasoning behind wage rate decrease leading to people decrease the quantity of labor supplied; firms increase the quantity of labor demanded.

- When the wage rate decreases, - the opportunity cost of leisure decreases, -so people reduce the labor supplied and increase leisure. -For firms, if the wage rate decreases, -marginal revenue product of labor is greater than its marginal factor cost, -so firm will increase the quantity of labor demanded until the marginal revenue product of labor equals its marginal factor cost.

Explain how: there is a an industry-wide improvement in worker productivity. when: workers would cause a firm to employ more workers and pay a higher wage Cover: 1. marginal revenue product of labor for every firm. 2. The market demand for labor

- When worker productivity increases for all firms, - the marginal revenue product of labor increases for every firm. - The market demand for labor is the sum of all individual firms' demands for labor, -so both the individual firm's demand for labor and the market demand for labor increase, -leading to higher employment at a firm and a higher market wage.

Why is A below-market equilibrium minimum wage is ineffective.

- With wages below equilibrium, -the competition for employees among employers will drive the wage up toward the market-clearing level. -Thus, a below-market minimum wage will not be binding (that is, firms will voluntarily pay more than the minimum wage to their workers).

Why is a firm's marginal revenue product of labor (MRP_L) curve representative of a firm's demand for labor

-A firm's demand for labor depends on both how much additional output is produced by another unit of labor, -and on how much additional revenue a firm gets from that output.

Indentured servitude is no longer legal. Evaluate the law prohibiting such contracts with respect to the concept of pareto efficiency.

-A law prohibiting poor would-be immigrants from indenturing themselves to employers blocks mutually beneficial transactions, -making both the employer and the would-be immigrant worse off - thus reducing pareto efficiency.

Explain in detail what is a monopsony labor market Cover: 1. slope of market supply 2. relationship between the marginal factor cost of labor for a firm hiring labor in a monopsony market and the supply of labor.

-A monopsony labor market has a single firm hiring labor. -The market supply of labor is upward sloping, - so if a firm wants to hire more labor, - it must increase the wage it pays to all workers it hires. - Therefore, the marginal factor cost of labor for a firm hiring labor in a monopsony market is greater than the supply of labor.

Why does wages increase and employment increases when income of buyers increases? Cover: 1. Market Demand 2. marginal revenue product of the labor used in production of good 3.Labor demand

-If consumer incomes increase, -the market demand for a normal good increases -which raises the price of eggs. -When the price of eggs increases, - the marginal revenue product of the labor used in egg production increases, -increasing the demand for labor. -When the demand for labor increases, wages and employment increase.

Explain- why are the effect on wages is indeterminate and employment decreases when: the preference for leisure increases at the same time worker productivity decreases Cover: 1. supply of labor 2. Demand of labor

-If the preference for leisure increases, - the supply of labor decreases, -which increases wages and decreases employment. -When worker productivity decreases, -the demand for labor decreases -which decreases wages and decreases employment. Both of these changes lower employment, so employment definitely decreases, but we cannot determine what the effect will be on wages.

Explain why The marginal revenue product of labor equals the wage rate. when A firm produces and sells novelty hats in an oligopoly market and hires labor in a perfectly competitive labor market.

-In a perfectly competitive labor market, -a firm hires the quantity of labor where the amount that the firm must pay to hire each unit of labor (the wage rate) equals the value of hiring that additional unit of labor (the marginal revenue product of labor).

marginal revenue product of labor for a firm formula explained Include: 1. Marginal revenue

-The marginal product of labor is the additional amount of output produced when an additional unit of labor is used. -Marginal revenue is the additional amount of revenue received when one more unit is sold. -Therefore, the marginal revenue product of labor is the additional revenue a firm gets when it uses one more unit of labor and creates more output.

explain why The marginal factor cost of labor is greater than the wage rate in monopsony labor market

-When a firm hires labor in a monopsony market it must increase the wage rate to hire more workers. -But every time it does so, it has to pay a higher wage to all workers, -not just the additional workers (with the exception of the first worker hired). -This is why marginal factor cost is higher than the supply curve.

