Deck 13: Monopolistic Competition

Question 1

A rightward shift of the labor supply curve in graph (a) would shift curve: a. d = mrp leftward in graph (b).
B) d = mrp rightward in graph (b).
C) s = MRC upward in graph (b).
D) s = MRC downward in graph (b).

Answer 1

Law of diminishing marginal returns of labor says that labour as input has increased the additional gains by labour decreases. The equilibrium quantity of labour is at the wage where quantity supplied of labour is equal to quantity demanded of labour.
When there is rightward shift in supply curve then there will be decrease in equilibrium wage. When there is decrease in equilibrium wage then supply in individual firm where supply is perfectly inelastic, which shift downward shifting MRC down.
Thus, the correct option is

Question 2

Complete the following labor supply table for a firm hiring labor competitively:
a. Show graphically the labor supply and marginal resource (labor) cost curves for this firm. Explain the relationship of these curves to one another.
b. Plot the labor demand data of question 2 in Chapter 12 on the graph used in part a above. What are the equilibrium wage rate and level of employment Explain.
Reference question 2 in Chapter 12
At the bottom of the page, complete the labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market.
a. How many workers will the firm hire if the market wage rate is $27.95 $19.95 Explain why the firm will not hire a larger or smaller number of units of labor at each of these wage rates.
b. Show in schedule form and graphically the labor demand curve of this firm.
c. Now again determine the firm's demand curve for labor, assuming that it is selling in an imperfectly competitive market and that, although it can sell 17 units at $2.20 per unit, it must lower product price by 5 cents in order to sell the marginal product of each successive labor unit. Compare this demand curve with that derived in question 2 b. Which curve is more elastic Explain.

Answer 2

(a) The supply curve and the MRC are the same.  (b)
  Equilibrium wage rate = $14; equilibrium level of employment = 5 units of labor. 
Feedback: Consider the following example (Table):
(a) The labor supply curve and MRC curve coincide as a single horizontal line at the market wage rate of $14.  The firm can employ as much labor as it wants, each unit costing $14; wage rate = MRC because the wage rate is constant to the firm. (b)   Graph:  equilibrium is at the intersection of the MRP and MRC curves.  Equilibrium wage rate = $14; equilibrium level of employment = 5 units of labor.  From the tables:  MRP exceeds MRC for each of the first four units of labor, MRP = MRC for the fifth unit, and MRP is less than MRC for the sixth unit.
Table from question 2, Chapter 12:

Question 3

What is the estimated size of the union wage advantage How might this advantage diminish the efficiency with which labor resources are allocated in the economy Normally, labor resources of equal potential productivity flow from low-wage employment to high-wage employment. Why does this not happen to close the union wage advantage

Answer 3

Fifteen percent.  The higher wages that unions achieve reduce employment, displace workers, and increase the marginal revenue product in the union sector.  Labor supply increases in the nonunionized sector, reducing wages and decreasing marginal revenue product there.  Because of the lower nonunion marginal revenue product, the workers added in the nonunion sector contribute less to GDP than they would have in the unionized sector.  The gain of GDP in the nonunionized sector does not offset the loss of GDP in the unionized sector so there is an overall efficiency loss. The union also restricts employment to ensure this gap is not eliminated.

Question 4

Suppose that the formerly competing firms in question 3 form an employers' association that hires labor as a monopsonist would. Describe verbally the effect on wage rates and employment. Adjust the graph you drew for question 3, showing the monopsonistic wage rate and employment level as W 2 and Q₂ , respectively. Using this monopsony model, explain why hospital administrators frequently complain about a "shortage" of nurses. How might such a shortage be corrected

Question 5

Which industries and occupations have the highest rates of unionization Which the lowest Speculate on the reasons for such large differences.

Question 6

Contrast the voice mechanism and the exit mechanism for communicating dissatisfaction. In what two ways do labor unions reduce labor turnover How might such reductions increase productivity

Question 7

The supply-of-labor curve S slopes upward in graph (a) because: a. the law of diminishing marginal utility applies.
B) the law of diminishing returns applies.
C) workers can afford to "buy" more leisure when their wage rates rise.
D) higher wages are needed to attract workers away from other labor markets, household activities, and leisure.

