374
CHAPTER 17
Wage Determination
A. Short-Answer, Essays, and Problems
1. When economists refer to labor, what type of workers are they referring to?
2. What do “wages” and “wage rates” mean in economics? How do they differ from labor earnings?
3. Discuss the hourly wage of production workers between the United States and some European countries.
4. What is the difference between nominal and real wages?
5. What factors explain the high level of level of productivity in the United States?
6. “The higher real wages earned by American workers primarily reflect the fact that Americans have a
greater inherent ability to produce goods and services than do foreign workers.” Evaluate.
7. Consider the following situations. Evaluate how they would affect the level of productivity of labor.
(a) The cost of health care skyrockets.
(b) Trade barriers with other countries are reduced.
(c) An energy shortage develops.
(d) Vast improvements are made in production technology.
8. Explain the long-run relationship between real hourly earning and productivity.
9. Evaluate the statement: “There is no difference between the labor supply curve for the single competitive
firm and the supply curve in a competitive market for labor.”
10. Answer the following questions based on the graph below.
(a) Discuss the equilibrium wage and quantity present in the market.
(b) Suppose an increase in immigration leads to a greater number of workers in the workforce. Depict and
discuss the effect this has for the market equilibrium and the individual firm.
17-375
11. A firm’s labor input, total output of labor, and product price schedules are given below. If labor is the only
variable input, how much labor should the firm employ if the wage rate is $8 per day?
Units of
labor
Total output
per day
Price of
good
2
10
$10
3
14
9
4
19
8
5
23
7
6
27
6
7
31
5
12. Suppose a single firm has the marginal revenue product schedule for a particular type of labor given in the
following table.
Number of
units of labor
MRP of
labor
1
$12
2
11
3
10
4
9
5
8
6
7
7
6
8
5
(a) Assume there are 150 firms with the same marginal-revenue-product schedules for this particular type
of labor. Compute the total or market demand for this labor by completing column 1 in the table
below.
(1)
Quantity of labor
demanded
(2)
Wage rate
(3)
Quantity of
labor supplied
_____
$12
1350
_____
11
1200
_____
10
1050
_____
9
900
_____
8
750
_____
7
600
_____
6
450
_____
5
300
(b) What will be the equilibrium wage rate and how many workers will be hired?
(c) What will be the marginal labor cost and wage rate for the individual firm? How many workers will
the firm employ?
(d) How would the imposition of a $9 minimum wage rate change the total amount of labor hired in this
market?
13. (Consider This) Discuss the reason take-home pay has not increased at the same rate as total compensation
in recent decades.
14. What is a monopsony? Explain its characteristics as applied to a labor market.
15. What, if any, is the relationship between the mobility of a particular type of labor and the supply of labor?
16. Why does the marginal resource cost exceed the wage rate in the case of a monopsonistic firm? Explain
and illustrate with an example.
17-377
17. In the table below, assume a monopsonist has the marginal-revenue-product schedule for a particular type
of labor given in columns 1 and 2 and that the supply schedule for labor is that given in columns 1 and 3.
(1)
Number of
labor units
(2)
MRP of
labor
(3)
Wage
rate
(4)
Total labor
cost
(5)
Marginal
labor cost
0
1
$18
$ 6
$_____
$_____
2
16
7
_____
_____
3
14
8
_____
_____
4
12
9
_____
_____
5
10
10
_____
_____
6
8
11
_____
_____
7
6
12
_____
_____
8
4
13
_____
_____
(a) Compute the firm’s total labor costs at each level of employment and the marginal labor cost of each
unit of labor, and enter these figures in columns 4 and 5.
(b) How many units of labor will the firm hire? What will be the wage rate?
(c) If this firm hired labor in a competitive labor market, what would be the wage rate and number of
workers hired?
18. In the table below, assume a monopsonist has the marginal-revenue-product schedule for a particular type
of labor given in columns 1 and 2 and that the supply schedule for labor is that given in columns 1 and 3.
(1)
Number of
labor units
(2)
MRP of
labor
(3)
Wage
rate
(4)
Total labor
cost
(5)
Marginal
labor cost
0
1
$21
$ 9
$_____
$_____
2
19
10
_____
_____
3
17
11
_____
_____
4
15
12
_____
_____
5
13
13
_____
_____
6
11
14
_____
_____
7
9
15
_____
_____
8
7
16
_____
_____
(a) Compute the firm’s total labor costs at each level of employment and the marginal labor cost of each
unit of labor, and enter these figures in columns 4 and 5.
(b) How many units of labor will the firm hire? What will be the wage rate?
(c) If this firm hired labor in a competitive labor market, what would be the wage rate and number of
workers hired?
19. The following is a monopsonist’s employment schedule. What is the firm’s marginal resource cost when it
hires the eleventh worker?
Units of
labor
Wage
rate
9
$14
10
15
11
18
12
20
17-378
20. Use the following data to answer the question.
Demand and Supply of Labor Data
Employment
Total
output
Product
price
Wage rate
50
708
$1.27
$6
51
760
1.26
7
52
810
1.25
8
53
858
1.24
9
How many units of labor will this firm hire in maximizing its profits?
