Chapter 16:
1. The following table shows the Total Output each week of workers on a perfectly competitive cherry
farm. The equilibrium price of a pound of cherries is $4. Complete the Marginal Product of Labor and the
Marginal Revenue Product of Labor columns in the table.
Marginal Product Value of Marginal
Quantity of Labor Total Output of Labor Product of Labor
0
2. Using the table in Problem 1, how many workers will the farmer hire if the equilibrium wage rate is $550
per week? $650 per week?
3. What happens to the demand curve for labor when the equilibrium price of output increases?
4. Which of the following groups are likely to benefit from legislation substantially increasing the minimum
wage? Explain why.
a. unskilled workers seeking jobs but lacking experience and education
b. skilled workers whose current wages are above the minimum wage
Answer: Skilled workers whose current wages are above minimum wage are likely to gain
c. manufacturers of machines that save labor in industries employing large amounts of unskilled labor
Answer: Manufacturers of machinery that saves labor in industries employing large
d. unskilled workers who have criminal records
e. a teenager seeking his or her first job
f. unskilled workers who retain employment after the minimum wage is raised
g. regions where almost everybody already earns substantially more than the minimum wage
5. If a competitive firm is paying $8 per hour (with no fringe benefits) to its employees, what would tend to
happen to its equilibrium wage if the company began to give on-the-job training or free health insurance
to its workers? What -the-
government mandated a minimum wage of $9 an hour?
Answer: The equilibrium wage would tend to decrease if a company provided on-the-job
6. Would the owner of University Pizza Parlor hire another worker for $60 per day if that worker added 40
pizzas a day and each pizza added $
Answer: The marginal revenue product from hiring another worker equals 40 x $2 = $80
7. What would happen to the demand for unskilled labor if the demand for hamburgers and fries
increased?
8. If all individuals have backward-bending labor supply curves, is the labor supply curve for a particular
industry or occupation also backward bending?
9. Professional athletes command and receive higher salaries than teachers. Yet teachers, not athletes,
are considered essential to economic growth and development. Why then do athletes receive higher
salaries than teachers?
Answer: One reason is that there is a great demand for the services of professional
10. The availability of jobs at higher real wages motivates many people to migrate legally or illegally to
the United States. Other things being equal, what impact would a large influx of immigrants have on real
wages? What impact
Answer: An influx of immigrants into a country will increase the supply of labor and
11. The dean at Middle State University knows that poets generally earn less than engineers in the
private market; that is, the equilibrium wage for engineers is higher than that for poets. Suppose that all
colleges and universities except for Middle State University pay their professors according to their
potential private market wage. The administration at Middle State believes that salaries should be equal
across all disciplines because its professors work equally hard and because all of the professors have
similar degrees Ph.D.s. As a result, Middle State opts to pay all its professors a mid-range wage, WMS.
What do you think is likely to happen to the engineering and poetry programs at Middle State?
Answer: The best engineering professors will likely consider leaving Middle State in order
12. An entrepreneur considers the following investment opportunity: For an investment of $500 today, he
can earn a return of $200 per year over the next three years. Should he undertake the investment if the
interest rate is 8 percent? 10 percent?
Answer: The present value of $200 to be received for each of the next three years at an 8%
13. Indicate which point could correspond to the equilibrium wage and quantity hired
Answers:
f. if the price of output produced by the labor increased and the number of hours workers were willing to
14. Using supply and demand curves, show how each of the following would affect the demand or supply
of workers. In each case, label the new equilibrium wage and quantity.
a. Immigration increases dramatically.
b. Demand for U.S. manufactured goods declines.
c. New computerized technology increases productivity of U.S. workers.
d. U.S. firms increase job amenities for workers.
e. U.S. workers choose more leisure.
15. Use the following diagrams to answer a c:
a. If unions are unable to have any effect on wages, draw the supply curve for the nonunion market.
Answer:
b. If unions become able to restrict the supply of labor in the union sector, indicate what would happen in
both the union and nonunion sectors.
Answer:
c. What happens to the union wage and the number of union workers hired in b? What happens to the
nonunion wage and the number of nonunion workers hired in b?
16. If the marginal revenue product for capital increased, what would it do to the demand for capital, the
rental price of capital, and the quantity of capital supplied?
Answer: Since the marginal revenue product of capital is the demand for capital, demand
17. What is the marginal productivity theory of income distribution?