For perfectly competitive market how do we prove: When the demand for the good decrease, the price of a the good decreases.

-When the price of a chupacabra figurine decreases, -each firm's marginal revenue product for figurine workers decreases which decreases the market demand for labor.

Beth is an evil genius who hires workers to be her minions and carry out her dastardly deeds in a monopsonistically competitive labor market. She also wants to maximize profit. When should Beth stop hiring workers, and how much should she pay them?

-stop hiring when the marginal factor cost of a worker equals the marginal revenue product of labor; - pay a wage less than the marginal revenue product of labor

Suppose that the supply curve for school teachers is Ls = 20,000 + 350W and the demand curve for school teachers is Ld = 100,000 - 150W, where L = the number of teachers and W = the daily wage. What are the equilibrium wage and employment level in this market?

. 𝐿𝑠 = 𝐿𝑑 ⇒ 20000 + 350𝑤 = 100000 − 150𝑤 500𝑤 = 80000 𝑤 ∗ = 160 𝐿𝑠 = 𝐿𝑑 = 76000

The supply curve for window washers is LS = 5+4W, where L is the number of window washers, and W is the hourly wage. The demand curve for window washers is LD = 20-W. Suppose the government imposes a $5 per hour tax on the employers of window washers. Indicate the effect of the tax on the market for window washers. What is the effect on the equilibrium wage and number of window washers employed? How much does the window washer receive? How much does the employer pay? How much does the government receive as tax revenue?

20 − (5 + 𝑊) = 5 + 4𝑊 The above equation holds for 𝑊 = $2. The effective wage, 𝑊𝑒 , is $2+$5, or $7 per hour. To find the number of window washer workers, substitute 𝑊 = $2 into either into the demand or supply equation. The equilibrium wage and number of window washers is thus $7 and 13 workers, respectively. The window washer receives $2 (the equilibrium wage), and the employer pays $7 (the equilibrium wage plus the tax). The government tax revenue is $65 ($5 × 13 = 65).

In February 2000, under the government of Prime Minister Lionel Jospin, France adopted the 35-hour working week. (Previously the legal limit was 39 hours per week) The stated objective of this law was to increase employment. Would economic theory predict that this objective was met? Please explain. (Substitution effect)

Answer : Depends on relative magnitude of scale effect. Substitution effect: → firms face penalties for employing workers for more than 35 hrs/week, which means marginal expense of hours (MEH) falls relative to marginal expense of employment (MEM) → more workers employed. Thus whether employment increase or decrease depends on |substitute effect| vs |scale effect. If the scale effect is larger in magnitude, employment would fall. |

The unemployment rate is defined as the percentage of the labor force that is unemployed at any particular point in time. Are changes in the unemployment rate a good barometer of the direction the economy is headed?

Changes in the unemployment rate are not always a good barometer for the direction the economy is headed.

Are changes in the unemployment rate a good barometer of the direction the economy is headed? For example, suppose the unemployment rate suddenly rises. What can we infer about the economy, such as job growth and job loss? Explain.

Changes in the unemployment rate are not always a good barometer for the direction the economy is headed. A rise in the unemployment rate, for example, could indicate either that employers are less willing to hire (job loss), or that the labor market is improving and more people are entering the labor force (job growth).

Some time ago the city of Chicago imposed a new per-worker employment tax on employers to help pay for city services. A city alderman, asserting that the city lawyers drafted the law so that it taxed employers, not workers, said ``The City of Chicago will never tax the working man." Show the consequences of this tax on the local labor market using diagrams. That is, show (1) the effects of the tax on equilibrium wage and employment; (2) the effects of the tax on the effective wages received by workers and paid by firms; and (3) the tax incidence, that is, the burden to workers and firms. Then, based on your diagram, comment on the alderman's statement.