21. Use the following data to answer the question.
Demand and Supply of Labor Data
Employment
Total
output
Product
price
Wage rate
10
108
$1.05
$6
11
160
.95
7
12
210
.85
8
13
258
.75
9
How many units of labor will this firm hire in maximizing its profits?
22. What factors might increase the demand for carpenters in a medium-sized town? Be specific.
23. What are the economic effects of imposition of a new occupational license or examination on a labor
market?
24. What is the difference between an exclusive union and an inclusive union? What are the economic effects
of each type?
25. What are the three different union strategies pursued to increase wages?
26. Is there a trade-off between wage increases for union members and employment? Explain
27. What is a bilateral monopoly? What is the economic outcome from a bilateral monopoly? Is a bilateral
monopoly a “bad” situation for society?
28.Though wages under bilateral monopoly are logically indeterminate, some wage rate is actually established
in such market situations. Explain those economic and noneconomic factors that might be pertinent to the
establishment of this wage.
17-379
29. Use the below graph to answer the next three questions.
(a) Why does the MRC curve lie above the labor supply curve?
(b) What would be the equilibrium wage and level of employment in a monopsonist market without an
industrial union? Explain.
(c) What if an industrial union was formed to negotiate with the monopsonist? What would be the
equilibrium wage and level of output in this case? Explain.
30. Illustrate the following by drawing a supply and demand graph in the appropriate graph spaces below: (a)
the economic effects of exclusive or craft unionism; (b) the economic effects of increasing the demand for
labor; (c) wage determination in a monopsonistic labor market; (d) wage determination in a bilateral
monopoly.
31. What are the case against and the case for the minimum wage? What does the evidence indicate?
32. Use the graph below to illustrate and explain what would happen in the labor market if a minimum wage
was established at a level above the equilibrium wage.
33. What explains wage differentials in labor markets? Evaluate from a demand and supply perspective.
34. Why is there a difference in the strength of demand for labor?
35. “In all likelihood highly educated workers are the individuals who would earn high incomes even if they
did not have as much education.” Evaluate.
36. Define and illustrate “noncompeting groups” and “compensating differences.”
37. Why is there a significant difference in the pay of physicians and construction workers?
38.Use graphs to explain the scenarios below.
(a) The wage differential between labor markets with different labor demand. (Labor supply is the same
for both markets.)
(b) The wage differential between labor markets with different labor supply. (Labor demand is the same
for both markets.)
39. (Consider This) What is human capital? How is it related to labor markets?
40. What are four market imperfections that prevent workers from moving from their current jobs to take
higher-paying jobs?
41. Explain the principal–agent problem in job performance and briefly describe actions that can be taken to
correct the problem.
42. What is the rationale for efficiency wages? How do efficiency wages help address the principal–agent
problem?
43. Why do solutions to the principal–agent problem sometimes produce problems? Give an example.
44. (Last Word) Discuss the effect of occupational licensing requirements has had in states where interior
designers have requirements have been made law.
45. (Last Word) Which market participants benefit and which are hurt by “unnecessary” occupational license
requirements.
B. Answers to Short-Answer, Essays, and Problems
1. When economists refer to labor, what type of workers are they referring to?
2. What do “wages” and “wage rates” mean in economics? How do they differ from labor earnings?
3. Discuss the hourly wage of production workers between the United States and some European countries.
4. What is the difference between nominal and real wages?
5. What factors explain the high level of level of productivity in the United States?
6. “The higher real wages earned by American workers primarily reflect the fact that Americans have a
greater inherent ability to produce goods and services than do foreign workers.” Evaluate.
7. Consider the following situations. Evaluate how they would affect the level of productivity of labor.
8. Explain the long-run relationship between real hourly earning and productivity.
9. Evaluate the statement: “There is no difference between the labor supply curve for the single competitive
firm and the supply curve in a competitive market for labor.”
17-383
10. Answer the following questions based on the graph below.
(a) Discuss the equilibrium wage and quantity present in the market.
(b) Suppose an increase in immigration leads to a greater number of workers in the workforce. Depict and
discuss the effect this has for the market equilibrium and the individual firm.
11. A firm’s labor input, total output of labor, and product price schedules are given below. If labor is the only
variable input, how much labor should the firm employ if the wage rate is $8 per day?
Units of
labor
Total output
per day
Price of
good
2
10
$10
3
14
9
4
19
8
5
23
7
6
27
6
7
31
5
The firm should hire 5 workers. The MRP of the fifth worker is $11 and the MRC is $8.
17-384
12. Suppose a single firm has the marginal revenue product schedule for a particular type of labor given in the
following table.
Number of
units of labor
MRP of
labor
1
$12
2
11
3
10
4
9
5
8
6
7
7
6
8
5
(a) (a) Assume there are 150 firms with the same marginal-revenue-product schedules for this
particular type of labor. Compute the total or market demand for this labor by completing column 1 in
the table below.
