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Chapter 11 Labor Markets Key Concepts Summary Practice Quiz Internet Exercises ©2002 South-Western College Publishing

In a perfectly competitive market, what determines the level of wages?
The intersection of the demand for labor and the supply of labor

Market Supply and Demand
Wages D Quantity of Labor

What does the demand curve for labor show?
The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus

Production Function Total Output 1 2 3 4 5 6
60 Production Function 50 40 Total Output 30 Total Output 20 10 Quantity of Labor 1 2 3 4 5 6

What is marginal revenue product?
The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource

Marginal Product Curve Law of Diminishing Returns
12 10 8 Marginal Product 6 Law of Diminishing Returns 4 2 Quantity of Labor 1 2 3 4 5 6

What is the demand curve for labor equal to?
It is equal to the marginal revenue product of labor

Q MRP = demand Demand Curve for Labor 1 2 3 4 5 \$350 \$280 \$210 \$140
\$70 Q 1 2 3 4 5

Increase in Quantity of labor an employer will hire
Decrease in Wage Rate

How do we measure MRP in perfect competition?
A perfectly competitive firm’s marginal revenue product is equal to the marginal product of its labor times the price of its product

What is derived demand? The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce

What does the supply curve for labor show?
The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus

S \$350 Supply Curve of Labor \$280 \$210 \$140 \$70 10 20 30 40 50
Wage Rate per day \$140 \$70 Quantity of Labor 10 20 30 40 50

Increase in Quantity of labor willing to work
Wage Rate

What is human capital? The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive

Competitive Labor Market
\$350 Competitive Labor Market \$280 S E \$210 Wage Rate per day \$140 D \$70 Quantity of Labor 10 20 30 40 50

Competitive Labor Market
\$350 \$280 E S \$210 Wage Rate per day \$140 D \$70 Quantity of Labor 1 2 3 4 5

Does the perfectly competitive model apply to workers in unions?
No

What are examples of unions?
Teamsters United Auto Workers National Education Assoc. American Federation of Government Employees

How do unions attempt to raise wages?
Increase demand for labor Decrease supply for labor Power

What is featherbedding?
Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker

What else can unions do to increase the demand for labor?
Decrease competition from other nations

Unions cause an increase in the demand for labor
\$350 \$280 S E2 \$210 Wage Rate per day E1 \$140 D2 \$70 D1 Quantity of Labor 10 20 30 40 50

Increase in wages and employment
Increase in the demand for labor Union featherbeds

Unions cause a decrease in the supply for labor
\$420 \$350 S2 E2 S1 \$280 Wage Rate per day E1 \$210 D1 \$140 Quantity of Labor 10 20 30 40 50

How else can unions raise wages?
Collective bargaining

What is collective bargaining?
The process of negotiations between the union and management over wages and working conditions

Collective Bargaining causes a Wage Rate increase
\$350 \$280 S Unemployment \$210 Wage Rate per day \$140 D \$70 Quantity of Labor 10 20 30 40 50

What factors can cause a change in the demand for labor?
Unions Prices of substitute goods Demand for final products Marginal product of labor

What factors can cause a change in the supply for labor?
Unions Demographic trends Expectations of future income Changes in immigrations laws Education and training

What has happened to union membership since WWII?
Union power has declined

How does union membership in the U.S. compare to other countries?
Union membership is far below that of other industrialized countries

What is a monopsony? A labor market in which a single firm hires labor

Union Membership for Different Countries
87% 75% Union Membership for Different Countries 40% 32% 32% 29% 24% 15% U.S. Japan Canada U.K. Germany Italy Denmark Sweden

What is marginal factor cost (MFC)?
The additional total cost resulting from a one-unit increase in the quantity of labor

What conclusion can be drawn from a monopsonistic market?
Because the monopsonist can hire additional workers only by raising the wage rate for all workers, the MFC > W

A Monopsonist determines its Wage Rate
\$18 MFC \$15 E S \$12 Dollars per hour F \$9 D (MRP) \$6 Quantity of Labor 1 2 3 4 5

How are wages compared between the two markets?
A monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market

Key Concepts

Key Concepts In a perfectly competitive market, what determines the level of wages? What is marginal revenue product? What is the demand curve for labor equal to? How do we measure mrp in perfect competition? What does the supply curve for labor show?

Key Concepts cont. How do unions attempt to raise wages?
What is featherbedding? What is collective bargaining? What factors can cause a change in the demand for labor? What factors can cause a change in the supply for labor?

Key Concepts cont. What has happened to union membership since WWII?
How does union membership in the u.S. Compare to other countries? What is a monopsony? What is marginal factor cost (mfc)? How are wages compared between the two markets?

Summary

Marginal revenue product (MRP) is determined by a worker’s contribution to a firm’s total revenue. Algebraically, the MRP equals the price of the product times the worker’s marginal product (MP).

The demand curve for labor is the curve showing the quantities of labor a firm is willing to hire at different prices of labor. The marginal revenue product (MRP) of labor curve is the firm’s demand curve for labor. Summing individual demand for labor curves gives the market demand curve for labor.

Q MRP = demand Demand Curve for Labor 1 2 3 4 5 \$350 \$280 \$210 \$140
\$70 Q 1 2 3 4 5

Derived demand means that a firm demands labor because labor is productive. Changes in consumer demand for a product cause changes in demand for labor and for other resources used to make the product.

The supply curve of labor is the curve showing the quantities of workers willing to work at different prices of labor. The market supply curve of labor is derived by adding the individual supply curves of labor.

S \$350 Supply Curve of Labor \$280 \$210 \$140 \$70 10 20 30 40 50
Wage Rate per day \$140 \$70 Quantity of Labor 10 20 30 40 50

Human capital is the accumulated people make in education, training, experience, and health in order to make themselves more productive. One explanation for earnings differences is differences in human capital.

