eoc13 - Economics.pdf

12/17/2014 eoc13Economics

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Economics

OCC - ECON 101

4_US ECONOMY

CHAPTER 1 - M/C

CHAPTER 1 - M/C(SET2)

CHAPTER 1 -PROBLEMS

CHAPTER 1 -SOLUTIONS

CHAPTER 1 - T/F

CHAPTER 1 - T/F (SET2)

CHAPTER 10

CHAPTER 10

CHAPTER 11

CHAPTER 11

CHAPTER 12

CHAPTER 12

CHAPTER 13

CHAPTER 13

CHAPTER 14

CHAPTER 14

CHAPTER 15

CHAPTER 15

CHAPTER 16

CHAPTER 16

CHAPTER 17

CHAPTER 17

CHAPTER 18

CHAPTER 18

CHAPTER 19

CHAPTER 19

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Chapter 13 Wage Determination QUESTIONS 1. Explain why the general level of wages ishigh in the United States and other industriallyadvanced countries. What is the single mostimportant factor underlying the longrunincrease in average realwage rates in theUnited States? LO1

Answer: The general level of wagesis higher in the United States andother industrially advanced nationsbecause of the high demand forlabor in relation to supply. Laborproductivity is high in the U.S andother industrially advancedcountries because: (1) capital perworker is very high; (2) naturalresources are abundant relative tothe size of the labor forceparticularly in the U.S.; (3)technology is advanced in theUnited States and other industriallyadvanced countries relative to muchof the rest of the world; (4) laborquality is high because of health,vigor, training, and work attitudes;(5) other factors contributing to highAmerican productivity are theefficiency and flexibility of Americanmanagement; the business, social,and political environment thatgreatly emphasizes production andproductivity; and the vast domesticmarket, which facilitates the gainingof economies of scale.

2. Why is a firm in a purely competitive labormarket a wage taker? What would happen if itdecided to pay less than the going marketwage rate? LO2

Answer: A firm in a purelycompetitive labor market is a wagetaker because there are a largenumber of firms wanting to buy the

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CHAPTER 2 - MARKETSYSTEM

CHAPTER 2 - MARKETSYSTEM

CHAPTER 2 - MARKETSYSTEM (PROBS/ANS)

CHAPTER 2 - MARKETSYSTEM (SET 2)

CHAPTER 2 -MULTIPLE/CHOICE (SET2)

CHAPTER 2 -PROBLEMS

CHAPTER 20

CHAPTER 20

CHAPTER 20

CHAPTER 21

CHAPTER 21

CHAPTER 21

CHAPTER 22

CHAPTER 22

CHAPTER 22

CHAPTER 23 (37)

CHAPTER 26

CHAPTER 27

CHAPTER 28

CHAPTER 29

CHAPTER 3

CHAPTER 3 - DEMAND& SUPPLY

CHAPTER 3 - SET2

CHAPTER 3 - T/F

CHAPTER 30

CHAPTER 31

CHAPTER 32

CHAPTER 33

CHAPTER 34

CHAPTER 35

CHAPTER 35

CHAPTER 36

labor services of the workers in thatmarket and a large number ofworkers with identical skills wantingto sell their labor services. As aresult, the individual firm has nocontrol over the price of labor.

If a firm attempted to pay a wagebelow the going wage, no workerswould offer their services to thatfirm.

3. Describe wage determination in a labormarket in which workers are unorganized andmany firms actively compete for the servicesof labor. Show this situation graphically, usingW1 to indicate the equilibrium wage rate andQ1 to show the number of workers hired bythe firms as a group. Show the labor supplycurve of the individual firm, and compare itwith that of the total market. Why thedifferences? In the diagram representing thefirm, identify total revenue, total wage cost,and revenue available for the payment of non-labor resources. LO2

Answer: The labor market ismade up of many firms desiring topurchase a particular labor serviceand of many workers with that laborservice. The market demand curveis downward sloping because ofdiminishing returns and the marketsupply curve is upward slopingbecause a higher wage will benecessary to attract additionalworkers into the market. Whereasthe individual firms supply curve isperfectly elastic because it can hireany number of workers at the goingwage, the market supply curve isupward sloping.

