Chapter 11 The Labor Market Review Questions 2. The introduction of a new input that is complementary with labor will increase the marginal product of labor at any level of employment, and consequently shift the labor demand curve rightward. A sewing machine in a textile factory is complementary with labor. The introduction of a new input that is substitutable for labor will decrease the marginal product of labor at any level of employment, and consequently shift the labor demand curve leftward. A robot in an assembly line is substitutable for labor.
4. Marginal revenue (= ∆TR/∆Q) tells us the rise in total revenue from producing one more unit of output. Marginal revenue product (= ∆TR/∆ quantity of resource) tells us the change in total revenue per unit increase in the resource. Marginal product (= ∆Q/∆ quantity of resource) tells us how much additional output is produced from adding one more unit of an input.
Marginal cost (= ∆TC/∆Q) tells us the rise in cost from producing one more unit of output. MFC (= ∆TC/∆ quantity of resource) tells us the rise in cost per unit increase in the resource.
6. Suppose the wage rate drops. A drop in the wage rate will generally lead the firm to hire not only more labor, but, in the long run, more of other inputs as well. As the firm uses more of these other inputs, the MRP curve shifts rightward. As a result, the new, profit- maximizing level of employment at the lower wage is greater than it would be along the original MRP curve. Thus, any given wage change causes a greater change in employment when other inputs can be varied (the labor demand curve is flatter).
8. An individual’s reservation wage for a labor market is the lowest wage that will induce the individual to supply labor in that market. Your reservation wage will be higher for jobs you find distasteful, and will be lower for jobs you enjoy. Two individuals’ reservation wages will generally be different for the same job because of their differing preferences for the job and also because of their different opportunity costs to taking the job.
10. False. When the labor demand curve shifts left, there is an excess supply of labor. If the wage rate falls to its new equilibrium level, the shift will not cause any unemployment. However, if the wage fails to adjust downward to its new equilibrium value—say, because the firm views the change in labor demand as temporary—then a labor surplus (unemployment) can result.
12. [Appendix] When all else is the same, monopsonists employ fewer workers, produce less output, and pay lower wage rates than firms in a perfectly competitive labor market.
Problems and Exercises 2. Number of Workers Total Output MPL MRP 10 80 8 $220.00 11 88 6 $165.00 12 94 3 $82.50 13 97 2 $55.00 14 99 a. Your Mama will hire 13 workers. Hiring the fourteenth would not be profitable since wage ($80) would exceed MRP ($55) at this point. b. With the wage now $85 per day, the firm will hire only twelve workers. Hiring the thirteenth will no longer be profitable because for that increase in employment, the MRP is less than the wage. 4. a. There are increasing returns to labor over the output range 0 to 450. There are diminishing returns to labor over the output range 450 to 775. b. Marginal Factor Number of Packages Total Marginal Revenue Cost (for use in Workers per Week Revenue Product part (c)) 1 100 $600 $900 $700 2 250 $1500 $1200 $700 3 450 $2700 $900 $700 4 600 $3600 $600 $700 5 700 $4200 $300 $700 6 750 $4500 $150 $700 7 775 $4650 c. Byproducts should hire 4 workers and produce 600 units of output.
6. a. Wage
L S
A W1
B W2 D L 1
D L 2
L2 L1 Number of Physicists The cutbacks caused labor demand for physicists, equilibrium salary, and the number of physicists employed to fall. If the wage adjusts to the new equilibrium value, there is no unemployment among physicists.
b. Wage
L S
B A W1
D L 1
D L 2
L2 L1 Number of Physicists In this case, wages cannot fall. At the original wage, labor supply exceeds labor demand, and there is unemployment.
8. While it is true that there is an inverse relationship between the wage rate and the number of workers a firm demands along a given labor demand curve, in this case each firm has moved to a new demand curve.
10.
Prediction #1: In the aggregate market for these language speakers (incorporating both government agencies and other jobs), the increase in demand by government agencies increases the overall demand for these workers, shifting the labor demand curve rightward and driving up their wage rate. The wage rate will rise to W’ in all jobs for these workers (since if not, they would move from the lower wage markets to the higher wage markets until all earned the same wage). Prediction #2: In the long run—a time horizon long enough for people to learn these languages—the labor supply curve in the aggregate market will shift rightward, as the higher salaries for employees proficient in these languages attracts more people to study and become proficient in them. The labor supply curve will stop shifting rightward when the wage rate reaches its new, long-run equilibrium value—higher than the initial wage, but lower than the wage in the temporary, short-run equilibrium. Note: In the long run, the wage cannot return to its original value, for at that value, many of the new entrants would leave, causing the wage rate to rise again. When the short-run labor supply curve has stopped shifting, the market wage rate will be higher than the original wage.
Challenge Questions
2. Marginal Number of Packages Total Revenue Marginal Marginal Marginal Workers per Week Revenue Product Factor Cost Revenue Cost 1 100 $600 $900 $700 $6 $4.67 2 250 $1500 $1200 $700 $6 $3.50 3 450 $2700 $900 $700 $6 $4.67 4 600 $3600 $600 $700 $6 $7 5 700 $4200 $300 $700 $6 $14 6 750 $4500 $150 $700 $6 $28 7 775 $4650
In Problem 4, we found that when the wage rate was $700, the firm would hire 4 workers and produce 600 packages per week. Here we find that the firm will produce out to the point where marginal revenue exceeds marginal cost, which is again at 600 packages per week, produced with 4 workers.
4. Total Cost of P Q Labor TR MRP Labor MFC $10 300 5 $3000 $ 225 $150 $67.50 $ 9 400 9 $3600 $ 495 $66.67 $80 $ 8 500 15 $4000 $ 975 $28.57 $96.43 $ 7 600 22 $4200 $1650 -- $112.50 $ 6 700 30 $4200 $2550 The firm’s profit-maximizing employment level is 9 workers, price of output is $9, and daily output level is 400. Notice that the monopsonist in this question hires fewer workers, charges a higher price, and produces less output than the firm that hires its labor in a competitive labor market in question 3. Economic Applications Exercises
2. a. This varies by market. Some markets may see an increase in wages and hours worked, while others will see a reduction. b. Answers may vary.