Economics 320 Ohio University/Hong Kong Baptist University

Economics 320 Ohio University/Hong Kong Baptist University

Problem Set 2 Summer 2004

Labor Demand

1.Explain how marginal revenue product is derived. Why is the MRP curve the firm's short-run labor demand curve? Explain how and why the labor demand curves of a perfectly competitive seller (a price taker) and an imperfectly competitive seller differ.

2.Referring to the output and substitution effects, explain why an increase in the wage rate for autoworkers will generate more of a negative employment response in the long run than in the short run. Assume there is no productivity increase and no change in the price of nonlabor resources.

3.Suppose that the elasticity of demand for unskilled workers is E = - 0.33. If the wage rate paid to unskilled workers rises by 15%, what will happen to the employment level of unskilled workers? What would you predict will happen to the total wage bill earned by unskilled workers after the wage increase?

4.Use the table below to answer the following questions. Assume that the labor market is perfectly competitive.

Labor / Output / Price (D1) / Price (D2)
0 / 0 / $10.00 / $10.00
1 / 15 / $10.00 / $9.50
2 / 29 / $10.00 / $9.00
3 / 42 / $10.00 / $8.50
4 / 54 / $10.00 / $7.50
5 / 65 / $10.00 / $6.50
6 / 75 / $10.00 / $5.50

a)Suppose product demand is given by D1. If the wage rate is $100, the firm will maximize profits by hiring ____ workers.

b)Suppose product demand is given by D1. If the wage rate rises from $100 to $130, the firm will reduce the quantity of labor employed by ____ units.

c)Suppose product demand is given by D2. If the wage rate is $100, the firm will maximize profits by hiring ____ workers.

d)Suppose product demand is given by D1. If the wage rate rises from $100 to $130, the firm will reduce the quantity of labor employed by ____ units.

5.What, if any, is the difference between the MRP and the VMP?

6.What effect will each of the following have on the market labor demand for a specific type of labor?

a)An increase in product demand of this type of labor.

b)A decline in the productivity of this type of labor.

c)An increase in the price of a gross complement for labor.

d)A decline in the price of a gross substitute for labor.

e)The demise of several firms that hire this labor.

f)A decline in the market wage for this labor.

g)A series of mergers that transforms the product market into a monopoly.

Market Equilibrium

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

8.In the early 1970’s two things happened roughly simultaneously: crude oil prices rose substantially and more information became available about the long-term health effects of working in underground coal mines. What effect would these events have on the equilibrium wage and employment of coal miners? Show graphically.

9.Using economic analysis, what is meant by being “over-paid” or “under-paid”? What type of signals may indicate whether and occupation was under- or over-paid?

10.Consider the market for goat herders. What would we expect to happen to wages and employment if the following events occurred: the demand for goat milk and wool declines, while the wages in occupations closely related to goat herding increase.

a)Show graphically.

b)Suppose you discovered that the wages of goat herders rose from $5 to $6 and employment fell from 30,000 to 28,000. Is this consistent with your conclusions? Why or why not?

11.Suppose the supply of physicists is given by w = 10 + 5E, while the demand curve is given by w = 50 - 3E. Calculate the equilibrium wage and employment levels. Suppose now that the demand for physicists increases and the new demand curve is given by w = 70 - 3E. Assume that this market is subject to cobwebs. Calculate the wage and employment levels in each "round" as the wage and employment levels slowly adjust to the demand shock. What is the new equilibrium level of wages and employment?

12.The data below pertain to Durtee Coal Co., a monopsonist in a small West Virginia town:

Wage / Labor / TC / MWC / Total Output / Output Price / MP / MRP
4 / 30 / 400 / 2
5 / 35 / 460 / 2
6 / 40 / 510 / 2
7 / 45 / 550 / 2
8 / 50 / 580 / 2
9 / 55 / 600 / 2
10 / 60 / 610 / 2

a)Complete the table by computing TC (= W*L) and MWC (=TC/L).

b)Determine the level of employment which will maximize this firm's profit.

c)What wage will the firm pay to attract this quantity of labor?

d)Describe the hiring decision of a perfectly discriminating monopsonist. In what sense do monopsonists "exploit" workers?

13.Explain how each of the following contract provisions might affect the elasticity of labor demand during the period of the labor contract:

a)Layoff and severance pay.

b)Prevention of subcontracting

c)The limiting of plant shutdown or relocation.

14.Under what elasticity of labor demand conditions could a union restrict the supply of labor and thereby increase the collective wage income of those workers still employed?

Wage Structure

15.Explain carefully: “If all workers and jobs were identical, there would be just one wage rate, assuming perfect information and costless mobility.” As part of your answer, use the graphs below to illustrate what would happen if wages were initially unequal. Be sure to explain the role of the two assumptions given—what happens if they are violated?