For the graphs, see Figure13.3 and its legend.

4. Suppose the formerly competing firms inquestion 3 form an employers associationthat hires labor as a monopsonist would.Describe verbally the effect on wage rates andemployment. Adjust the graph you drew forquestion 3, showing the monopsonistic wagerate and employment level as W2 and Q2,respectively. Using this monopsony model,explain why hospital administratorssometimes complain about a shortage ofnurses. How might such a shortage becorrected? LO3

Answer: The equilibriumwage in the monopsonistic marketdeclines from the competitivemarkets Wl rate to W2. Theemployment level in this market will



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CHAPTER 37

CHAPTER 37

CHAPTER 38

CHAPTER 38

CHAPTER 39

CHAPTER 39

CHAPTER 4

CHAPTER 4

CHAPTER 5

CHAPTER 5

CHAPTER 5

CHAPTER 5 - SET2

CHAPTER 6

CHAPTER 6

CHAPTER 7

CHAPTER 7

CHAPTER 8

CHAPTER 8

CHAPTER 9

CHAPTER 9

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decline from Q1 to Q2. See Figure13.4 (wage falls from Wc to Wm and

the employment level falls from Qcto Qm).

If there are only one or twohospitals in an area, there exists amonopsonistic market for nurses. Their wages would be less thanthose for nurses where there iscompetition among employers(numerous hospitals and/or clinics). Because hospitals prefer to hiremore nurses at a wage W2, theyview the difference between Q3 andQ2 as a shortage. However, sincetheir profits are maximized at W2,they are unwilling to raise wagesvoluntarily. The hospitaladministrator might offer a higherwage, but this wage would not beprofit maximizing. Another solutionwould be for nurses to organize anddemand higher wages. This wouldallow nurses to earn wages closer totheir MRP and as wages rise towardW1, the shortage would disappear.

5. Assume a monopsonistic employer is payinga wage rate of Wm and hiring Qm workers, asindicated in Figure 13.8. Now suppose anindustrial union is formed that forces theemployer to accept a wage rate of Wc. Explainverbally and graphically why in this instancethe higher wage rate will be accompanied byan increase in the number of workers hired.LO4

Answer: The union wage rateWc becomes the firms MRC, whichwould be shown as a horizontal lineto the left of the labor supply curve. Each unit of labor now adds only itsown wage rate to the firms costs. The firm will employ Qc workers,the quantity of labor where MRP =MRC (= Wc); Qc is greater than theQm workers it would employ ifthere were no union and if theemployer did not have anymonopsonistic power, i.e., moreworkers are will to offer their laborservices when the wage is Wc thanWm.

6. Have you ever worked for the minimumwage? If so, for how long? Would you favorincreasing the minimum wage by a dollar? Bytwo dollars? By five dollars? Explain yourreasoning. LO5



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CHAPTER 1

CHAPTER 10

CHAPTER 10

CHAPTER 10

CHAPTER 10

CHAPTER 10

CHAPTER 11

CHAPTER 11

CHAPTER 11

CHAPTER 11

CHAPTER 11

CHAPTER 12

CHAPTER 12

CHAPTER 12

CHAPTER 12

CHAPTER 13

CHAPTER 13

CHAPTER 13

CHAPTER 13

CHAPTER 13

CHAPTER 14

CHAPTER 14

CHAPTER 14

CHAPTER 14

CHAPTER 15

CHAPTER 15

CHAPTER 15

CHAPTER 15

CHAPTER 16

CHAPTER 16

CHAPTER 16

CHAPTER 16

CHAPTER 17

CHAPTER 17

CHAPTER 17

Answer: Student answers willvary. Those students that haveworked for minimum wageprobably didnt stay at that job forlong, and would probably describetheir performance and that of theirco-workers as relativelyunproductive (an absence ofefficiency wages). Support for anincrease will depend on factors suchas their perception of how muchemployment would be lost versusthe income gains of those retainingemployment.

7. Many of the lowestpaid people in societyfor example, shortorder cooks also haverelatively poor working conditions. Hence, thenotion of compensating wage differentials isdisproved. Do you agree? Explain. LO5

Answer: Shortorder cooksgenerally need few specific skills,i.e., practically anyone is thought tobe capable of flipping burgers. Since the supply of unskilledworkers is high relative to thedemand for them, their wages arelow. In this case, the concept ofcompensating wage differentials isswamped by the excess supply oflowwage workers.

