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eoc13Economics

Economics

OCC - ECON 101

4_US ECONOMY

eoc13

CHAPTER 1 - M/C

CHAPTER 1 - M/C

(SET2)

CHAPTER 1 PROBLEMS

CHAPTER 1 SOLUTIONS

CHAPTER 1 - T/F

CHAPTER 1 - T/F (SET2)

CHAPTER 10

CHAPTER 10

CHAPTER 11

CHAPTER 11

CHAPTER 12

CHAPTER 12

CHAPTER 13

CHAPTER 13

CHAPTER 14

CHAPTER 14

CHAPTER 15

CHAPTER 15

CHAPTER 16

CHAPTER 16

CHAPTER 17

CHAPTER 17

CHAPTER 18

CHAPTER 18

CHAPTER 19

CHAPTER 19

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QUESTIONS

1. Explain why the general level of wages is

high in the United States and other industrially

advanced countries. What is the single most

important factor underlying the longrun

increase in average realwage rates in the

United States? LO1

Answer: The general level of wages

is higher in the United States and

other industrially advanced nations

because of the high demand for

labor in relation to supply. Labor

productivity is high in the U.S and

other industrially advanced

countries because: (1) capital per

worker is very high; (2) natural

resources are abundant relative to

the size of the labor force

particularly in the U.S.; (3)

technology is advanced in the

United States and other industrially

advanced countries relative to much

of the rest of the world; (4) labor

quality is high because of health,

vigor, training, and work attitudes;

(5) other factors contributing to high

American productivity are the

efficiency and flexibility of American

management; the business, social,

and political environment that

greatly emphasizes production and

productivity; and the vast domestic

market, which facilitates the gaining

of economies of scale.

2. Why is a firm in a purely competitive labor

market a wage taker? What would happen if it

decided to pay less than the going market

wage rate? LO2

Answer: A firm in a purely

competitive labor market is a wage

taker because there are a large

number of firms wanting to buy the

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eoc13Economics

CHAPTER 2 - MARKET

SYSTEM

CHAPTER 2 - MARKET

SYSTEM

result, the individual firm has no

CHAPTER 2 - MARKET

SYSTEM (PROBS/ANS)

CHAPTER 2 - MARKET

SYSTEM (SET 2)

CHAPTER 2 MULTIPLE/CHOICE (SET

2)

CHAPTER 2 PROBLEMS

CHAPTER 20

CHAPTER 20

CHAPTER 20

CHAPTER 21

CHAPTER 21

CHAPTER 21

CHAPTER 22

CHAPTER 22

CHAPTER 22

CHAPTER 23 (37)

CHAPTER 26

CHAPTER 27

CHAPTER 28

CHAPTER 29

CHAPTER 3

CHAPTER 3 - DEMAND

& SUPPLY

CHAPTER 3 - SET2

CHAPTER 3 - T/F

CHAPTER 30

CHAPTER 31

CHAPTER 32

CHAPTER 33

CHAPTER 34

CHAPTER 35

CHAPTER 35

CHAPTER 36

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workers with identical skills wanting

If a firm attempted to pay a wage

below the going wage, no workers

would offer their services to that

firm.

3. Describe wage determination in a labor

market in which workers are unorganized and

many firms actively compete for the services

of labor. Show this situation graphically, using

W1 to indicate the equilibrium wage rate and

Q1 to show the number of workers hired by

the firms as a group. Show the labor supply

curve of the individual firm, and compare it

with that of the total market. Why the

differences? In the diagram representing the

firm, identify total revenue, total wage cost,

and revenue available for the payment of nonlabor resources. LO2

Answer: The labor market is

made up of many firms desiring to

purchase a particular labor service

and of many workers with that labor

service. The market demand curve

is downward sloping because of

diminishing returns and the market

supply curve is upward sloping

because a higher wage will be

necessary to attract additional

workers into the market. Whereas

the individual firms supply curve is

perfectly elastic because it can hire

any number of workers at the going

wage, the market supply curve is

upward sloping.

For the graphs, see Figure

13.3 and its legend.

question 3 form an employers association

that hires labor as a monopsonist would.

Describe verbally the effect on wage rates and

employment. Adjust the graph you drew for

question 3, showing the monopsonistic wage

rate and employment level as W2 and Q2,

respectively. Using this monopsony model,

explain why hospital administrators

sometimes complain about a shortage of

nurses. How might such a shortage be

corrected? LO3

Answer: The equilibrium

wage in the monopsonistic market

declines from the competitive

markets Wl rate to W2. The

employment level in this market will

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eoc13Economics

CHAPTER 36

CHAPTER 37

CHAPTER 37

CHAPTER 38

CHAPTER 38

CHAPTER 39

13.4 (wage falls from Wc to Wm and

the employment level falls from Qc

to Qm).