(1)
Quantity of labor
demanded
(2)
Wage rate
(3)
Quantity of
labor supplied
_____
$12
1350
_____
11
1200
_____
10
1050
_____
9
900
_____
8
750
_____
7
600
_____
6
450
_____
5
300
(b) What will be the equilibrium wage rate and how many workers will be hired?
(c) What will be the marginal labor cost and wage rate for the individual firm? How many workers will
the firm employ?
(d) How would the imposition of a $9 minimum wage rate change the total amount of labor hired in this
market?
(a) See table.
(1)
Quantity of labor
demanded
(2)
Wage rate
(3)
Quantity of labor
supplied
150
$12
1350
300
11
1200
450
10
1050
600
9
900
750
8
750
900
7
600
1050
6
450
1200
5
300
Formatted: Indent: Left: 0.25″, Hanging: 0.25″, No bullets
or numbering
17-385
13. (Consider This) Discuss the reason take-home pay has not increased at the same rate as total compensation
in recent decades.
14. What is a monopsony? Explain its characteristics as applied to a labor market.
15. What, if any, is the relationship between the mobility of a particular type of labor and the supply of labor?
16. Why does the marginal resource cost exceed the wage rate in the case of a monopsonistic firm? Explain
and illustrate with an example.
17-386
17. In the table below, assume a monopsonist has the marginal-revenue-product schedule for a particular type
of labor given in columns 1 and 2 and that the supply schedule for labor is that given in columns 1 and 3.
(1)
Number of
labor units
(2)
MRP of
labor
(3)
Wage
rate
(4)
Total labor
cost
(5)
Marginal
labor cost
0
1
$18
$ 6
$_____
$_____
2
16
7
_____
_____
3
14
8
_____
_____
4
12
9
_____
_____
5
10
10
_____
_____
6
8
11
_____
_____
7
6
12
_____
_____
8
4
13
_____
_____
(a) Compute the firm’s total labor costs at each level of employment and the marginal labor cost of each
unit of labor, and enter these figures in columns 4 and 5.
(b) How many units of labor will the firm hire? What will be the wage rate?
(c) If this firm hired labor in a competitive labor market, what would be the wage rate and number of
workers hired?
(a) See table.
(1)
Number of
labor units
(2)
MRP of
labor
(3)
Wage
rate
(4)
Total labor
cost
(5)
Marginal
labor cost
0
1
$18
$ 6
$ 6
$ 6
2
16
7
14
8
3
14
8
24
10
4
12
9
36
12
5
10
10
50
14
6
8
11
66
16
7
6
12
84
18
8
4
13
104
20
(b) The firm will hire 4 workers and pay a wage rate of $9.
(c) The firm will hire 5 workers and pay a wage of $10.
17-387
18. In the table below, assume a monopsonist has the marginal-revenue-product schedule for a particular type
of labor given in columns 1 and 2 and that the supply schedule for labor is that given in columns 1 and 3.
(1)
Number of
labor units
(2)
MRP of
labor
(3)
Wage
rate
(4)
Total labor
cost
(5)
Marginal
labor cost
0
1
$21
$ 9
$_____
$_____
2
19
10
_____
_____
3
17
11
_____
_____
4
15
12
_____
_____
5
13
13
_____
_____
6
11
14
_____
_____
7
9
15
_____
_____
8
7
16
_____
_____
(a) Compute the firm’s total labor costs at each level of employment and the marginal labor cost of each
unit of labor, and enter these figures in columns 4 and 5.
(b) How many units of labor will the firm hire? What will be the wage rate?
(c) If this firm hired labor in a competitive labor market, what would be the wage rate and number of
workers hired?
(a) See table.
(1)
Number of
labor units
(2)
MRP of
labor
(3)
Wage
rate
(4)
Total labor
cost
(5)
Marginal
labor cost
0
1
$21
$ 9
$ 9
$ 9
2
19
10
20
11
3
17
11
33
13
4
15
12
48
15
5
13
13
65
17
6
11
14
84
19
7
9
15
105
21
8
7
16
128
23
(b) The firm will hire 4 workers and pay a wage rate of $12.
(c) The firm will hire 5 workers and pay a wage of $13.
19. The following is a monopsonist’s employment schedule. What is the firm’s marginal resource cost when it
hires the eleventh worker?
Units of
labor
Wage
rate
9
$14
10
15
11
18
12
20
20. Use the following data to answer the question.
Demand and Supply of Labor Data
Employment
Total
output
Product
price
Wage rate
50
708
$1.27
$6
51
760
1.26
7
52
810
1.25
8
53
858
1.24
9
How many units of labor will this firm hire in maximizing its profits?
21. Use the following data to answer the question.
Demand and Supply of Labor Data
Employment
Total
output
Product
price
Wage rate
10
108
$1.05
$6
11
160
.95
7
12
210
.85
8
13
258
.75
9
How many units of labor will this firm hire in maximizing its profits?
22. What factors might increase the demand for carpenters in a medium-sized town? Be specific.
23. What are the economic effects of imposition of a new occupational license or examination on a labor
market?