Chicago imposes per worker tax, $T → Demand shifts down $T per worker to Demand' → Equilibrium wage and employment fall from w0 and L0 to w1 and L1. Effective wages paid by firm/employer : Before tax : w0 After tax : w2 = w1 + T Effective wages received by worker : Before tax : w0 After tax : w1 Burden of tax : Employer: (w1+T) - w0, or, w2 - wo (BF in the graph) Worker : w0 - w1 (BW in the graph)

What would happen to the wages and employment levels of engineers if government expenditures on research and development programs were to fall? Show the effect graphically.

Government represents one source of demand for engineers. (Government either directly employs them or indirectly employs them via R&D contracts with industry) → Government R&D expenditures decrease. → Demand for engineers shift in (to Demand') → Equilibrium employment falls from L0 to L1 and wages fall from w0 to w1: that is, the number of engineers and their wages fall.

What does income elasticity of demand describe?

How much the quantity bought of a good changes when buyers' incomes change Income elasticity of demand is a measure of the change in quantity demanded of good in response to a change in income.

. An employer who is a monopolist in the product market will probably

hire fewer employees than a perfect competitor would.

Two employers pay a wage of $10 an hour. Employer A is a monopsony while Employer B hires in a competitive labor market. Both firms sell their output in competitive markets. Which of the following will be true?

It will cost employer A more to hire another worker.

A single large hospital system hires all nurses in a city. Assume that this is a for-profit hospital system. What can we assume about this market compared to a competitive market?

Nurses are paid less than they would be paid in a competitive labor market.

Are the following statements positive or normative? Why? Employers offering pension benefits will pay lower wages than they would if they did not offer a pension program.

P

Are the following statements positive or normative? Why? If further immigration of unskilled foreigners is prevented, the wages of unskilled immigrants already here will rise.

P

Are the following statements positive or normative? Why? If the military draft were reinstituted, military salaries would probably fall.

P

Madam Malkin's produces and sells robes, and the wage it pays its workers is set in the labor market. The value of the firm's marginal product of labor (MP_L)decreases as it hires more workers, even though it can always sell a robe for the same price. Which of the following is true about the buying and selling market based on the information above?

The firm sells in a perfectly competitive market and hires labor in a perfectly competitive market.

In February 2000, under the government of Prime Minister Lionel Jospin, France adopted the 35-hour working week. (Previously the legal limit was 39 hours per week) The stated objective of this law was to increase employment. Would economic theory predict that this objective was met? Please explain. (Scale effect)

Scale effect: → mandating 35 hour work week increases costs of production for those firms who would not have chosen those hours before the new law → output reduced → fewer workers employed Thus whether employment increase or decrease depends on |substitute effect| vs |scale effect. If the scale effect is larger in magnitude, employment would fall. |

Suppose the worker would like to work but has dropped out of the labor force because jobs are very hard to find. Has the labor market become tighter or looser because of the worker's withdrawal from the labor force?

The labor market becomes looser if an unemployed worker withdraws from the labor force. When the unemployment rate drops, as it would in this case, it usually indicates that the labor market is getting tighter, that is, employers are finding it harder to fill positions at the old wage, and prospects are improving from the workers' perspective. In this case, however, even though the unemployment rate is going down, the labor market is actually getting looser. Workers' prospects are declining and employers would be able to draw on an increasingly desperate pool of workers.

Define marginal product of labor. Explain why diminishing marginal productivity in an input occurs.

The marginal product of labor is the change in physical output produced by a change in the units of labor, holding capital constant. Diminishing marginal returns occur because we hold capital constant. The law of diminishing marginal returns is an empirical proposition that derives from the fact that as employment expands, each additional worker has a progressively smaller share of the capital stock to work with.

If wages are $50 per day and pots sell for $20 each, how many potters will the firm hire? Number of Workers Total # of Pots Produced Per Day 0 0 1 6 2 13 3 18 4 21 5 23 6 22

The point where the marginal revenue product of labor equals the wage maximizes profits. If the wage is $50, the firm will hire 4 workers where MRPL=$60, but not 5 workers where MRPL drops below the wage to $40.

Shark repellent is exchanged in a perfectly competitive market, and firms in this market hire labor in a perfectly competitive labor market. What effect in price of good cause employment in this industry to decrease?

The price of shark repellent decreases.

what happens in the market for labor if the wage rate increases?