If there are only one or two

hospitals in an area, there exists a

monopsonistic market for nurses.

Their wages would be less than

those for nurses where there is

CHAPTER 39

CHAPTER 4

CHAPTER 4

more nurses at a wage W2, they

view the difference between Q3 and

CHAPTER 5

CHAPTER 5

CHAPTER 5

voluntarily. The hospital

administrator might offer a higher

CHAPTER 5 - SET2

CHAPTER 6

CHAPTER 6

CHAPTER 7

demand higher wages. This would

allow nurses to earn wages closer to

their MRP and as wages rise toward

W1, the shortage would disappear.

CHAPTER 7

CHAPTER 8

CHAPTER 8

CHAPTER 9

CHAPTER 9

MC23A

a wage rate of Wm and hiring Qm workers, as

indicated in Figure 13.8. Now suppose an

industrial union is formed that forces the

employer to accept a wage rate of Wc. Explain

verbally and graphically why in this instance

the higher wage rate will be accompanied by

an increase in the number of workers hired.

LO4

MC38A

MC6A

MC6AA

SOL10

Each unit of labor now adds only its

own wage rate to the firms costs.

SOL8

TF1

TF2

Qm workers it would employ if

there were no union and if the

TF4

TF5

TF5

TF5

TF5

TF6

TF6

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services when the wage is Wc than

Wm.

6. Have you ever worked for the minimum

wage? If so, for how long? Would you favor

increasing the minimum wage by a dollar? By

two dollars? By five dollars? Explain your

reasoning. LO5

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TF6

vary. Those students that have

TF6

CHAPTER 1

CHAPTER 10

long, and would probably describe

their performance and that of their

co-workers as relatively

CHAPTER 10

CHAPTER 10

CHAPTER 10

CHAPTER 10

as their perception of how much

employment would be lost versus

the income gains of those retaining

employment.

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CHAPTER 11

CHAPTER 11

CHAPTER 11

CHAPTER 11

CHAPTER 12

CHAPTER 12

CHAPTER 12

CHAPTER 12

CHAPTER 13

CHAPTER 13

CHAPTER 13

CHAPTER 13

CHAPTER 13

CHAPTER 14

CHAPTER 14

CHAPTER 14

CHAPTER 14

CHAPTER 15

CHAPTER 15

CHAPTER 15

CHAPTER 15

CHAPTER 16

CHAPTER 16

CHAPTER 16

CHAPTER 16

CHAPTER 17

CHAPTER 17

CHAPTER 17

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for example, shortorder cooks also have

relatively poor working conditions. Hence, the

notion of compensating wage differentials is

disproved. Do you agree? Explain. LO5

Answer: Shortorder cooks

generally need few specific skills,

i.e., practically anyone is thought to

be capable of flipping burgers.

Since the supply of unskilled

workers is high relative to the

demand for them, their wages are

low. In this case, the concept of

compensating wage differentials is

swamped by the excess supply of

lowwage workers.

8. What is meant by investment in human

capital? Use this concept to explain (a) wage

differentials and (b) the longrun rise of real

wage rates in the United States. LO5

Answer: Investment in

human capital is educational activity

that

improves

individual

productivity

(a) Wage differentials are

explainable to some extent

through the concept of human

capital investment. There is a

strong positive correlation

between time spent acquiring

a formal education and

lifetime earnings. Of course, it

can be said that the brain

surgeon who spent over

twenty years in training,

starting in grade 1, had the

qualities to succeed in the

labor market without spending

over twenty years in school.

Though this counter-argument

has some merit, the point still

is that this highly-skilled

individual would never have

become a brain surgeon

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CHAPTER 17

in school and might not have

CHAPTER 18

CHAPTER 18

medical specialist.

CHAPTER 18

CHAPTER 18

is positively correlated to

CHAPTER 19

investment in human capital.

Without the increase in

CHAPTER 19

CHAPTER 19

CHAPTER 19

CHAPTER 2

CHAPTER 20

CHAPTER 20

CHAPTER 20

CHAPTER 20

CHAPTER 21

CHAPTER 21

CHAPTER 21

CHAPTER 21

CHAPTER 22

CHAPTER 22

CHAPTER 22

CHAPTER 22

CHAPTER 23

CHAPTER 23

CHAPTER 23

CHAPTER 23

CHAPTER 23

CHAPTER 24

CHAPTER 24

CHAPTER 24

CHAPTER 24

CHAPTER 24

CHAPTER 25

CHAPTER 25

CHAPTER 25

productivity (output per

have risen because of the

investment in real capital,

improved technology, and our

abundant natural resource

base. But the real wage would

undoubtedly now be very

much lower, because an

unskilled labor force could not

possibly have made efficient

use of the material resources

and advancing technology of

the economy.