8. What is meant by investment in humancapital? Use this concept to explain (a) wagedifferentials and (b) the longrun rise of realwage rates in the United States. LO5

Answer: Investment inhuman capital is educational activitythat improves individualproductivity

(a) Wage differentials areexplainable to some extentthrough the concept of humancapital investment. There is astrong positive correlationbetween time spent acquiringa formal education andlifetime earnings. Of course, itcan be said that the brainsurgeon who spent overtwenty years in training,starting in grade 1, had thequalities to succeed in thelabor market without spendingover twenty years in school. Though this counter-argumenthas some merit, the point stillis that this highly-skilledindividual would never havebecome a brain surgeon



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CHAPTER 18

CHAPTER 18

CHAPTER 18

CHAPTER 18

CHAPTER 19

CHAPTER 19

CHAPTER 19

CHAPTER 19

CHAPTER 2

CHAPTER 20

CHAPTER 20

CHAPTER 20

CHAPTER 20

CHAPTER 21

CHAPTER 21

CHAPTER 21

CHAPTER 21

CHAPTER 22

CHAPTER 22

CHAPTER 22

CHAPTER 22

CHAPTER 23

CHAPTER 23

CHAPTER 23

CHAPTER 23

CHAPTER 23

CHAPTER 24

CHAPTER 24

CHAPTER 24

CHAPTER 24

CHAPTER 24

CHAPTER 25

CHAPTER 25

CHAPTER 25

CHAPTER 25

CHAPTER 25

without the over twenty yearsin school and might not haveachieved the particular highincome that goes with being amedical specialist.

(b) The long-run rise in realwage rates in the United Statesis positively correlated toinvestment in human capital. Without the increase ineducation and training of theAmerican labor force that hasoccurred over the years,productivity (output perperson per hour) would stillhave risen because of theinvestment in real capital,improved technology, and ourabundant natural resourcebase. But the real wage wouldundoubtedly now be verymuch lower, because anunskilled labor force could notpossibly have made efficientuse of the material resourcesand advancing technology ofthe economy.

9. What is the principalagent problem? Haveyou ever worked in a setting where thisproblem has arisen? If so, do you thinkincreased monitoring would have eliminatedthe problem? Why dont firms simply hiremore supervisors to eliminate shirking? LO6

Answer: Business ownerswho hire workers because they areneeded to help produce the goodsor services of the firm face thedilemma of the principal-agentproblem. Workers are the agents;they are hired to promote theinterests of the firm's owners (theprincipals). Owners and workersboth have a common goal in thesurvival of the firm, but theirinterests are not identical. Aprincipal- agent problem ariseswhen those interests diverge. Workers may seek to increase theirutility by shirking theirresponsibilities and providing lessthan the agreed upon effort. Owners of firms have a profitincentive to reduce or eliminateshirking. Hiring more supervisorypersonnel can be costly and there isno guarantee that it will eliminatethe problem.

10. LAST WORD Do you think exceptionallyhigh pay to CEOs is economically justified?



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CHAPTER 26

CHAPTER 26

CHAPTER 27

CHAPTER 27

CHAPTER 27

CHAPTER 27

CHAPTER 28

CHAPTER 28

CHAPTER 28

CHAPTER 28

CHAPTER 29

CHAPTER 29

CHAPTER 29

CHAPTER 3

CHAPTER 3

CHAPTER 3

CHAPTER 30

CHAPTER 30

CHAPTER 30

CHAPTER 31

CHAPTER 31

CHAPTER 31

CHAPTER 32

CHAPTER 32

CHAPTER 32

CHAPTER 33

CHAPTER 33

CHAPTER 33

CHAPTER 33

CHAPTER 34

CHAPTER 34

CHAPTER 34

CHAPTER 35

CHAPTER 35

CHAPTER 35

Why or why not?

