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| | | | | Economics, Fourth Edition
John B. Taylor, Stanford University
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Parallel Problems
Chapter 13: Labor Markets
- Funny Farm is a 400-acre profit-maximizing farm that produces wheat. The wheat industry is competitive and the price of wheat is $5 per bushel. The relationship between the number of workers the farm hires and production of wheat is shown below:
- Calculate the marginal product and marginal revenue product of labor for Funny Farm.
- If the wage for farm workers is $16,000 per year, how many workers will the farm hire? Explain.
- Suppose the yearly wage for farm workers is $16,000, the fixed rent is $30,000 per year, and there are no other costs. Calculate the farm’s profits or losses. Will there be entry or exit from this industry?
- Using the supply and demand model for labor, explain how a decrease in labor productivity results in a decline in the real wage.
- Draw a typical supply and demand for labor diagram to represent the market for lawyers. Suppose the wage for lawyers employed by large law firms is above the equilibrium level. Depict this in your diagram. Will there be a shortage or surplus of lawyers at that wage rate? This is an inefficient situation based on the supply and demand model. Give one reason why it may persist over time.
- Use the definition of the demand for labor as the marginal revenue product of labor to show how the two statements below can explain why there has been a decline in unskilled workers’ real wages.
- New methods of production are requiring higher skilled workers in the sense of being more flexible and better able to switch between different tasks.
- Global competition in industries that utilize unskilled labor has driven down the price of the products sold by these industries.
- Given your answers to problem 4, what policies should the government pursue to correct this problem? In answering, consider that the policies adopted should have a minimally adverse effect on the rest of the economy.
- College professors are frequently paid less than others with equivalent skills working outside academia. Use the idea of compensating differentials to explain why professors’ wages are relatively low.
- A toy manufacturing company is considering hiring sales representatives to market its new toys to retail stores. Under what circumstances should it pay a commission for every order of toys promoted by its sales representatives, and under what circumstances should it pay them an hourly wage?
- Analyze the labor supply schedules for Mary and Anne based on the data given below:
- Draw the labor supply schedules for the two individuals.
- Who probably has a higher level of education? Why?
- At what point does the income effect begin to outweigh the substitution effect for Anne? Explain.
- A competitive firm has the following production function.
- Calculate the marginal product of labor and draw the marginal revenue product schedule when the market price of the good it produces is $.15 per unit.
- If the wage is $15, how many workers will the firm hire? Why?
- Assume the market wage stays the same. If the price of the product falls to $.075 per unit, how many workers will the firm hire? Why does it make sense for the firm to hire fewer workers?
- Suppose a firm with some market power faces a downward-sloping demand curve for the product it produces. Given the following information on demand, fill in the table and draw the resulting demand curve for labor. If the hourly wage rate is $4 per hour, how many workers will this firm hire?
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