9. What is the principalagent problem? Have

you ever worked in a setting where this

problem has arisen? If so, do you think

increased monitoring would have eliminated

the problem? Why dont firms simply hire

more supervisors to eliminate shirking? LO6

Answer: Business owners

who hire workers because they are

needed to help produce the goods

or services of the firm face the

dilemma of the principal-agent

problem. Workers are the agents;

they are hired to promote the

interests of the firm's owners (the

principals). Owners and workers

both have a common goal in the

survival of the firm, but their

interests are not identical. A

principal- agent problem arises

when those interests diverge.

Workers may seek to increase their

utility by shirking their

responsibilities and providing less

than the agreed upon effort.

Owners of firms have a profit

incentive to reduce or eliminate

shirking. Hiring more supervisory

personnel can be costly and there is

no guarantee that it will eliminate

the problem.

CHAPTER 25

CHAPTER 25

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high pay to CEOs is economically justified?

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CHAPTER 26

CHAPTER 26

CHAPTER 26

CHAPTER 26

CHAPTER 27

productivity. High pay provides an

incentive not only for current CEOs,

CHAPTER 27

CHAPTER 27

CHAPTER 27

necessary, they are excessive

relative to the productivity

CHAPTER 28

CHAPTER 28

CHAPTER 28

CHAPTER 28

CHAPTER 29

CHAPTER 29

CHAPTER 29

CHAPTER 3

CHAPTER 3

CHAPTER 3

CHAPTER 30

CHAPTER 30

CHAPTER 30

CHAPTER 31

CHAPTER 31

CHAPTER 31

CHAPTER 32

CHAPTER 32

CHAPTER 32

CHAPTER 33

CHAPTER 33

CHAPTER 33

CHAPTER 33

CHAPTER 34

CHAPTER 34

CHAPTER 34

CHAPTER 35

CHAPTER 35

CHAPTER 35

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PROBLEMS

1. Workers are compensated by firms with

benefits in addition to wages and salaries.

The most prominent benefit offered by many

firms is health insurance. Suppose that in

2000 workers at one steel plant were paid $20

per hour and in addition received health

benefits at the rate of $4 per hour. Also

suppose that by 2010 workers at that plant

were paid $21 per hour but received $9 in

health insurance benefits. LO1

a. By what percentage did total compensation

(wages plus benefits) change at this plant from

2000 to 2010? What was the approximate

average annual percentage change in total

compensation?

b. By what percentage did wages change at

this plant from 2000 to 2010? What was the

approximate average annual percentage

change in wages?

c. If workers value a dollar of health benefits

as much as they value a dollar of wages, by

what total percentage will they feel that their

incomes have risen over this time period?

What if they only consider wages when

calculating their incomes?

d. Is it possible for workers to feel as though

their wages are stagnating even if total

compensation is rising?

Answers: (a) Total compensation rose from

$24 in 2000 to $30 in 2010. This is a 25%

increase. Dividing that number by 10 we

see that the average annual growth rate

was approximately 2.5% per year. (b)

Wages went up by 5% over this time period

(= $1/$20). Dividing that number by the

number of years (10), we see that the

approximate average annual growth rate

of total compensation was 0.5% per year.

(c) If workers value health benefits as much

as wages, then they will feel that their

incomes have risen by 25%. If they exclude

health benefits and focus only on wages,

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CHAPTER 36

CHAPTER 36

part c.

CHAPTER 37

CHAPTER 37

example: Suppose that in 2000

workers at one steel plant were paid

CHAPTER 37

CHAPTER 37

CHAPTER 38

2010 workers at that plant were

paid $21 per hour but received $9 in

CHAPTER 38

CHAPTER 39

Part a:

CHAPTER 39

CHAPTER 39

CHAPTER 4

CHAPTER 4

CHAPTER 4

CHAPTER 5

benefits)) and in 2010 total

compensation is $30 (=$21 + $9).

The percentage increase in total

compensation is (30-24)/24 = 6/24 =

0.25 (or 25%). This implies the

approximate average annual

percentage change in total

compensation is 0.25/10 = 0.025 (or

2.5%).

CHAPTER 5

CHAPTER 5

CHAPTER 6

CHAPTER 6

CHAPTER 6

CHAPTER 6

CHAPTER 7

CHAPTER 7

CHAPTER 7

CHAPTER 7

CHAPTER 7

CHAPTER 8

CHAPTER 8

CHAPTER 8

CHAPTER 8

CHAPTER 9

CHAPTER 9

Part b:

The percentage increase in wages

alone is (21-20)/20 = 1/20 = 0.05 (or

5%). This implies the approximate

average annual percentage change

in wages is 0.05/10 = 0.005 (or

0.5%).

