Hiring Decisions & Changes in Factor Supply and Demand
Firms hire workers up to the point where this equals wage in a perfectly competitive market.
Marginal Revenue Product = Wage
In a perfectly competitive factor market, firms are wage takers because there are...?
Many firms and many workers, so no single firm has the power to be a wage maker.
What is an externality?
List two ways governments intervene to correct market failures.
taxes, subsidies, regulations, providing public goods.
the unequal distribution of income among individuals or groups.
When consumer demand for a product rises, what happens to the demand for labor that produces that product? What is the name for this concept?
Demand for labor increases. This is called derived demand.
Describe how an increase in labor supply affects a monopsonist's wage and employment choice.
More labor supply gives monopsonists more options. It will not affect the amount of labor or wage b/c the monopsonist will still pay below a competitive wage as compared to a perfectly competitive labor market.
Why do externalities cause market failures?
Prices don't reflect all the social costs/benefits, leading to inefficient outcomes.
It decreases costs for producers, making the price lower for consumers.
Name a government policy aimed at reducing inequality.
Progressive Taxation, transfer payments, minimum wage, public education.
Name two factors that can shift the supply for labor.
Name two factors that can shift the demand for labor.
Supply of labor shifters:
Population, worker preferences, Education/Training, immigration
Demand for labor shifters:
Demand for the product, labor productivity, technology, price of inputs.
Why does a monopsonist's marginal factor/resource costs lie above the supply of labor?
To attract additional workers the monopsonist must increase the wages for all workers. Therefore, the cost of the additional laborer is greater than the wage paid.
Give one example of a public good and explain why the free market is inefficient at producing it.
National Defense. The Free Market underproduces national defense capabilities due to the free-rider problem.
Name and explain at least two ways a government can regulate natural monopolies. What might the government have to do to enforce these regulations?
Make them pay the socially optimal price (P=MC). To get to the socially optimal price the government will need to subsidize the industry. Gov'ts can also make natural monopolies pay a fair return price (P = ATC). At this case the gov't will need to put a price cap on the natural monopoly to make sure it is only breaking even. In some cases the gov't will need to run the company.
How do factor market outcomes contribute to wage inequality?
Differences in skills and education create productivity wage gaps which leads to inequality in the economy.
Labor MP $/unit
Labor 30 units $10/worker
Capital 60 units $15/worker. According to the chart should the firm hire more labor, more capital, or do nothing? Explain your reasoning using numbers.
30/10 = 3 60/15 = 4
the firm is getting more output per dollar spent on capital 4>3 so they should use more capital and less labor.
In a monopsony labor market, which of the following occurs relative to a perfectly competitive labor market?
A. Higher wage and higher employment
B. Higher wage and lower employment
C. Lower wage and lower employment
D. Lower wage and higher employment
E. Same wage and employment
C.
When the consumption of a a good generates a positive externality, which of the following must be true at market equilibrium?
A. Marginal social benefit is less than marginal private cost.
B. Marginal social benefit is greater than marginal private benefit.
C. Marginal social cost is greater than marginal social benefit.
D. Marginal social cost is less than marginal private benefit.
E. Marginal social cost is equal to marginal external benefit.
B. Marginal Social benefit is greater than marginal private benefit.
A price ceiling set below equilibrium in a competitive market will cause:
A. Surplus and increased producer surplus.
B. Shortage and DWL
C. Equilibrium with no surplus or shortage
D. Excess supply and reduced consumer surplus
E. Efficient allocation
Explain the reasoning for your answer.
B. Producers will not produce enough for consumers demand. The deadweight loss is the excess demand from consumers that is unfulfilled by producers.
In a perfectly competitive market, if the supply of skilled labor decreases while demand stays the same, what happens to the wage of skilled workers and inequality?
A. Wages increase, inequality decreases
B. Wages decrease, inequality increases
C. Wages decrease, inequality decreases
D. Wages increase, inequality decreases
E. Wage and inequality are unchanged
C. Wage increases, inequality increases
Skilled workers become more scarce and a knowledge/skill gap between workers creates more inequality.
Suppose a firm produces widgets using labor and capital. The price of their widgets falls due to a decrease in market demand.
a. Using a graph of the labor market, show how this change affects: i. demand for labor, ii. wage, iii. quantity of labor demanded in the short run.
b. Explain how the change in output price affects the marginal revenue product of labor and the firm's hiring decisions.
a. Labor demand curve shifts left, lower wage, lower employment quantity.
b. MRP falls because output price decreases which reduces the value of the marginal product.
Consider a town in a which a single factory is the only employer. The local government enacts a minimum wage above the monopolistic wage but below the competitive equilibrium wage.
a. Graph and determine the effects on employment, wages, and monopsonist's marginal cost curve. On your graph indicate where the wage rate would be in a perfectly competitive industry.
b. Explain whether this minimum wage increase or decreases social welfare compared to the monopsony outcome.
a. MRC, Labor Supply, and MRP curves with minimum wage increasing closer to competitive market standards.
b. Employment increases relative to the monopsony. Welfare increases, b/c reduced DWL
A factory emits pollution into a river harming downstream users. The marginal private cost, marginal social cost, and marginal social benefit functions are given.
a. On a graph, show the socially efficient level of output and compare it to the free-market outcome.
b. Calculate the optimal tax to remedy this externality. Then explain its effect on producer and consumer surplus.
a. Graph showing MSC above MPC with DWL.
b. Pigouvian Tax (a per unit tax). Both consumer and producer surplus are decreased. Consumer surplus decreases more as taxes are passed onto the consumer.
Suppose a good is produced in a perfectly competitive market. In this market the marginal social benefit (MSB) exceeds the marginal private benefit (MPB) at every quantity. The marginal social costs (MSC) equals the marginal private cost (MPC) at every quantity.
a. Draw a correctly labeled graph of MSB, MPB, MSC, & MPC curves and show each of the following.
i. The market equilibrium quantity, labeled Qm ii. The socially optimal quantity labeled Qs. iii. The DWL
b. Suppose the government is considering granting per unit subsidy to consumers: i. would the DWL increase, decrease, or remain the same. ii. Compared to the market equilibrium in part a would the quantity produced increase, decrease, or remain the same?
B. Deadweight loss would decrease w/a subsidy and the quantity produced would increase
Using Lorenz Curves and the Gini Coefficient, explain how transfer payments (ex: welfare) and progressive taxation can change income distribution. Illustrate with properly labeled before and after graphs.
a. Before: large gap between Lorenz Curve and line of equality with high Gini coefficient. After: smaller gap between Lorenz Curve and line of equality with lower Gini Coefficient.