Name and Student No.

: _______________________________________________ Section: ______________________

University of the Philippines

SCHOOL OF ECONOMICS

Economics 11
2nd Semester, AY 2018-2019
Problem Set #11 How Markets Determine Incomes, Labor Market

Prof. MS Gochoco-Bautista _______________________________________________ R. de Guzman / J. de Leon

Instructions. For multiple choice items, mark the circle that corresponds to the best answer. Answer the rest of the
questions appropriately. Please be prepared with your answers for the discussion class.

1. Why is each of the following incorrect? State the correct proposition.

a. Marginal revenue product is calculated as total revenue earned per worker.
b. Distribution theory is simple. You simply figure out how much each factor produces and then give the factor
its share of output.
c. Under competition, workers get paid the total output produced minus the costs of raw materials.

2. We can use the neoclassical theory of distribution to analyze the impact of immigration on the distribution of
national income. Assume that there are two factors, homogeneous labor and capital, with returns being wages and
profits.
a. Draw the marginal product of labor curve MPL, and an initial supply curve S consistent with the neoclassical
theory. Mark the equilibrium point as A. Label your axes appropriately.
Now assume that there is a large increase in labor supply due to immigration. Assume that all other inputs are
unchanged. Answer the following:
b. Describe and draw the new equilibrium after the immigration.
c. Explain what will happen to the wage rate.
d. Explain what happens to total profits and to the rate of profit (profits per unit of capital).
e. Explain why you cannot tell what will happen to total wages or to the share of labor income in total national
income.

3. Explain what would happen to wage differentials as a result of each of the following:
a. An increase in the cost of going to college.
b. Free migration among the nations of Europe.
c. Introduction of free public education into a country where education had previously been private and
expensive.
d. Through technological change, a large increase in the number of people reached by popular sports and
entertainment programs.
4. Define “pure economic rent”.
a. Show that an increase in the supply of a rent-earning factor will depress its rent and lower the prices of goods
that use it.
b. Explain the following statement: “It is not true that the price of corn is high because the price of corn land is
high. Rather, the reverse is closer to the truth: the price of corn land is high because the price of corn is high.”
Illustrate with a diagram.

5. Assume that the supply curve for top baseball players is perfectly inelastic with respect to their salaries.
a. Explain what completely inelastic supply means in terms of number of games played.
b. Next assume that because of television, the demand for the services of major-league baseball players
increases. What would happen to their salaries? What would happen to their batting averages, other things
held constant?

6. Explain why a tax on land rent is efficient. Compare a tax on the land with a tax on the houses on the land.
Provide diagrams if necessary.