The quantity of labor supplied increases; the quantity of labor demanded decreases

Assume that football teams keep all the "gate" and TV revenues they generate and that players are free to choose their teams at the end of any season. Do stars earn more than nonstars? How are the wages of each group determined?

The teams must offer a wage that keeps both nonstars and stars from taking an alternative offer (say, W'), but the employer will not pay above marginal revenue product of labor. Since stars attract more fans and TV viewers than nonstars, their wage will exceed those of nonstars because teams will bid more for their services. Nonstars will get at least W' or they wouldn't play, and their services are still necessary for the game.

If a firm hires labor in a perfectly competitive labor market. What change, for the industry, to workers would cause a firm to employ more workers and pay a higher wage?

There is an industry-wide improvement in worker productivity.

1985 1995 2014 Average wage $7.00 $10.00 $20.00 CPI (base 1995) 80 100 200 i. Assume 1995 is the base year, convert the nominal wages to constant dollar wages.

To convert the 1985 nominal wage to the real wage using 1995 as the base year, divide 1985 nominal wages by the CPI in 1985 and multiply by CPI in 1995. $7 /80 × 100 = $8.75 To convert the 2014 nominal wage to the real wage using 1995 as the base year, divide 2014 nominal wages by the CPI in 2014 and multiply by CPI in 1995. $20 /200 × 100 = $10 Real wage has remained unchanged between 1995 and 2014 in terms of 1995 dollars.

In principle, the government could impose separate minimum wages on distinct occupations. Suppose the government imposed a minimum wage of 20 percent over their respective market wages for ditch-diggers and university professors. Would this create greater (proportional) job losses among ditch-diggers or university professors? Explain. (In formulating your answer, consider the four Hicks-Marshall laws of derived demand.)

To determine how the minimum wage will affect each of these occupations, we need to evaluate their respective demand elasticities. According to the four Hicks-Marshall laws of derived demand, labor demand is more elastic when: i. The price elasticity of demand for the product produced is high (if the price of the product goes up a little, demand decreases a lot) ii. Other factors of production are easily substituted for the labor category (capital is a good replacement for labor) iii. The greater the supply elasticity of other factors of production (capital is relatively inexpensive) iv. The share of expenditure on labor is high (a wage increase has a big impact on marginal cost) Together these laws will determine the relative size of job losses. It can be argued that the demand elasticity for ditch diggers is more elastic than the demand elasticity for university professors because capital can more easily replace a ditch digger than a professor. If this is the case, then ditch diggers would experience greater proportional job losses than university professors given the 20% minimum wage increase.

Suppose the firm currently employs 500 workers and 100 units of capital and that the following relationship holds: MPL/W= 12/3=4 a nd MPK/C= 15/3=5. MPL and MPK are the marginal products of labor and capital, respectively. W is wage and C is the per unit cost of capital. Prove that the firm is not at an equilibrium mix of labor and capital by clearly explaining how there is an opportunity to produce more of the good it is producing now at the same cost.

To maximize profit in the long run, the firm must adjust both labor and capital so that the marginal revenue product of each equals its marginal expense.

If demand and supply are represented by the equations Demand: LD = 8 − (1/3)W Supply: LS = (1/2) W − 2 then the equilibrium wage (W* ) and employment level (L* ) will equal

W* = $12, L* = 4.

. Continue to assume that players are free to choose their teams, but assume now that teams agree to share all their gate and TV revenues equally (they put them into a "pool" and divide it equally among the team owners). What happens now to salaries of stars and nonstars?

When all teams pool revenues, individual teams no longer have the incentive to bid for a star player. The star's contribution to an individual team's revenues is diluted by a factor of 1/N (where N= number of teams) because any increased revenue generated by the star must be shared with all other teams. In fact, a star's contribution to an individual team's revenue could be zero - the extra fans attracted to watch his new team could be offset by the loss of fans caused by his departure from his old team. The net effect would be no change in the size of the total pool, so no increase (or decrease) in revenues of the new (old) team. Under these circumstances, stars and nonstars would get the same wage W'. Their wage would be the minimum required to get them to play football, but there would be no competition among the teams for their services and therefore no mechanism to bid wages above W'

Capital and labor are complementary in the production of a good. Assume factor markets are perfectly competitive. What would a decreases in the demand for labor do to price?

