Eoc13 - Economics PDF

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eoc13Economics
Economics
OCC - ECON 101
4_US ECONOMY
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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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Chapter 13 Wage Determination

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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CHAPTER 2 - MARKET
SYSTEM
labor services of the workers in that
CHAPTER 2 - MARKET
SYSTEM
to sell their labor services. As a

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
market and a large number of

workers with identical skills wanting
control over the price of labor.

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.
4. Suppose the formerly competing firms in

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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CHAPTER 36
CHAPTER 37
CHAPTER 37
CHAPTER 38
CHAPTER 38
CHAPTER 39
decline from Q1 to Q2. See Figure

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
competition among employers
CHAPTER 4
Because hospitals prefer to hire
CHAPTER 4
(numerous hospitals and/or clinics).

more nurses at a wage W2, they
view the difference between Q3 and
CHAPTER 5
Q2 as a shortage. However, since
CHAPTER 5
they are unwilling to raise wages
CHAPTER 5
their profits are maximized at W2,

voluntarily. The hospital
administrator might offer a higher
CHAPTER 5 - SET2
wage, but this wage would not be
CHAPTER 6
would be for nurses to organize and
CHAPTER 6
CHAPTER 7
profit maximizing. Another solution

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
5. Assume a monopsonistic employer is paying

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
Answer: The union wage rate
MC6A
Wc becomes the firms MRC, which
MC6AA
to the left of the labor supply curve.
SOL10
would be shown as a horizontal line

Each unit of labor now adds only its
own wage rate to the firms costs.
SOL8
The firm will employ Qc workers,
TF1
MRC (= Wc); Qc is greater than the
TF2
the quantity of labor where MRP =

Qm workers it would employ if
there were no union and if the
TF4
employer did not have any
TF5
workers are will to offer their labor
TF5
TF5
TF5
TF6
TF6
monopsonistic power, i.e., more

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
Answer: Student answers will

vary. Those students that have
TF6
worked for minimum wage
CHAPTER 1
CHAPTER 10
probably didnt stay at that job for

long, and would probably describe
their performance and that of their
co-workers as relatively
CHAPTER 10
unproductive (an absence of
CHAPTER 10
increase will depend on factors such
CHAPTER 10
CHAPTER 10
efficiency wages). Support for an

as their perception of how much
employment would be lost versus
the income gains of those retaining
employment.
CHAPTER 11
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
7. Many of the lowestpaid people in society

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
without the over twenty years

in school and might not have
CHAPTER 18
achieved the particular high
CHAPTER 18
medical specialist.
income that goes with being a
CHAPTER 18
(b) The long-run rise in real
CHAPTER 18
is positively correlated to
CHAPTER 19
wage rates in the United States

investment in human capital.
Without the increase in
CHAPTER 19
education and training of the
CHAPTER 19
occurred over the years,
CHAPTER 19
person per hour) would still
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
American labor force that has

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
principalagent 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
10. LAST WORD Do you think exceptionally

high pay to CEOs is economically justified?
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CHAPTER 26
Why or why not?
CHAPTER 26
Answer: Student answers will
CHAPTER 26
vary. Supporters will point to the
CHAPTER 26
and their effect on overall firm
CHAPTER 27
important decisions made by CEOs

productivity. High pay provides an
incentive not only for current CEOs,
CHAPTER 27
but also for aspiring CEOs, further
CHAPTER 27
argue that while pay gaps are
CHAPTER 27
enhancing productivity. Critics

necessary, they are excessive
relative to the productivity
CHAPTER 28
differences. They further argue that
CHAPTER 28
CEO pay reduces company profits.
stockholders are hurt because high
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
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
they will feel that their incomes went up
CHAPTER 36
part c.
CHAPTER 37
CHAPTER 37
5%. (d) Yes, this is possible. See answers to
Feedback: Consider the following

example: Suppose that in 2000
workers at one steel plant were paid
CHAPTER 37
$20 per hour and in addition
CHAPTER 37
of $4 per hour. Also suppose that by
CHAPTER 38
received health benefits at the rate

2010 workers at that plant were
paid $21 per hour but received $9 in
CHAPTER 38
health insurance benefits.
CHAPTER 39
Part a:
CHAPTER 39
(=$20 (wage rate) + $4 (health
CHAPTER 39
CHAPTER 4
CHAPTER 4
CHAPTER 4
CHAPTER 5
Total compensation in 2000 was $24

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
EOC1
EOC10
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EOC11
EOC12
EOC13
EOC14
EOC15
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EOC18
EOC19
EOC2
EOC20
EOC21
EOC22
EOC3
a. Show graphically the labor supply and

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
Equilibrium wage rate = $14; equilibrium

level of employment = 5 units of labor.
ESS27

example (Table):
ESS28
ESS29
ESS3
ESS30
ESS31
ESS31
ESS32
ESS33
ESS34
ESS35
ESS36
ESS37
ESS38
(a) The labor supply curve and