Question 8

Assume a firm is a monopsonist that can hire its first worker for $6 but must increase the wage rate by $3 to attract each successive worker. Draw the firm's labor supply and marginal resource cost curves and explain their relationships to one another. On the same graph, plot the labor demand data of question 2 in Chapter 12. What are the equilibrium wage rate and level of employment What will be the equilibrium wage rate and the level of employment Why do these differ from your answer to question 4
Reference question 2 in Chapter 12 At the bottom of the page, complete the labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market.
a. How many workers will the firm hire if the market wage rate is $27.95 $19.95 Explain why the firm will not hire a larger or smaller number of units of labor at each of these wage rates.
b. Show in schedule form and graphically the labor demand curve of this firm.
c. Now again determine the firm's demand curve for labor, assuming that it is selling in an imperfectly competitive market and that, although it can sell 17 units at $2.20 per unit, it must lower product price by 5 cents in order to sell the marginal product of each successive labor unit. Compare this demand curve with that derived in question 2 b. Which curve is more elastic Explain.

Question 9

Explain why the general level of wages is higher in the United States and other industrially advanced countries. What is the single most important single factor underlying the long run increase in average real-wage rates in the United States

Question 10

Assume a monopsonistic employer is paying a wage rate of W m and hiring Q m workers, as indicated in Figure 13.8. Now suppose an industrial union is formed that forces the employer to accept a wage rate of W c. Explain verbally and graphically why in this instance the higher wage rate will be accompanied by an increase in the number of workers hired.
Reference Figure 13.8.

Question 11

REAL WAGES AND PRODUCTIVITY-ARE WORKERS' PAYCHECKS KEEPING UP Over the long run, real wages grow at about the same pace as labor productivity. Go to the Bureau of Labor Statistics Web site, www.bls.gov/lpc, and select Get Detailed Statistics (it is on the top row) and then scroll down to Major Sector Productivity and Costs Index. Select Most Requested Statistics to find current information on percentage changes in output per hour of all persons in the business sector (labor productivity) and percentage changes in real compensation per hour. Has real compensation per hour kept up with output per hour over the latest 3 years shown

Question 12

Have you ever worked for the minimum wage If so, for how long Would you favor increasing the minimum wage by a dollar By two dollars By five dollars Explain your reasoning.

Question 13

What percentage of the wage and salary workers are union members Is this percentage higher, or is it lower, than in the previous decades Which of the factors explaining the trend do you think is most dominant

Question 14

"Many of the lowest paid people in society-for example, short order cooks-also have relatively poor working conditions. Hence, the notion of compensating wage differentials is disproved." Do you agree Explain.

Question 15

This firm's labor demand curve d in graph (b) slopes downward because: a. the law of diminishing marginal utility applies.
B) the law of diminishing returns applies.
C) the firm must lower its price to sell additional units of its product.
D) the firm is a competitive employer, not a monopsonist.

Question 16

What is meant by investment in human capital Use this concept to explain (a) wage differentials, and (b) the long-run rise in real wage rates in the United States.

Question 17

Why is a firm in a purely competitive labor market a wage taker What would happen if it decided to pay less than the going market wage

Question 18

What is the principal-agent problem Have you ever worked in a setting where this problem has arisen If so, do you think increased monitoring would have eliminated the problem Why don't firms simply hire more supervision to eliminate shirking

Question 19

MEN'S AND WOMEN'S EARNINGS IN PROFESSIONAL GOLF-WHY THE DIFFERENCES Go to espn.com and select Golf and then Money Leaders. What are the annual earnings to date of the toP₁0 men golfers on the PGA tour What are the earnings of the toP₁0 women golfers on the LPGA tour Why the general differences in earnings between the male and female golfers

Question 20

Do you think exceptionally high pay to CEOs is economically justified Why or why not

Question 21

Suppose that you are the president of a newly established local union about to bargain with an employer for the first time. List the basic areas you would want covered in the work agreement. Why might you begin with a larger wage demand than you actually are willing to accept What is the logic of a union threatening an employer with a strike during the collective bargaining process Of an employer threateningthe union with a lockout What is the role of the deadline in encouraging agreement in collective bargaining

Question 22

In employing five workers, the firm represented in graph (b): a. has a total wage cost of $6000.
B) is adhering to the general principle of undertaking all actions for which the marginal benefit exceeds the marginal cost.
C) uses less labor than would be ideal from society's perspective.
D) experiences increasing marginal returns.

Question 23

Describe wage determination in a labor market in which workers are unorganized and many firms actively compete for the services of labor. Show this situation graphically, using W 1 to indicate the equilibrium wage rate and Q₁ to show the number of workers hired by the firms as a group. Show the labor supply curve of the individual firm, and compare it with that of the total market. Why the differences In the diagram representing the firm, identify total revenue, total wage cost, and revenue available for the payment of nonlabor resources.

Question 24

Explain how featherbedding and other restrictive work practices can reduce labor productivity. Why might strikes reduce the economy's output less than a loss of production by the stuck firm