When the demand for the good decrease, the price of a the good decreases.

What change in demand for a good leads to an increase in wages and employment in the labor market?

an increase in the demand for the good that labor produces

After general training, the employee's wage will be

equal to his or her marginal product of labor.

What is likely to increase the supply of labor, regarding population?

immigration

Explain: As the cost of robots decreases, some workers may be displaced because of the substitution effect

labor will be replaced by capital. Types of workers that are most likely to be displaced include any job that can be automated. However, the scale effect may increase labor demand and improve market prospects for all workers. Employees who are complementary to the use of robots, including workers with skills to repair or program robots, will be in greater demand.

When a firm faces competition in the product market

the product price the firm receives can be treated as given. the firm can sell as much as it wants at the going price. the firm's marginal revenue equals the product price.

For two substitutes in production, if the substitution effect dominates

then the inputs are gross substitutes.

In a market where the wage is below the market clearing wage

there are labor shortages but no labor surpluses.

A monopsony market is one in which what happens, regarding buyer and sellers:

there is one buyer and many sellers.

What would be the effects of the following Repealing the prohibitions enables garment manufacturers to substitute home workers for factory workers. Assuming that the 1942 regulations were constraining, one can presume that there will be at least some substitution of home workers for factory workers;

this substitution will tend to shift the labor demand curve for factory workers to the left. However there may be a favorable scale effect for certain factory workers performing tasks (such as packaging and shipping) complementary with home production. Besides the shift to the left of the labor demand curve, the new substitution possibilities opened up by repealing the 1942 regulations should serve to make the labor demand curve for factory workers more elastic. Just as the greater ability to substitute capital for labor will tend to make the labor demand curve more elastic, so too will the ability to substitute home labor for factory workers.

in a perfectly competitive market that is currently in equilibrium, with labor being perfectly competitive . What happens to employment and wages in the labor market if the income of buyers increases?

wages increase; employment increases

If a firm offers specific training to its workers, when the training is over,

workers will most likely be paid a wage that is less than their marginal product at the firm. .

Suppose that the supply curve for school teachers is Ls = 20,000 + 350W and the demand curve for school teachers is Ld = 100,000 - 150W, where L = the number of teachers and W = the daily wage. Now suppose that at any given wage 20,000 more workers are willing to work as school teachers. Plot the new supply curve and find the new wage and employment level. Why doesn't employment grow by 20,000?

𝐿 ′ 𝑠 = 40000 + 350𝑤 𝐿𝑑 = 100000 − 150𝑤 𝐿 ′ 𝑠 = 𝐿𝑑 ⇒ 40000 + 350𝑤 = 100000 − 150𝑤 500𝑤 = 60000 𝑤 ∗ = 120 𝐿′𝑠 = 𝐿𝑑 = 82000

Suppose that the supply curve for school teachers is Ls = 20,000 + 350W and the demand curve for school teachers is Ld = 100,000 - 150W, where L = the number of teachers and W = the daily wage. Plot the demand and supply curves.

𝐿𝑠 = 20000 + 350𝑤 𝐿𝑑 = 100000 − 150w

The manager of the automated warehouse said he would need 1.5 workers to do the job of 1 robot. Using the definition of the marginal rate of substitution (holding output constant):

𝑀𝑅𝑇𝑆 = Δ𝐾 /Δ𝐿 | 𝑞=𝑞̅ = −1 1.5 = −0.67

The supply curve for window washers is LS = 5+4W, where L is the number of window washers, and W is the hourly wage. The demand curve for window washers is LD = 20-W. Graph the demand curve and the supply curve and determine the equilibrium wage and number of window washers working

𝑊 = 3 𝐿𝑠 = 𝐿𝑑 = 17. So, the equilibrium wage and number of window washers working respectively is 3 and 17