Answer: Student answers willvary. Supporters will point to theimportant decisions made by CEOsand their effect on overall firmproductivity. High pay provides anincentive not only for current CEOs,but also for aspiring CEOs, furtherenhancing productivity. Criticsargue that while pay gaps arenecessary, they are excessiverelative to the productivitydifferences. They further argue thatstockholders are hurt because highCEO pay reduces company profits.

PROBLEMS 1. Workers are compensated by firms withbenefits in addition to wages and salaries.The most prominent benefit offered by manyfirms is health insurance. Suppose that in2000 workers at one steel plant were paid $20per hour and in addition received healthbenefits at the rate of $4 per hour. Alsosuppose that by 2010 workers at that plantwere paid $21 per hour but received $9 inhealth insurance benefits. LO1a. By what percentage did total compensation(wages plus benefits) change at this plant from2000 to 2010? What was the approximateaverage annual percentage change in totalcompensation?b. By what percentage did wages change atthis plant from 2000 to 2010? What was theapproximate average annual percentagechange in wages?c. If workers value a dollar of health benefitsas much as they value a dollar of wages, bywhat total percentage will they feel that theirincomes have risen over this time period?What if they only consider wages whencalculating their incomes?d. Is it possible for workers to feel as thoughtheir wages are stagnating even if totalcompensation is rising? Answers: (a) Total compensation rose from$24 in 2000 to $30 in 2010. This is a 25%increase. Dividing that number by 10 wesee that the average annual growth ratewas approximately 2.5% per year. (b)Wages went up by 5% over this time period(= $1/$20). Dividing that number by thenumber of years (10), we see that theapproximate average annual growth rateof total compensation was 0.5% per year.(c) If workers value health benefits as muchas wages, then they will feel that theirincomes have risen by 25%. If they excludehealth benefits and focus only on wages,



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CHAPTER 37

CHAPTER 37

CHAPTER 37

CHAPTER 37

CHAPTER 38

CHAPTER 38

CHAPTER 39

CHAPTER 39

CHAPTER 39

CHAPTER 4

CHAPTER 4

CHAPTER 4

CHAPTER 5

CHAPTER 5

CHAPTER 5

CHAPTER 6

CHAPTER 6

CHAPTER 6

CHAPTER 6

CHAPTER 7

CHAPTER 7

CHAPTER 7

CHAPTER 7

CHAPTER 7

CHAPTER 8

CHAPTER 8

CHAPTER 8

CHAPTER 8

CHAPTER 9

CHAPTER 9

CHAPTER 9

CHAPTER 9

CHAPTER 9

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they will feel that their incomes went up5%. (d) Yes, this is possible. See answers topart c.

Feedback: Consider the followingexample: Suppose that in 2000workers at one steel plant were paid$20 per hour and in additionreceived health benefits at the rateof $4 per hour. Also suppose that by2010 workers at that plant werepaid $21 per hour but received $9 inhealth insurance benefits. Part a:Total compensation in 2000 was $24(=$20 (wage rate) + $4 (healthbenefits)) and in 2010 totalcompensation is $30 (=$21 + $9).The percentage increase in totalcompensation is (30-24)/24 = 6/24 =0.25 (or 25%). This implies theapproximate average annualpercentage change in totalcompensation is 0.25/10 = 0.025 (or2.5%).

Part b:The percentage increase in wagesalone is (21-20)/20 = 1/20 = 0.05 (or5%). This implies the approximateaverage annual percentage changein wages is 0.05/10 = 0.005 (or0.5%). Part c:If workers value a dollar of healthbenefits as much as they value adollar of wages, they feel that theirincomes have risen by 25% (part a)over this time period.If they only consider wages whencalculating their incomes they feelthat their incomes have risen by 5%(part b) over this time period. Part d:Yes, if workers only look at theirwages they may feel as if theirwages are stagnating.

2. Complete the following labor supply tablefor a firm hiring labor competitively:LO2



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a. Show graphically the labor supply andmarginal resource (labor) cost curves for thisfirm. Are the curves the same or different? Ifthey are different, which one is higher?b. Plot the labor demand data of question 2 inChapter 12 on the graph used in part a above.What are the equilibrium wage rate and levelof employment? Answers: (a) The supply curve and the MRCare the same.