Part c:

If workers value a dollar of health

benefits as much as they value a

dollar of wages, they feel that their

incomes have risen by 25% (part a)

over this time period.

If they only consider wages when

calculating their incomes they feel

that their incomes have risen by 5%

(part b) over this time period.

Part d:

Yes, if workers only look at their

wages they may feel as if their

wages are stagnating.

2. Complete the following labor supply table

for a firm hiring labor competitively:

LO2

CHAPTER 9

CHAPTER 9

CHAPTER 9

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EOC3

marginal resource (labor) cost curves for this

firm. Are the curves the same or different? If

they are different, which one is higher?

b. Plot the labor demand data of question 2 in

Chapter 12 on the graph used in part a above.

What are the equilibrium wage rate and level

of employment?

Answers: (a) The supply curve and the MRC

are the same.

EOC35

EOC36

EOC37

Units

of

labor

Wage

Rate

Total

labor

cost

Marginal

resource

(labor)

cost

EOC38

EOC39

0

1

2

3

4

5

6

EOC4

EOC5

EOC6

EOC7

$14

14

14

14

14

14

14

$0

14

28

42

56

70

84

$14

14

14

14

14

14

EOC7

EOC8

EOC9

EOC9

ESS1

ESS10

ESS11

ESS12

ESS13

ESS14

ESS15

ESS16

ESS17

(b)

ESS17

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ESS18

ESS19

ESS2

ESS20

ESS21

ESS22

ESS23

ESS23

ESS23

ESS23

ESS24

ESS25

ESS26

ESS27

level of employment = 5 units of labor.

ESS27

example (Table):

ESS28

ESS29

ESS3

ESS30

ESS31

ESS31

ESS32

ESS33

ESS34

ESS35

ESS36

ESS37

ESS38

MRC curve coincide as a single

horizontal line at the market

wage rate of $14. The firm can

employ as much labor as it

wants, each unit costing $14;

wage rate = MRC because the

wage rate is constant to the

firm.

ESS39

ESS4

ESS5

ESS6

ESS7

ESS8

ESS9

Units

of

labor

Wage

Rate

Total

labor

cost

Marginal

resource

(labor)

cost

ESSAY1

ESSAY2

0

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$14

$0

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ESSAY2

14

14

$14

14

28

14

ESSAY3

14

42

14

INFO1

14

56

14

14

70

14

14

84

14

INFO10

INFO11

INFO12

INFO13

INFO14

INFO15

INFO16

INFO17

INFO18

INFO19

INFO2

INFO20

INFO21

the intersection of the MRP

and MRC curves. Equilibrium

wage rate = $14; equilibrium

level of employment = 5 units

of labor. From the tables:

MRP exceeds MRC for each of

the first four units of labor, but

MRP is less than MRC for the

fifth unit.

INFO22

INFO23

INFO23

INFO24

INFO25

INFO26

INFO27

12:

INFO28

INFO29

INFO3

INFO30

INFO31

Units

of

labor

Total

product

Marginal

product

Product

price

Total

revenue

Marginal

revenue

product

INFO32

INFO33

INFO34

INFO35

INFO36

INFO37

0

1

2

3

4

5

6

0

17

31

43

53

60

65

17

14

12

10

7

5

$2

2

2

2

2

2

2

$0

34

62

86

106

120

130

$34

28

24

20

14

10

INFO38

INFO39

INFO4

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hire its first worker for $6 but must increase

the wage rate by $3 to attract each successive

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INFO5

INFO6

INFO7

INFO8

resource cost curves. Are the curves the same

higher?

b. On the same graph, plot the labor demand

INFO9

MC15A

employment?

c. Compare these answers with those you

MC34A

MC36A

MC38A

MC6A

MC6A

MC8A

P1

competitive level?

Answers: (a) Graph: (approximate shape

below. Also note that the discreet nature of

the problem requires that the marginal

revenue product (MRP) be greater than or

equal to the marginal resource cost (MRC)):

QUIZ1

QUIZ10

QUIZ11

QUIZ12

QUIZ13

QUIZ14

QUIZ15

QUIZ16

QUIZ17

QUIZ18

QUIZ19

QUIZ2

QUIZ20

QUIZ21

QUIZ22

QUIZ23

QUIZ24

QUIZ25

QUIZ26

QUIZ27

QUIZ28

QUIZ29

QUIZ3

QUIZ30

higher than the labor supply curve.

(b) The firm will employ three workers in

this situation. Here the MRP = $24 is

greater than the MRC = $18. For the fourth

worker the MRP = $20 and the MRC = $24.