Collective bargaining is the process through which a union and management negotiate a labor contract.

Monopsony is a labor market in which a single firm hires labor
Monopsony is a labor market in which a single firm hires labor. Because the monopsonist faces the industry supply curve of labor and each worker is paid the same wage, changes in total wage cost exceed the wage rate necessary to hire each additional worker. As a result, the marginal factor cost (MFC) of labor curve lies above the supply curve of labor.

The monopsonist’s wage rate and quantity of labor are determined where the MFC equals MRP . Since at this point the worker’s MRP is greater than the wage paid, the monopsonist exploits the workers.

A Monopsonist determines its Wage Rate
\$18 MFC \$15 E S \$12 Dollars per hour F \$9 D (MRP) \$6 Quantity of Labor 1 2 3 4 5

Chapter 11 Quiz ©2002 South-Western College Publishing

1. Marginal revenue product measures the increase in
a. output resulting from one more unit of labor. b. TR resulting from one ore unit of output. c. revenue per unit from one more unit of output. d. total revenue resulting from one more unit of labor. D. MRP is the increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource.

2. Troll Corporation sells dolls for \$10
2. Troll Corporation sells dolls for \$10.00 each in a market that is perfectly competitive. Increasing the number of workers from 100 to 101 would cause output to rise from 500 to 510 dolls per day. Troll should hire the 101st worker only when the wage is a. \$100 or less per day. b. more than \$100 per day. c. \$5.10 or less per day. d. none of the above. A. Under perfect competition, the firm hires workers until the MRP equals the wage rate. MRP equals \$10 x MP ( ) = \$100.

3. Derived demand for labor depends on the
a. cost of factors of production used in the product. b. market supply curve of labor. c. consumer demand for the final goods produced by labor. d. firm’s total revenue less economic profit. C. If consumers do not purchase goods, there is no MRP and no workers are hired.

4. If demand for a product falls, the demand curve for labor used to produce the product will shift
a. leftward. b. rightward. c. upward. d. downward. A. If consumers demand for a product decreases and supply remains the constant, the price of the product falls and the MRP (P x MP) decreases.

5. The owner of a restaurant will hire waiters if the
a. additional labor’s pay is close to the minimum wage . b. marginal product is at the maximum. c. additional work of the employees adds more to total revenue than to costs. d. waiters do not belong to a union. C. If MRP exceeds the wage rate paid waiters, it is profitable for the restaurant to hire more waiters.

6. In a perfectly competitive market, the demand curve for labor
a. slopes upward. b. slopes downward because of diminishing marginal productivity. c. is perfectly elastic at the equilibrium wage rate. d. all of the above. B. As output expands in the short run, a fixed factor results in diminishing returns causing MP to decrease. Correspondingly, MRP decreases.

7. A union can influence the equilibrium wage rate by
a. featherbedding. b. requiring longer apprenticeships. c. favoring trade restrictions on foreign products. d. all of the above. D. Featherbedding and trade protectionism increase the demand for labor. Requiring longer apprenticeship decreases the demand for labor.

8. In which of the following market structures is the firm not a price taker in the factor market?
a. Oligopoly. b. Monopsony. c. Monopoly. d. Perfect competition. B. Monopsony is a labor market in which a single firm hires labor. For example, the “company town” where everyone works for the same employer.

9. The extra cost of obtaining each additional unit of a factor of production is called the marginal
a. physical product. b. revenue product. c. factor cost. d. implicit cost. C. The assumption of MFC is that the firm must pay a higher wage to each additional worker as well as to all previously hired workers.

10. A monopsonist’s marginal factor cost curve lies above its supply curve because the firm must
a. increase the price of its product to sell more. b. lower the price of its product to sell more. c. increase the wage rate to hire more labor. d. lower the wage rate to hire more labor. C. The monopsonist can hire an additional worker only by raising the wage rate for all workers. Therefore, the MFC exceeds the wage rate along the labor supply curve.

11. In order to maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost is equal to a. marginal physical product. b. marginal revenue product. c. total revenue product. d. any of the above. B. The MRP curve is the contribution of each worker to total revenue and MFC the addition to total cost. When MRP > MFC, the firm hires more workers.

Marginal Factor Cost (MFC) and Marginal Revenue Product (MRP)
\$10 MFC \$8 Surplus \$6 Dollars per hour Shortage \$4 D (MRP) \$2 Quantity of Labor 1 2 3 4 5

12. BigBiz, a local monopolist, currently hires 50 workers and pays them \$6 per hour. To attract an additional worker to its labor force, BigBiz would have to raise the wage rate to \$6.25 per hour. What is BigBiz’s marginal factor cost? a. \$6.25 per hour. b. \$12.50 per hour. c. \$18.75 per hour. d. \$20.00 per hour. C. Its total cost would increase by \$18.75 to hire that additional worker (25 x ).

13. Suppose a firm can hire 100 workers at \$8
13. Suppose a firm can hire 100 workers at \$8.00 per hour, but must pay \$8.05 per hour to hire 101 workers. Marginal factor cost (MFC) for the 101st worker is approximately equal to a. \$8.00. b. \$8.05. c. \$13.05. d. \$13.00. C. The firm’s total cost would increase \$13.05 to hire the 101st worker (.05 x ).

14. A monopsonist in equilibrium has a marginal revenue product of \$10 per worker hour. Its equilibrium wage rate must be a. less than \$10. b. equal to \$10. c. greater than \$10. d. equal to \$5. A. Because of its monopoly in the labor market, a monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market.

A Monopsonist determines its Wage Rate
\$18 MFC \$15 E S \$12 Dollars per hour F \$9 D (MRP) \$6 Quantity of Labor 1 2 3 4 5

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