Units

oflabor

WageRate

Totallaborcost

Marginalresource

(labor)cost

0123456

$14141414141414

$0142842567084

$141414141414

(b)



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Equilibrium wage rate = $14; equilibriumlevel of employment = 5 units of labor.

Feedback: Consider the followingexample (Table):

(a) The labor supply curve andMRC curve coincide as a singlehorizontal line at the marketwage rate of $14. The firm canemploy as much labor as itwants, each unit costing $14;wage rate = MRC because thewage rate is constant to thefirm.

Units

oflabor

WageRate

Totallaborcost

Marginalresource

(labor)cost

0 $14 $0



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123456

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142842567084

$141414141414

(b) Graph: equilibrium is atthe intersection of the MRPand MRC curves. Equilibriumwage rate = $14; equilibriumlevel of employment = 5 unitsof labor. From the tables: MRP exceeds MRC for each ofthe first four units of labor, butMRP is less than MRC for thefifth unit.

Table from question 2, Chapter12:

Units

oflabor

Total

product

Marginalproduct

Product

price

Total

revenue

Marginalrevenueproduct

0123456

0173143536065

1714121075

$2222222

$0346286

106120130

$34

2824201410

3. Assume a firm is a monopsonist that canhire its first worker for $6 but must increasethe wage rate by $3 to attract each successive



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worker (so that the second worker must bepaid $9, the third $12, and so on). LO3a. Draw the firms labor supply and marginalresource cost curves. Are the curves the sameor different? If they are different, which one ishigher?b. On the same graph, plot the labor demanddata of question 2 in Chapter 12. What are theequilibrium wage rate and level ofemployment?c. Compare these answers with those youfound in problem 2. By how much does themonoposonist reduce wages below thecompetitive wage? By how much does themonopsonist reduce employment below thecompetitive level?

Answers: (a) Graph: (approximate shapebelow. Also note that the discreet nature ofthe problem requires that the marginalrevenue product (MRP) be greater than orequal to the marginal resource cost (MRC)):

The curves are different; the MRC curve ishigher than the labor supply curve.(b) The firm will employ three workers inthis situation. Here the MRP = $24 isgreater than the MRC = $18. For the fourthworker the MRP = $20 and the MRC = $24.(c) The monopsonist reduces the wage by$2 (from $14 to $12) and reducesemployment by two workers (from 5 to 3).

Feedback: Consider the followingexample: Assume a firm is amonopsonist that can hire its firstworker for $6 but must increase thewage rate by $3 to attract each



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successive worker (so that thesecond worker must be paid $9, thethird $12, and so on). Parts a and b:Table for part a and table for part b(from question 2 in Chapter 12 andproblem 2 above).

Units

oflabor

WageRate

Totallaborcost

(wagebill)

Marginalresource

(labor)cost

0123456

$NA69

12151821

$06

18366090

126

$61218243036

Units

oflabor

Total

product

Marginalproduct

Product

price

Total

revenue

Marginalrevenueproduct

0123456

0173143536065

1714121075

$2222222

$0346286

106120130

$34

2824201410

Graph: (approximate shape below.Also note that the discreet nature ofthe problem requires that themarginal revenue product (MRP) begreater than or equal to themarginal resource cost (MRC)).



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The MRC schedule lies above thelabor supply schedule becauseemploying the next worker requiresa higher wage in this market andyou must pay all workers this higherwage.

The firm will employ three workersin this situation. To see this look atthe MRP and MRC columns in thetable above. The first worker willgenerate a MRP = $34 and will havea MRC = $6, thus the firm willemploy this worker (the marginalrevenue product for this worker isgreater than his or her marginalcost). For the second worker wehave MRP = $28 and MRC = $12, sowe employ this worker. For the thirdworker we have MRP = $24 isgreater than the MRC = $18, so weemploy this worker as well. For thefourth worker we have MRP = $20and the MRC = $24. In this case themarginal cost of this worker isgreater than the worker's marginalrevenue product, so we do notemploy this worker.

Part c: The monopsonist decreasesemployment by 2 units and theequilibrium wage rate is $2 lessthan the competitive wage.

