Labor Economics Midterm Review

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. ii. Assume 2014 is the base year, convert the nominal wages to constant dollar wages.

1985 1995 2014 Average wage $7.00 $10.00 $20.00 CPI (base 1995) 80 100 200 Ave. wage ($1995) $8.75 $10.00 $10.00 Ave. wage ($2014) $17.50 $20.00 $20.00

If the firm hires to a point where marginal expense of labor is less than the marginal revenue product of labor, then A) profits could be increased by increasing employment. B) profits could be increased by reducing employment. C) profits are maximized. D) total cost must be greater than total revenue.

A if MRPL> MEL (W) we have to decrease MRPL for it to be maximized. One way to do this is by increasing labor until MRPL = MEL (W).

2. If the price of capital decreases in an industry and the scale effect dominates, A) wages and employment levels will both increase. B) wages and employment levels will both decrease. C) wages will increase and employment levels will decrease, D) wages will decrease and employment levels will increase.

A, (PUT WHY)

If the salaries of college professors decrease and other conditions remain the same, then A) the labor demand curve for college professors will shift to the left. B) the labor demand curve for college professors will shift to the right. C) a college will move to the left along its labor demand curve for college professors. D) a college will move to the right along its labor demand curve for college professors.

D, the salary decrease is a change in wages or labor input prices and therefore will result in a movement along the demand curve. Because salary decreasing, this will result in an increase in quantity labor demanded which is a rightward movement ALONG the demand curve.

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?

For those who are unemployed when the labor market is described as "tight" they will be able to find work quickly. However, when the labor market is "loose" there are more workers than there are jobs. For a worker who has become discouraged, this indicates that the market is loose.

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?

MPRL = 20-L , W = $5.00 MPRL = W 20 - L = 5 L = 15

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.

Normative because it is not entered into involuntarily, they are being compelled.

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

Normative, because this would be categorized as redistribution of income. The employers would have added income at the expense of its worker

Indentured servitude is no longer legal. An indenture was a contract binding a person to work for another for a given length of time (usually for many years), as an apprentice to a master or an immigrant to service in a colony. Such a relationship was a way for a poor but ambitious person to immigrate to a more prosperous country. The period of servitude, however, was harsh, and the penalty for breaking the contract extreme (imprisonment or worse). Evaluate the law prohibiting such contracts with respect to the concept of pareto efficiency.

Pareto efficiency describes a market where the transactions are mutually beneficial to the parties involved. The relationship between the indentured servants and their master would be considered pareto efficient because both individuals would be better off after the transaction. The indentured servant would have work experience and the master would receive labors. Laws that prohibits this transactions creates the scenario where the master loses free labor, and the indentured servants are unable to find work. Therefore the law would not be pareto-improving.

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

Positive because it suggests scarcity among military personnel

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.

Positive, because it showing that because there a favorable incentive of higher wages.

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.

Positive, because it showing that the workers would respond to favorably incentives such as the pension program.

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.

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.

The unemployment rate can be a good indication of the economy however, it has it problems as well. A low unemployment rate indicates that there is job growth, but this might not necessarily be true. For example in problem 2a a discouraged worker who leaves the workforce because they are unable to find a job will result in a low unemployment rate which can be a false indicator of job growth. If the unemployment rate increases then this suggest that job loss is increasing, however this can also indicate discouraged workers entering the labor force because firms are hiring. Therefore, the unemployment rate is a better prediction of the economy in the long-run.

Suppose the firm currently employs 500 workers and 100 units of capital and that the following relationship holds: MPL/W= 12/3=4 and 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. Profit maximization requires that the following two equalities be satisfied: 𝑀𝑃𝐿∙ 𝑃 = 𝑊 or 𝑃 =𝑊/𝑀𝑃𝐿 𝑀𝑃𝐾 ∙ 𝑃 = 𝐶 or 𝑃 =𝐶/𝑀𝑃𝐾 Hence, 𝑃 = 𝐶/𝑀𝑃𝐾=𝑊/𝑀𝑃𝐿 In this problem 𝐶/𝑀𝑃𝐾 ≠ 𝑊/𝑀𝑃𝐿. So, the firm is not at an equilibrium mix of labor and capital. 𝑊/𝑀𝑃𝐿 is the added cost of producing an added unit of output when using labor to generate the increase in output. Analogously, 𝐶/𝑀𝑃𝐾 is the marginal cost of producing an extra unit of output using capital. Here 𝑊/𝑀𝑃𝐿=3/12 = 0.25 and 𝐶/𝑀𝑃𝐾= 3/15 = 0.2. In other words, because the marginal cost of expanding output by one unit using labor is $0.25, and the marginal cost using capital is $0.2, the firm could keep output constant and lower its costs of production. It could reduce its labor by enough to cut output by one unit (saving $0.25) and then add enough capital to restore the one unit cut (costing $0.20). Output would be the same, but costs would have fallen by $0.05. Thus, for the firm to be maximizing profits, it must be operating at the point such that further marginal changes in both labor and capital would neither lower costs nor add to profits.

What happens to the unemployment rate when an unemployed worker drops out of the labor force?

When an unemployed worker drops out of the labor force this suggests that the unemployment rate decreases.

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. 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?

When the government imposes $5.00 tax on the employers of window washers, the employers cost then changes to Wo + 5. The increase in wage would cause a decrease in labor demand because firms will not want to pay employees at wage = Wo + 5. The demand curve will shift to the left creating a new equilibrium wage below the original equilibrium wage. This will result in decrease in the number of window washers. The employers will receive the new equilibrium wage W' which is $2.00. However, the employers pay the new equilibrium wage in addition to the new tax imposition of $5.00, therefore, the employers pay $7.00. The government receives the amount employees ( 13) times the tax imposition (5). In total the government receives $65.00 in revenue. 𝐿𝑑 = 20 − 𝑊 and 𝐿𝑠 = 5 + 4𝑊, 20 − 𝑊 = 5 + 4𝑊. Solving for W: 𝑊 = 3 𝐿𝑑′ = 20 − (5 + 𝑊), 𝐿𝑑′ = 15 − 𝑊. 20 − (5 + 𝑊) = 5 + 4W

Use the table below to answer the following 3 questions. 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 which employee? Suppose a pot sells for $20 each. What is the marginal revenue product of labor of the second worker? If wages are $50 per day and pots sell for $20 each, how many potters will the firm hire? Assuming pots are $20 each, graph the labor demand curve (in current dollars).

a. Diminishing marginal returns begins with the 3rd employee b. If a pot sells for $20, the marginal revenue product of labor for the second worker is: $20 ∗ (13 − 6) = $140 c. 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.

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. a. Plot the demand and supply curves. b. What are the equilibrium wage and employment level in this market? c. 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?

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