Chapter 19/Labor and Entrepreneurship: The Human Inputs
CHAPTER 19
LABOR AND ENTREPRENEURSHIP: THE
HUMAN INPUTS
TEST YOURSELF
1. The following table shows the number of pizzas that can be produced by a large pizza
parlor employing various numbers of pizza chefs.
Number of
Chefs
Number of Pizzas per Day
1 40
2 64
3 82
4 92
5 100
6 92
a. Find the marginal physical product schedule of the pizza chefs.
b. Assuming a price of $9 per pizza, find the marginal revenue product schedule.
c. If chefs are paid $100 per day, how many chefs will this pizza parlor employ? How
would your answer change if chefs’ wages rose to $125 per day?
d. Suppose the price of pizza increases from $9 to $12.
Show what happens to the derived demand curve for chefs.
Number of
Chefs
Number of
Pizzas per Day
Marginal
Physical
Product
Marginal
Revenue
Product when P
= $9
Marginal
Revenue
Product when P
= $12
1 40 40 $360 $480
2 64 24 216 288
2. Discuss the concept of the financial rate of return on a college education. If this return
is less than the return on a bank account, does that mean you should quit college? Why
might you want to stay in school anyway? Are there circumstances under which it might
be rational not to go to college, even when the financial returns to college are very high?
Going to college entails considerable expenses—the out of pocket expenses for tuition,
books, etc., plus the opportunity cost of earnings forgone. On the other hand, going to
college today is likely to lead to higher earnings in the future. If the future improved
3. In which of the following industries is wage determination most plausibly explained by
the model of perfect competition? The model of bilateral monopoly?
a. Odd-job repairs in private homes
b. Manufacture of low-priced clothing for children
c. Auto manufacturing
(a) Odd-job repairs in private homes: perfect competition.
4. Can you think of some types of workers whose marginal products probably were raised
by computerization? Are there any whose marginal products were probably reduced?
Can you characterize the difference between the two types of jobs in general terms?
Many secretaries found their marginal productivities considerably increased by
computerization. With modern word processing equipment they could produce more
5. Suppose you are the sole producer of commodity X, which was just invented to clean the
snow from sidewalks more efficiently, and you have produced enough to sell for two
winters. If the quantity you expect to sell in 2012 would yield MR = $400 and in 2013 it
will be $300, what can you do to try to increase your total profit?
This involves price discrimination between different dates: high prices before
competition as the new product arrives in the market and ever lower prices at later dates
6. Explain what a doubling of the number of customers for your snow cleaner will do to
the R&D component of your marginal costs.
Once the entrepreneur has spent the R&D funding, this amount will be fixed. The
7. If two jobs are available, one of which is fun and very respectable and the other
unpleasant and dangerous, where would you expect wages to be higher? Is that really so
in practice?
Wage is expected to be higher in the latter case. Supply-demand analysis implies that
8. Assume the inventor of the snow cleaner gets only 3 percent of the benefits, the
remainder consisting of reduced medical bills for back pain. In the general public,
explain why this is an externality. How large is it? Is it a beneficial externality? How
will it affect the number of snow cleaners it is most profitable to manufacture, as
compared to the number that best contributes to the general welfare?
It is a beneficial externality as the use of snow cleaners reduces the medical bills for
people with back pain. The externality is large because major part of the benefit of the
DISCUSSION QUESTIONS
1. Colleges are known to pay rather low wages for student labor. Can this trend be
explained by the operation of supply and demand in the local labor markets? Is the
concept of monopsony of any use? How might things differ if students formed a
union?
The supply of youthful, (fairly) unskilled labor is relatively high in colleges and college
towns. This leads one to expect that the marginal productivity of such labor is driven to
2. College professors are highly skilled (or at least highly educated!) laborers, yet their
wages are not very high. Is this a refutation of the marginal productivity theory?
Chapter 19/Labor and Entrepreneurship: The Human Inputs
No, marginal productivity determines the demand schedule for labor, but the actual wage
is determined by the interaction of supply with that demand schedule. Since college
3. It seems to be a well-established fact that workers with more years of education
typically receive higher wages. What are some possible reasons for this trend?
There are many possible reasons for the positive relation between years of education and
wages:
(a) People may have learned more by staying in school longer and therefore have higher
marginal productivity.
(b) People who were smarter to begin with may have stayed in school longer. Although
4. Approximately what fraction of the U.S. labor force belongs to unions? (Try asking
this question of a person who has never studied economics.) Why do you think this
fraction is so low?
Currently only about 13 percent of the U.S. labor force belongs to unions. Many different
reasons have been advanced for this low figure, some of the reasons being contradictory.
5. What are some reasonable goals for a union? Use the tools of supply and demand to
explain how a union might pursue its goals, whatever they are. Consider a union
that has been in the news recently. What was it trying to accomplish?
A union might try to maximize the wage rate of its members. To achieve this, it could try
to restrict the supply of workers, or negotiate a high wage floor. In any case, it will
probably have to sacrifice employment. A different goal might be to increase
6. “Strikes are simply intolerable and should be outlawed.” Comment on this
statement.
Strikes often hurt third parties, that is to say the public, as well as the workers and the
7. In a bitter strike battle between Eastern Airlines and several of its unions, it was
clear from the beginning that the airline was in serious financial trouble. The airline
was, indeed, eventually forced to close down, costing many jobs. Discuss what might
nevertheless have led the unions to hold out so tenaciously.
In the Eastern Airlines strike, the unions took a high-risk strategy, by holding out so
firmly when the company was in danger of going bankrupt. One could have understood
8. Since about 1980, GDP per capita (that is, the average real income per person) in the
United States has risen fairly substantially. Yet real wages have failed to rise. What
do you think may explain this phenomenon?
9. If you were the youngest son of an English nobleman in the Middle Ages, what could
you do to make your fortune? What kinds of innovation would be appreciated by
people in power?
10. How did Julius Caesar attain his position in Rome and in history? In what sense can
his activities be said to have been entrepreneurial?
11. Why do you think medieval China, with all its incredible inventions, fell behind
economically?
12. What are some of the U.S. laws and other rules that played a critical role in the
attainment of leadership in per capita income and innovation?
13. What steps should the United States consider undertaking to protect itself from the
fate of other countries that once were economic leaders of the world and then fell far
behind?
14. Why do you think, even though high school education in other countries is widely
considered to be better than that in the United States, every country sends its best
and brightest to the United States to get their doctorate degrees?