4. Suppose that lowskilled workers employedin clearing woodland can each clear one acreper month if they are each equipped with ashovel, a machete, and a chainsaw. Clearingone acre brings in $1000 in revenue. Each



workers equipment costs the workersemployer $150 per month to rent and eachworker toils 40 hours per week for four weekseach month. LO4a. What is the marginal revenue product ofhiring one lowskilled worker to clearwoodland for one month?b. How much revenue per hour does eachworker bring in?c. If the minimum wage were $6.20, would therevenue per hour in part b exceed theminimum wage? If so, by how much per hour?d. Now consider the employers total costs.These include the equipment costs as well as anormal profit of $50 per acre. If the firm paysworkers the minimum wage of $6.20 per hour,what will the firms economic profit or loss beper acre?e. At what value would the minimum wagehave to be set so that the firm would makezero economic profit from employing anadditional lowskilled worker to clearwoodland? Answers: (a) $1000. (b) $6.25 (= $1000/160hours). (c) Yes, exceeds by $0.05 per hour.(d) The firms loss per acre will be -192.00dollars (= $1000 in revenue - $150 in rentalcost for equipment - $50 in normal profit -$992 in wages for 160 hours at $6.20 perhour). (e) If X is the firms labor cost perworker for one month to clear one acre,then we need $1000 - $150 - $50 X = 0.Solving this equation for X yields X = $800.Dividing X by 160 hours yields a minimumwage of $5 per hour as what would beneeded for the firm to earn zero profit.

Feedback: Consider the followingexample. Clearing one acre brings in$1000 in revenue. Each workersequipment costs the workersemployer $150 per month to rentand each worker toils 40 hours perweek for four weeks each month. Part a: The marginal revenue is$1000. This is the revenue eachworker can generate for the firm byclearing one acre. Part b: Since the worker generates$1000 per month and works a totalof 160 hours (40 hours per week for4 weeks), revenue per hour equals$6.25 (= $1000/160). Part c: If the minimum wage were$6.20, revenue per hour in part bexceeds the minimum wage by 5cents per hour (=$6.25-$6.20).

Part d: Now consider the employers



total costs. These include theequipment costs as well as a normalprofit of $50 per acre. The totalexplicit cost for the firm per acreequals $150. Thus, the economicprofit per worker at the minimumwage equals $1000 (revenue) - $150(explicit cost) - $50 (normal profit) -160x$6.20 (hour of labor multipliedby the minimum wage = $992) = -$192. The firm suffers a loss peracre. Part e: To determine the minimumwage necessary for the firm tobreak-even (earn zero economicprofit, we first calculate the revenueleft over for labor after accountingfor normal profit and explicit cost.The revenue left over after thesecomponents have been removed is$800 (=$1000 - $150 -$50). Thisleaves $800 left to pay each unit oflabor for the month (clears oneacre). Since each worker works 160hours a month, the highest thebreak-even wage can be is $5(=$800/160). This is the highest theminimum wage can be set in theindustry without exit.

5. Suppose that a car dealership wishes to seeif efficiency wages will help improve itssalespeoples productivity. Currently, eachsalesperson sells an average of one car perday while being paid $20 per hour for aneighthour day. LO6a. What is the current labor cost per car sold?b. Suppose that when the dealer raises theprice of labor to $30 per hour the averagenumber of cars sold by a salespersonincreases to two per day. What is now thelabor cost per car sold? By how much is ithigher or lower than it was before? Has theefficiency of labor expenditures by the firm(cars sold per dollar of wages paid tosalespeople) increased or decreased?c. Suppose that if the wage is raised a secondtime to $40 per hour the number of cars soldrises to an average of 2.5 per day. What is nowthe labor cost per car sold?d. If the firms goal is to maximize theefficiency of its labor expenditures, which ofthe three hourly salary rates should it use: $20per hour, $30 per hour, or $40 per hour?e. By contrast, which salary maximizes theproductivity of the car dealers workers (carssold per worker per day)? Answers: (a) $160 (b) $120 per vehicle; $40less per vehicle; increased. (c) $128 pervehicle. (d) $30 per hour (e) $40 per hour.