16.Suppose there are two types of jobs in the labor market: "safe" jobs and "risky" jobs. Describe how the worker decides whether to accept a safe job (where she cannot be injured) or a risky job (where she will certainly be injured).

17.Company X announces a plan to test all employees for drugs on a periodic basis. If employees whose tests are positive are found, upon further investigation, to be drug users, they will be fired. Analyze the likely effects of this policy on Company X's hiring, supervisory, and wage costs.

18.Consider the following statement: "As long as even one person dies from an industrial accident there is not enough safety at the workplace." Evaluate this statement from an economic point of view. Critics charge that human life cannot be assigned a dollar value, and benefits of additional safety cannot and should not be balanced against costs as advocated by economists. What do you think about this argument?

19.Consider an urban area, in which there are school systems in the suburbs in addition to a separate school system in the central city. Suppose that during the past year 25 teachers in central city have been assaulted while no assaults occurred in suburban schools.

a)If all teachers are equally competent and equally qualified, what would you expect to happen to the salaries of central city and suburban teachers? Why?

b)Suppose state law requires that all teachers with the same educational qualifications and teaching experience be paid the same salary. If some teachers are better than others, what would you expect to happen to the quality of teachers in suburban schools as compared with central city schools? Why?

20.Suppose there are two job characteristics that workers care about: wages and health insurance. If the government does not require employers to offer health insurance to their workers, what would be the relationship between the wage level in a particular job and whether the job offers health insurance? Suppose now that the government requires all firms to provide a standard package of health insurance to their workers, valued at, say, $5,000 a year. What happens to the wage structure in the labor market?

21.What is the theory of compensating wage differentials? Explain. Suppose workers with similar skills and education earn different wages. Cite and discuss five circumstances under which these wage differentials will persist.

Unions

22.Discuss three explanations for the decline of unionism in the United States since the mid-1950s.

23.As long as demand curves slope downward, an increase in the wage rate will result in a loss of jobs. Does this mean that when union leaders negotiate wage increases that they are working against the interests of their own members? At what point does the negative employment effect deter union wage demands?

24.What effect might the following changes have on the growth of unions in the US?

a)a drop in real wages.

b)an increase in the unemployment rate.

c)a repeal of right-to-work laws.

d)an increase in the inequality of earnings in the work force.

25.Suppose that we have the following data about Worldwide Wickets' wire pulling plant, which sells wires for $5 per unit. Assume it does not need to worry about the cost of its capital equipment.

Workers / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10
Output / 10 / 19 / 27 / 34 / 40 / 45 / 49 / 52 / 54 / 55

a)What wage will its union set to maximize the wage bill?

b)What wage will its union set to maximize the total rents earned by its members if they can earn $20 per hour in nonunion jobs?

c)What is the range of outcomes over which the union can bargain with Worldwide about both wages and employment, subject to the restriction that the firm not lose money?

26.In Germany temporary layoffs and dismissals on short notice are often illegal. A dismissal is illegal if it is "socially unjustified", and it is considered "socially unjustified" if a person could be employed in a different position or establishment of the firm even if retraining is required. Workers illegally dismissed may sue their employers. What are the likely consequences of this German law for the ability of German unions to raise wages? (Hint: what impact does the law have on the elasticity of labor demand?)

27.Use Chamberlain's concept of union bargaining power to explain the rationale for each of the following union tactics:

a)the union announces a strike vote wherein workers overwhelmingly endorse striking.

b)the union places a full-page newspaper ad explaining the reasonableness of its wage demand.

c)the union threatens to encourage a buyer's boycott of the firm's product.

d)the union pickets the firm.

e)the union promises to accept the removal of certain provisions of the old bargaining agreement which management claims diminish labor productivity.

f)the union eliminates its demand for a 5-day increase in sick leaves.

g)the union reduces its hourly wage demand by $0.20.

Indicate which of the above actions or tactics are coercive and which are persuasive.

28.List and explain three reasons why strikes or work stoppages may occur.

29.How is the "pure" union wage advantage defined? If in a given labor market the wage rate would be $8 without a union and $10 with a union, then what is the pure union wage advantage? Explain how, and in what direction, each of the following might cause the "measured" union wage advantage to vary from the pure advantage: (a) the spillover effect, (b) the threat effect, (c) the product market effect, and (d) the superior-worker effect.

30.Give two explanations for how the representation of workers by a union in one firm (or industry or labor market) may lead to wage increases for non-union workers. You may find it useful to use labor market supply and demand curves to answer this question.

31.Do unions increase or decrease productivity? Briefly provide two arguments in support of each side.

32.Describe the various avenues through which unions might alter the distribution of earnings. On balance, do unions enhance or mitigate wage dispersion?