Chapter 11 Labor Markets

Chapter 11 Labor Markets Key Concepts Summary Practice Quiz Internet Exercises©2000 South-Western College Publishing1In this chapter, you will learn to solve these economic puzzles:What determines the wage rate an employer pays?How do labor unions influence wages and employment?Does the NCAA exploit college athletes?2In a Perfectly Competitive Market, what determines the level of Wages?The intersection of the demand for labor and the supply of labor3DSMarket Supply and DemandWagesQuantity of Labor4What does the Demand Curve for Labor show?The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus54010124 Production Function30205506360Total OutputQuantity of LaborTotal Output6What is Marginal Revenue Product?The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource782124Marginal Product Curve645106312Marginal ProductQuantity of LaborLaw of Diminishing Returns8What is the Demand Curve for Labor equal to?It is equal to the marginal revenue product of labor9$280$210$140$701234Demand Curve for LaborMRP = demand$3505Q10Decrease in Wage RateIncrease in Quantity of labor an employer will hire11How do we measure MRP in Perfect Competition?A perfectly competitive firm’s marginal revenue product is equal to the marginal product of its labor times the price of its product12What isDerived Demand?The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce13What does the Supply Curve for Labor show?The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus14$280$210$140$7010203040Supply Curve of Labor$35050SDQuantity of LaborWage Rate per day15Increase in Wage RateIncrease in Quantity of labor willing to work16What is Human Capital?The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive17$280$210$140$7010203040Competitive Labor Market$35050SDEQuantity of LaborWage Rate per day18$280$210$140$701234Competitive Labor Market$3505SDEQuantity of LaborWage Rate per day19Does the Perfectly Competitive model apply to workers in unions?No20What are examples of Unions?TeamstersUnited Auto WorkersNational Education Assoc.American Federation of Government Employees21How do Unions attempt to raise wages?Increase demand for laborDecrease supply for laborPower22What is Featherbedding?Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker23What else can Unions do to increase the demand for labor?Decrease competition from other nations24$280$210$140$7010203040Unions cause an increase in the demand for labor$35050SD2E1D1E2Quantity of LaborWage Rate per day25Union featherbedsIncrease in the demand for laborIncrease in wages and employment26$350$280$210$14010203040Unions cause a decrease in the supply for labor$42050S2D1E1E2Quantity of LaborWage Rate per dayS127How else can Unions raise wages?Collective bargaining28What isCollective Bargaining?The process of negotiations between the union and management over wages and working conditions29$280$210$140$7010203040Collective Bargaining causes a Wage Rate increase$35050DUnemploymentWage Rate per daySQuantity of Labor30What factors can cause a change in the Demand for Labor?UnionsPrices of substitute goodsDemand for final productsMarginal product of labor31What factors can cause a change in the Supply for Labor?UnionsDemographic trendsExpectations of future incomeChanges in immigrations lawsEducation and training32What has happened to Union Membership since WWII?Union power has declined33In which sectors has union membership increased since 1989?Public sector and services34How does union membership in the U.S. compare to other countries?Union membership is far below that of other industrialized countries35What is a Monopsony?A labor market in which a single firm hires labor3615%24%29%32%37%40%U.S.JapanCanadaU.K.GermanyItalySwedenUnion Membership for Different Countries87%37What is Marginal Factor Cost (MFC)?The additional total cost resulting from a one-unit increase in the quantity of labor38What conclusion can be drawn from a Monopsonistic Market?Because the monopsonist can hire additional workers only by raising the wage rate for all workers, the MFC > W39$4$3$2$112345D (MRP)Dollars per hourSQuantity of LaborMFC$5A Monopsonist determines its Wage Rate40How are wages compared between the two markets?A monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market41Key Concepts42Key ConceptsIn a Perfectly Competitive Market, what determines the level of Wages?What is Marginal Revenue Product?What is the Demand Curve for Labor equal to?How do we measure MRP in Perfect Competition?What does the Supply Curve for Labor show?43Key Concepts cont.How do Unions attempt to raise wages?What is Featherbedding?What is Collective Bargaining?What factors can cause a change in the Demand for Labor?What factors can cause a change in the Supply for Labor?44Key Concepts cont.What has happened to Union Membership since WWII?How does union membership in the U.S. compare to other countries?What is a Monopsony?What is Marginal Factor Cost (MFC)?How are wages compared between the two markets?45Summary46 Marginal revenue product (MRP) is determined by a worker’s contribution to a firm’s total revenue. Algebraically, the MRP equals the price of the product times the worker’s marginal product (MP).47 The demand curve for labor is the curve showing the quantities of labor a firm is willing to hire at different prices of labor. The marginal revenue product (MRP) of labor curve is the firm’s demand curve for labor. Summing individual demand for labor curves gives the market demand curve for labor.48$280$210$140$701234Demand Curve for LaborMRP = demand$3505Q49 Derived demand means that a firm demands labor because labor is productive. Changes in consumer demand for a product cause changes in demand for labor and for other resources used to make the product. 50 The supply curve of labor is the curve showing the quantities of workers willing to work at different prices of labor. The market supply curve of labor is derived by adding the individual supply curves of labor.51$280$210$140$7010203040Supply Curve of Labor$35050SDQuantity of LaborWage Rate per day52 Human capital is the accumulated people make in education, training, experience, and health in order to make themselves more productive. One explanation for earnings differences is differences in human capital.53 Collective bargaining is the process through which a union and management negotiate a labor contract. 