(c) The monopsonist reduces the wage by

$2 (from $14 to $12) and reduces

employment by two workers (from 5 to 3).

Feedback: Consider the following

example: Assume a firm is a

monopsonist that can hire its first

worker for $6 but must increase the

wage rate by $3 to attract each

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QUIZ31

second worker must be paid $9, the

QUIZ32

QUIZ33

Parts a and b:

Table for part a and table for part b

QUIZ34

problem 2 above).

QUIZ35

QUIZ36

QUIZ37

Units

of

Wage

Rate

labor

QUIZ38

Total

Marginal

labor

cost

resource

(labor)

(wage

bill)

cost

QUIZ39

QUIZ4

0

1

$NA

6

$0

6

QUIZ6

2

3

9

12

18

36

QUIZ7

4

5

15

18

60

90

21

126

QUIZ5

QUIZ8

$6

12

18

24

30

36

QUIZ9

TF1

TF10

TF11

TF12

TF13

Units

of

labor

Marginal

Total

product

Marginal

product

Product

price

Total

revenue

revenue

product

TF14

TF15

TF16

TF17

TF18

TF19

$2

$0

1

2

17

31

17

14

2

2

34

62

3

4

43

53

12

10

2

2

86

106

5

6

60

65

7

5

2

2

120

130

TF2

$34

28

24

20

14

10

TF2

TF20

TF21

TF22

TF23

Also note that the discreet nature of

the problem requires that the

marginal revenue product (MRP) be

greater than or equal to the

marginal resource cost (MRC)).

TF24

TF25

TF26

TF27

TF28

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TF29

TF29

TF3

TF3

TF30

TF31

TF31

TF32

TF33

TF34

TF35

TF36

TF37

TF38

TF39

TF39

TF39

labor supply schedule because

employing the next worker requires

a higher wage in this market and

you must pay all workers this higher

wage.

TF4

TF4

TF4

TF5

in this situation. To see this look at

the MRP and MRC columns in the

table above. The first worker will

TF5

a MRC = $6, thus the firm will

TF6

revenue product for this worker is

TF7

cost). For the second worker we

TF8

we employ this worker. For the third

TF9

SITEMAP

greater than the MRC = $18, so we

employ this worker as well. For the

fourth worker we have MRP = $20

and the MRC = $24. In this case the

marginal cost of this worker is

greater than the worker's marginal

revenue product, so we do not

employ this worker.

Part c: The monopsonist decreases

employment by 2 units and the

equilibrium wage rate is $2 less

than the competitive wage.

4. Suppose that lowskilled workers employed

in clearing woodland can each clear one acre

per month if they are each equipped with a

shovel, a machete, and a chainsaw. Clearing

one acre brings in $1000 in revenue. Each

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employer $150 per month to rent and each

worker toils 40 hours per week for four weeks

each month. LO4

a. What is the marginal revenue product of

hiring one lowskilled worker to clear

woodland for one month?

b. How much revenue per hour does each

worker bring in?

c. If the minimum wage were $6.20, would the

revenue per hour in part b exceed the

minimum wage? If so, by how much per hour?

d. Now consider the employers total costs.

These include the equipment costs as well as a

normal profit of $50 per acre. If the firm pays

workers the minimum wage of $6.20 per hour,

what will the firms economic profit or loss be

per acre?

e. At what value would the minimum wage

have to be set so that the firm would make

zero economic profit from employing an

additional lowskilled worker to clear

woodland?

Answers: (a) $1000. (b) $6.25 (= $1000/160

hours). (c) Yes, exceeds by $0.05 per hour.

(d) The firms loss per acre will be -192.00

dollars (= $1000 in revenue - $150 in rental

cost for equipment - $50 in normal profit $992 in wages for 160 hours at $6.20 per

hour). (e) If X is the firms labor cost per

worker for one month to clear one acre,

then we need $1000 - $150 - $50 X = 0.

Solving this equation for X yields X = $800.

Dividing X by 160 hours yields a minimum

wage of $5 per hour as what would be

needed for the firm to earn zero profit.

Feedback: Consider the following

example. Clearing one acre brings in

$1000 in revenue. Each workers

equipment costs the workers

employer $150 per month to rent

and each worker toils 40 hours per

week for four weeks each month.

Part a: The marginal revenue is

$1000. This is the revenue each

worker can generate for the firm by

clearing one acre.

Part b: Since the worker generates

$1000 per month and works a total

of 160 hours (40 hours per week for

4 weeks), revenue per hour equals

$6.25 (= $1000/160).

Part c: If the minimum wage were

$6.20, revenue per hour in part b

exceeds the minimum wage by 5

cents per hour (=$6.25-$6.20).