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
$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
(b) Graph: equilibrium is at

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
Table from question 2, Chapter

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
3. 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 successive
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INFO5
worker (so that the second worker must be
INFO6
a. Draw the firms labor supply and marginal
INFO7
or different? If they are different, which one is
INFO8
paid $9, the third $12, and so on). LO3

resource cost curves. Are the curves the same
higher?
b. On the same graph, plot the labor demand
INFO9
data of question 2 in Chapter 12. What are the
MC15A
employment?
c. Compare these answers with those you
MC34A
equilibrium wage rate and level of
found in problem 2. By how much does the
MC36A
monoposonist reduce wages below the
MC38A
monopsonist reduce employment below the
MC6A
MC6A
MC8A
P1
competitive wage? By how much does the

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
The curves are different; the MRC curve is

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).
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
successive worker (so that the

second worker must be paid $9, the
QUIZ32
third $12, and so on).
QUIZ33
Parts a and b:
Table for part a and table for part b
QUIZ34
(from question 2 in Chapter 12 and

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
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)).
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
The MRC schedule lies above the

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
The firm will employ three workers

in this situation. To see this look at
the MRP and MRC columns in the
table above. The first worker will
TF5
generate a MRP = $34 and will have

a MRC = $6, thus the firm will
TF6
employ this worker (the marginal

revenue product for this worker is
TF7
greater than his or her marginal

cost). For the second worker we
TF8
have MRP = $28 and MRC = $12, so

we employ this worker. For the third
TF9
SITEMAP
worker we have MRP = $24 is

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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workers equipment costs the workers

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.
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).
Part d: Now consider the employers

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total costs. These include the

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.
5. Suppose that a car dealership wishes to see

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)?
Answers: (a) $160 (b) $120 per vehicle; $40

less per vehicle; increased. (c) $128 per
vehicle. (d) $30 per hour (e) $40 per hour.
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Feedback: The current labor cost

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.
Chapter 13 Wage Determination (Appendix)

APPENDIXQUESTIONS
1.Whichindustriesandoccupationshavethehighest
ratesofunionization?Whichthelowest?Speculateon
thereasonsforsuchlargedifferences.LO7
Answer: Figure 1a shows

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
Answer: 15.3 million workers

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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eoc13Economics
bargaining?LO7
Answer: Areas to be included

in a work agreement:
1. Wage rates with automatic
increases over time, preferably
in the form of a costofliving
adjustment
2.
Regulations governing
hours of work which ensure

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
procedure with mandatory

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
Answer: This type of activity

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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higher wages that unions achieve

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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eoc13Economics
the firm have to charge for each delivery in

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
(d) $26 per delivery

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
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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eoc13Economics
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?
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
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)).
Now we assume that 50 packages

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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eoc13Economics
workers does the factory employ after the

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.
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
agreement? How much do the

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
unionization (= $1,764,000 https://sites.google.com/site/usaprofmontanoeconomics/eoc13
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eoc13Economics
$1,800,000).
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Chapter 13 Wage Determination

labor services of the workers in that

to sell their labor services. As a

market and a large number of

control over the price of labor.

4. Suppose the formerly competing firms in

decline from Q1 to Q2. See Figure

competition among employers

Because hospitals prefer to hire

(numerous hospitals and/or clinics).

Q2 as a shortage. However, since

they are unwilling to raise wages

their profits are maximized at W2,

wage, but this wage would not be

would be for nurses to organize and

profit maximizing. Another solution

5. Assume a monopsonistic employer is paying

Answer: The union wage rate

Wc becomes the firms MRC, which

to the left of the labor supply curve.

would be shown as a horizontal line

The firm will employ Qc workers,

MRC (= Wc); Qc is greater than the

the quantity of labor where MRP =

employer did not have any

workers are will to offer their labor

monopsonistic power, i.e., more

Answer: Student answers will

worked for minimum wage

probably didnt stay at that job for

unproductive (an absence of

increase will depend on factors such

efficiency wages). Support for an

7. Many of the lowestpaid people in society

without the over twenty years

achieved the particular high

income that goes with being a

(b) The long-run rise in real

wage rates in the United States

education and training of the

occurred over the years,

person per hour) would still

American labor force that has

10. LAST WORD Do you think exceptionally

Why or why not?

Answer: Student answers will

vary. Supporters will point to the

and their effect on overall firm

important decisions made by CEOs

but also for aspiring CEOs, further

argue that while pay gaps are

enhancing productivity. Critics

differences. They further argue that

CEO pay reduces company profits.

stockholders are hurt because high

they will feel that their incomes went up

5%. (d) Yes, this is possible. See answers to

Feedback: Consider the following

$20 per hour and in addition

of $4 per hour. Also suppose that by