54 Monopsony is a labor market in which a single firm hires labor. Because the monopsonist faces the industry supply curve of labor and each worker is paid the same wage, changes in total wage cost exceed the wage rate necessary to hire each additional worker. As a result, the marginal factor cost (MFC) of labor curve lies above the supply curve of labor. 55 The monopsonist’s wage rate and quantity of labor are determined where the MFC equals MRP . Since at this point the worker’s MRP is greater than the wage paid, the monopsonist exploits the workers.56$4$3$2$112345D (MRP)Dollars per hourSQuantity of LaborMFC$5A Monopsonist determines its Wage Rate57 Chapter 11 Quiz©2000 South-Western College Publishing581. Marginal revenue product measures the increase in a. output resulting from one more unit of labor.b. TR resulting from one more unit of output.c. revenue per unit from one more unit of output.d. total revenue resulting from one more unit of labor.D. MRP is the increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource. 592. Troll Corporation sells dolls for $10.00 each in a market that is perfectly competitive. Increasing the number of workers from 100 to 101 would cause output to rise from 500 to 510 dolls per day. Troll should hire the 101st worker only when the wage is a. $100 or less per day.b. more than $100 per day.c. $5.10 or less per day.d. none of the above.A. Under perfect competition, the firm hires workers until the MRP equals the wage rate. MRP equals $10 x MP (510 - 500) = $100. 603. Derived demand for labor depends on the a. cost of factors of production used in the product.b. market supply curve of labor.c. consumer demand for the final goods produced by labor.d. firm’s total revenue less economic profit.C. If consumers do not purchase goods, there is no MRP and no workers are hired. 614. If demand for a product falls, the demand curve for labor used to produce the product will shift a. leftward.b. rightward.c. upward.d. downward.A. If consumers demand for a product decreases and supply remains the constant, the price of the product falls and the MRP (P x MP) decreases. 625. The owner of a restaurant will hire waiters if the a. additional labor’s pay is close to the minimum wage .b. marginal product is at the maximum.c. additional work of the employees adds more to total revenue than to costs.d. waiters do not belong to a union.C. If MRP exceeds the wage rate paid waiters, it is profitable for the restaurant to hire more waiters. 636. In a perfectly competitive market, the demand curve for labor a. slopes upward.b. slopes downward because of diminishing marginal productivity.c. is perfectly elastic at the equilibrium wage rate.d. is described by all of the above.B. As output expands in the short run, a fixed factor results in diminishing returns causing MP to decrease. Correspondingly, MRP decreases.647. A union can influence the equilibrium wage rate by a. featherbedding.b. requiring longer apprenticeships.c. favoring trade restrictions on foreign products.d. all of the above.e. none of the above. D. Featherbedding and trade protectionism increase the demand for labor. Requiring longer apprenticeship decreases the demand for labor. 658. In which of the following market structures is the firm not a price taker in the factor market?a. Oligopoly.b. Monopsony.c. Monopoly.d. Perfect competition.B. Monopsony is a labor market in which a single firm hires labor. For example, the “company town” where everyone works for the same employer. 669. The extra cost of obtaining each additional unit of a factor of production is called the marginal a. physical product.b. revenue product.c. factor cost.d. implicit cost.C. The assumption of MFC is that the firm must pay a higher wage to each additional worker as well as to all previously hired workers. 6710. A monopsonist’s marginal factor cost curve lies above its supply curve because the firm must a. increase the price of its product to sell more.b. lower the price of its product to sell more.c. increase the wage rate to hire more labor.d. lower the wage rate to hire more labor.C. The monopsonist can hire an additional worker only by raising the wage rate for all workers. Therefore, the MFC exceeds the wage rate along the labor supply curve.6811. In order to maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost is equal to a. marginal physical product.b. marginal revenue product.c. total revenue product.d. any of the above.B. The MRP curve is the contribution of each worker to total revenue and MFC the addition to total cost. When MRP > MFC, the firm hires more workers. 69$8$6$4$212345D (MRP)Dollars per hourQuantity of LaborMFC$10Marginal Factor Cost (MFC) and Marginal Revenue Product (MRP)SurplusShortage7012. BigBiz, a local monopolist, currently hires 50 workers and pays them $6 per hour. To attract an additional worker to its labor force, BigBiz would have to raise the wage rate to $6.25 per hour. What is BigBiz’s marginal factor cost?a. $6.25 per hour.b. $12.50 per hour. c. $18.75 per hour.d. $20.00 per hour.C. Its total cost would increase by $18.75 to hire that additional worker (25 x 50 + 6.25). 7113. Suppose a firm can hire 100 workers at $8.00 per hour, but must pay $8.05 per hour to hire 101 workers. Marginal factor cost (MFC) for the 101st worker is approximately equal to a. $8.00.b. $8.05.c. $13.05.d. $13.00.C. The firm’s total cost would increase $13.05 to hire the 101st worker (.05 x 100 + 8.05). 7214. A monopsonist in equilibrium has a marginal revenue product of $10 per worker hour. Its equilibrium wage rate must be a. less than $10.b. equal to $10.c. greater than $10.d. equal to $5.A. Because of its monopoly in the labor market, a monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market. 73$4$3$2$112345D (MRP)Dollars per hourSQuantity of LaborMFC$5A Monopsonist determines its Wage Rate74Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises75END76