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equipment costs as well as a normal

profit of $50 per acre. The total

explicit cost for the firm per acre

equals $150. Thus, the economic

profit per worker at the minimum

wage equals $1000 (revenue) - $150

(explicit cost) - $50 (normal profit) 160x$6.20 (hour of labor multiplied

by the minimum wage = $992) = $192. The firm suffers a loss per

acre.

Part e: To determine the minimum

wage necessary for the firm to

break-even (earn zero economic

profit, we first calculate the revenue

left over for labor after accounting

for normal profit and explicit cost.

The revenue left over after these

components have been removed is

$800 (=$1000 - $150 -$50). This

leaves $800 left to pay each unit of

labor for the month (clears one

acre). Since each worker works 160

hours a month, the highest the

break-even wage can be is $5

(=$800/160). This is the highest the

minimum wage can be set in the

industry without exit.

if efficiency wages will help improve its

salespeoples productivity. Currently, each

salesperson sells an average of one car per

day while being paid $20 per hour for an

eighthour day. LO6

a. What is the current labor cost per car sold?

b. Suppose that when the dealer raises the

price of labor to $30 per hour the average

number of cars sold by a salesperson

increases to two per day. What is now the

labor cost per car sold? By how much is it

higher or lower than it was before? Has the

efficiency of labor expenditures by the firm

(cars sold per dollar of wages paid to

salespeople) increased or decreased?

c. Suppose that if the wage is raised a second

time to $40 per hour the number of cars sold

rises to an average of 2.5 per day. What is now

the labor cost per car sold?

d. If the firms goal is to maximize the

efficiency of its labor expenditures, which of

the three hourly salary rates should it use: $20

per hour, $30 per hour, or $40 per hour?

e. By contrast, which salary maximizes the

productivity of the car dealers workers (cars

sold per worker per day)?

less per vehicle; increased. (c) $128 per

vehicle. (d) $30 per hour (e) $40 per hour.

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per car is $160 (= $20 per hour

times eight hours per day divided by

1 car sold per day on average). (b)

The labor cost per hour falls to $120

per vehicle. It is now $40 less per

vehicle. Efficiency has increased. (c)

The labor cost per car is now $128

per vehicle. (d) The dealer should

pay $30 per hour if it wants to

maximize the efficiency of labor

expenditures. (e) If the dealer wants

to maximize output per worker per

day, it should pay $40 per hour.

APPENDIXQUESTIONS

1.Whichindustriesandoccupationshavethehighest

ratesofunionization?Whichthelowest?Speculateon

thereasonsforsuchlargedifferences.LO7

that government and transportation

are the two highest by industry.

Figure 1b shows that teachers and

protective services are the two

highest by occupation. These figures

also show that the two lowest

unionization rates are Finance and

Agriculture (industry) and Managers

and Sales Workers (occupation).

2.Whatpercentageofwageandsalaryworkersare

unionmembers?Isthispercentagehigher,orisit

lower,thaninpreviousdecades?Whichofthefactors

explainingthetrenddoyouthinkismostdominant?

LO7

or 12.3 percent. This is lower than in

past decades. Potential answers:

structural changes in economy

(movement

away

from

manufacturing

in

the

U.S.),

Consumer demand for foreign

goods,

and

managerial

an

increase

opposition

in

to

unionization.

3.Supposethatyouarepresidentofanewly

establishedlocalunionabouttobargainwithan

employerforthefirsttime.Listthebasicareasyou

wantcoveredintheworkagreement.Whymightyou

beginwithalargerwagedemandthanyouactuallyare

willingtoaccept?Whatisthelogicofaunion

threateninganemployerwithastrikeduringthe

collectivebargainingprocess?Ofanemployer

threateningtheunionwithalockout?Whatistherole

ofthedeadlineinencouragingagreementincollective

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bargaining?LO7

in a work agreement:

1. Wage rates with automatic

increases over time, preferably

in the form of a costofliving

adjustment

2.

Regulations governing

employees are entitled to paid

vacation time and the choice to

engage in overtime work at a

substantial premium

3.

A liberal fringebenefits

package provided by the firm,

including pension plans, health

care,

and

job

security

provisions

4.

Rules

governing

promotions, layoffs and recalls

that are based on worker

seniority

5.

A stipulated grievance

union participation in rulings.

6. A provision that requires all

worker to join or monetarily

support the union.

Asking for a higher-thanexpected wage increase is a tactical

decision. The law requires that

bargaining must occur. The higherthan-expected-wage demand allows

for the give-and-take of bargaining

and for compromises in other areas

of the initial proposal. The union

may threaten a strike if it thinks its

demands are not being met. The

deadline forces negotiation.

4.Explainhowfeatherbeddingandotherrestrictive

workpracticescanreducelaborproductivity.Why

mightstrikesreducetheeconomysoutputlessthan

thelossofproductionbythestruckfirms?LO7

may block the introduction of

output increasing machinery and

equipment. Seniority rules may also

reduce productivity by placing less

effective

workers

in

certain

positions. Firms not impacted by the

strike may increase their output

5.Whatistheestimatedsizeoftheunionwage

advantage?Howmightthisadvantagediminishthe

efficiencywithwhichlaborresourcesareallocatedin

theeconomy?Normally,laborresourcesofequal

potentialproductivityflowfromlowwage

employmenttohighwageemployment.Whydoes

thatnothappentoclosetheunionwageadvantage?

LO7

Answer: Fifteen percent. The

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reduce

employment,

displace

workers, and increase the marginal

revenue product in the union

sector. Labor supply increases in

the nonunionized sector, reducing

wages and decreasing marginal

revenue product there. Because of

the lower nonunion marginal

revenue product, the workers

added in the nonunion sector

contribute less to GDP than they

would have in the unionized sector.

The

gain

of

GDP

in

the

nonunionized sector does not offset

the loss of GDP in the unionized

sector so there is an overall

efficiency loss. The union also

restricts employment to ensure this

gap is not eliminated.

6. Contrast the voice mechanism and the exit

mechanism for communicating dissatisfaction.

In what two ways do labor unions reduce

labor turnover? How might such reductions

increase productivity? LO7

Answer: The voice mechanism lets

the employer know dissatisfaction is

present through communication,

whereas the exit mechanism signals

dissatisfaction by workers quitting

their jobs. Increasing the desirability

of the job and maintaining a

significant wage gap. This may

increase productivity because less

training is required and experience

is accumulated.

APPENDIX PROBLEMS

1. Suppose that a delivery company currently

uses one employee per vehicle to deliver

packages. Each driver delivers 50 packages per

day, and the firm charges $20 per package for

delivery. LO7

a. What is the MRP per driver per day?

b. Now suppose that a union forces the

company to place a supervisor in each vehicle

at a cost of $300 per supervisor per day. The

presence of the supervisor causes the number

of packages delivered per vehicle per day to

rise to 60 packages per day. What is the MRP

per supervisor per day? By how much per

vehicle per day do firm profits fall after

supervisors are introduced?

c. How many packages per day would each

vehicle have to deliver in order to maintain the

firms profit per vehicle after supervisors are

introduced?

d. Suppose that the number of packages

delivered per day cannot be increased (only 50

are delivered) but that the price per delivery

might potentially be raised. What price would

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order to maintain the firms profit per vehicle

after supervisors are introduced?

Answers: (a) Each drivers MRP is $1000 per

day.

(b) The MRP here is $200 per day. Firm

profits will fall by $100 per vehicle per day.

(c) 65

Feedback: Consider the following

example. Suppose that a delivery

company currently uses one

employee per vehicle to deliver

packages. Each driver delivers 50

packages per day, and the firm

charges $20 per package for

delivery.

Part a:

a. What is the MRP per driver per

day?

To find the marginal revenue

product (MRP) for each driver

multiply the number of packages

the driver delivers by the cost (price)

of each package delivered.

MRP = number of packages x price =

50 x $20 = $1000

Part b:

b. Now suppose that a union forces

the company to place a supervisor

in each vehicle at a cost of $300 per

supervisor per day. The presence of

the supervisor causes the number

of packages delivered per vehicle

per day to rise to 60 packages per

day. What is the MRP per supervisor

per day? By how much per vehicle

per day do firm profits fall after

supervisors are introduced?

By placing a supervisor in each truck

the total number of packages

delivered increases from 50 to 60

per truck. This implies that the

addition of the supervisor increases

deliveries by 10 units.

The additional revenue the

supervisor generates, the marginal

revenue product of the supervisor

(MRP), is $200.

MRP supervisor = 10 (additional

units) x $20 (price) = $200

Since the supervisor increases the

firm's cost by $300 per vehicle and

only generates $200 in additional

revenue the firm's profits will fall by

$100 per vehicle (= $200 (revenue) $300 (cost)).

Part c:

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would each vehicle have to deliver

in order to maintain the firms profit

per vehicle after supervisors are

introduced?

By adding the supervisor to the

vehicle, the company will need to

generate $300 in additional revenue

to cover the additional cost. This

implies that each vehicle will need

to generate a total of $1300 in

revenue (= $1000 (original revenue)

+$300 (revenue needed to cover

cost of supervisor)).

Given that the price the firm

charges for each package is $20,

each vehicle will need to deliver 65

packages (=$1300/$20) to maintain

profit per vehicle. Note that total

revenue per vehicle is 65 x $20 =

$1300.

Part d:

d. Suppose that the number of

packages delivered per day cannot

be increased (only 50 are delivered)

but that the price per delivery might

potentially be raised. What price

would the firm have to charge for

each delivery in order to maintain

the firms profit per vehicle after

supervisors are introduced?

Again, by adding the supervisor to

the vehicle, the company will need

to generate $300 in additional

revenue to cover the additional cost.

This implies that each vehicle will

need to generate a total of $1300 in

revenue (= $1000 (original revenue)

+$300 (revenue needed to cover

cost of supervisor)).

are delivered (no change in

packages delivered, supervisor MRP

=0), but the firm can adjust price.

Given that 50 packages are

delivered by each vehicle the firm

will need to charge $26 per package

to maintain profit per vehicle (=

$1300/50). Note that total revenue

per vehicle is 50 x $26 = $1300.

2. Suppose that a car factory initially hires

1500 workers at $30 per hour and that each

worker works 40 hours per week. Then the

factory unionizes, and the new union

demands that wages be raised by 10 percent.

The firm accedes to that request in collective

bargaining negotiations but then decides to

cut the factorys labor force by 20 percent due

to the higher labor costs. LO7

a. What is the new union wage? How many

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agreement goes into affect?

b. How much in total did the factorys workers

receive in wage payments each week before

the agreement? How much do the factorys

remaining workers receive in wage payments

each week after the agreement?

c. Suppose that the workers who lose their

jobs as a result of the agreement end up

unemployed. By how much do the total wages

received each week by the initial 1500 workers

(both those who continue to be employed at

the factory and those who lose their jobs)

change from before the agreement to after

the agreement?

d. If the workers who lose their jobs as a result

of the agreement end up making $15 per hour

at jobs where they work 40 hours per week, by

how much do the total wages received each

week by the initial 1500 workers change from

before the agreement to after the agreement?

Answers: (a) $33.00 is the union wage. The

factory employs 1200 workers at that wage.

(b) $1,800,000 before. $1,584,000 by

remaining workers after.

(c) Total wages fall by $216,000.

(d) Total wages fall by $36,000.

Feedback: Consider the following

example. Suppose that a car factory

initially hires 1500 workers at $30

per hour and that each worker

works 40 hours per week. Then the

factory unionizes, and the new

union demands that wages be

raised by 10 percent. The firm

accedes to that request in collective

bargaining negotiations but then

decides to cut the factorys labor

force by 20 percent due to the

higher labor costs.

Part a:

a. What is the new union wage? How

many workers does the factory

employ after the agreement goes

into affect?

The original wage rate was $30.00

per hour. The new union wage is

10% higher, or $33.00 (= 1.10 x

$30.00)

The original level of employment

was 1500. After unionization the car

factory reduces its work force by

20% due to higher labor costs. Thus,

the unionized level of employment

is 1200 (= 0.8 x 1500). Note the

company cuts 20% of its labor force,

which equals 300 (= 0.2 x 1500).

Part b:

b. How much in total did the

factorys workers receive in wage

payments each week before the

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eoc13Economics

factorys remaining workers receive

in wage payments each week after

the agreement?

Total earnings = hourly wage x

hours worked x number of workers.

We have total earnings before

unionization of $1,800,000.00 (= $30

x 40 x 1500).

We have total earnings after

unionization of $1,584,000.00 (= $33

x 40 x 1200).

Part c:

c. Suppose that the workers who

lose their jobs as a result of the

agreement end up unemployed. By

how much do the total wages

received each week by the initial

1500 workers (both those who

continue to be employed at the

factory and those who lose their

jobs) change from before the

agreement to after the agreement?

Since the workers no longer

employed with the car factory after

unionization remain unemployed

their effective earnings from

employment are zero.

Thus, the total wages received each

week by the initial 1500 workers

(both those who continue to be

employed at the factory and those

who lose their jobs) decreases by

$216,000 (= $1,584,000 - $1,800,000)

from before the agreement to after

the agreement. That is, the workers

as a group earn $216,000 less than

before the agreement.

Part d:

d. If the workers who lose their jobs

as a result of the agreement end up

making $15 per hour at jobs where

they work 40 hours per week, by

how much do the total wages

received each week by the initial

1500 workers change from before

the agreement to after the

agreement?

The 1200 workers who continue to

work for the company earn

$1,584,000 (= $33 x 40 x 1200).

The 300 workers who are no longer

employed earn $180,000 (= $15 x 40

x 300).

The 1500 workers combined earn

$1,764,000 ($1,584,00 (car factory) +

$180,000 (other employment)).

The change in total compensation in

this case is $36,000 less than before

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$1,800,000).

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