Feedback: The current labor costper car is $160 (= $20 per hourtimes eight hours per day divided by1 car sold per day on average). (b)The labor cost per hour falls to $120per vehicle. It is now $40 less pervehicle. Efficiency has increased. (c)The labor cost per car is now $128per vehicle. (d) The dealer shouldpay $30 per hour if it wants tomaximize the efficiency of laborexpenditures. (e) If the dealer wantsto maximize output per worker perday, it should pay $40 per hour.

Chapter 13 Wage Determination (Appendix) APPENDIXQUESTIONS1.Whichindustriesandoccupationshavethehighestratesofunionization?Whichthelowest?Speculateonthereasonsforsuchlargedifferences.LO7

Answer: Figure 1a showsthat government and transportationare the two highest by industry.Figure 1b shows that teachers andprotective services are the twohighest by occupation. These figuresalso show that the two lowestunionization rates are Finance andAgriculture (industry) and Managersand Sales Workers (occupation).

2.Whatpercentageofwageandsalaryworkersareunionmembers?Isthispercentagehigher,orisitlower,thaninpreviousdecades?Whichofthefactorsexplainingthetrenddoyouthinkismostdominant?LO7

Answer: 15.3 million workersor 12.3 percent. This is lower than inpast decades. Potential answers:structural changes in economy(movement away frommanufacturing in the U.S.),Consumer demand for foreigngoods, and an increase inmanagerial opposition tounionization.

3.Supposethatyouarepresidentofanewlyestablishedlocalunionabouttobargainwithanemployerforthefirsttime.Listthebasicareasyouwantcoveredintheworkagreement.Whymightyoubeginwithalargerwagedemandthanyouactuallyarewillingtoaccept?Whatisthelogicofaunionthreateninganemployerwithastrikeduringthecollectivebargainingprocess?Ofanemployerthreateningtheunionwithalockout?Whatistheroleofthedeadlineinencouragingagreementincollective



bargaining?LO7

Answer: Areas to be includedin a work agreement:

1. Wage rates with automaticincreases over time, preferablyin the form of a costoflivingadjustment

2. Regulations governinghours of work which ensureemployees are entitled to paidvacation time and the choice toengage in overtime work at asubstantial premium

3. A liberal fringebenefitspackage provided by the firm,including pension plans, healthcare, and job securityprovisions

4. Rules governingpromotions, layoffs and recallsthat are based on workerseniority

5. A stipulated grievanceprocedure with mandatoryunion participation in rulings.

6. A provision that requires allworker to join or monetarilysupport the union.

Asking for a higher-than-expected wage increase is a tacticaldecision. The law requires thatbargaining must occur. The higher-than-expected-wage demand allowsfor the give-and-take of bargainingand for compromises in other areasof the initial proposal. The unionmay threaten a strike if it thinks itsdemands are not being met. Thedeadline forces negotiation.

4.Explainhowfeatherbeddingandotherrestrictiveworkpracticescanreducelaborproductivity.Whymightstrikesreducetheeconomysoutputlessthanthelossofproductionbythestruckfirms?LO7

Answer: This type of activitymay block the introduction ofoutput increasing machinery andequipment. Seniority rules may alsoreduce productivity by placing lesseffective workers in certainpositions. Firms not impacted by thestrike may increase their output

5.Whatistheestimatedsizeoftheunionwageadvantage?Howmightthisadvantagediminishtheefficiencywithwhichlaborresourcesareallocatedintheeconomy?Normally,laborresourcesofequalpotentialproductivityflowfromlowwageemploymenttohighwageemployment.Whydoesthatnothappentoclosetheunionwageadvantage?LO7

Answer: Fifteen percent. The



higher wages that unions achievereduce employment, displaceworkers, and increase the marginalrevenue product in the unionsector. Labor supply increases inthe nonunionized sector, reducingwages and decreasing marginalrevenue product there. Because ofthe lower nonunion marginalrevenue product, the workersadded in the nonunion sectorcontribute less to GDP than theywould have in the unionized sector. The gain of GDP in thenonunionized sector does not offsetthe loss of GDP in the unionizedsector so there is an overallefficiency loss. The union alsorestricts employment to ensure thisgap is not eliminated.

6. Contrast the voice mechanism and the exitmechanism for communicating dissatisfaction.In what two ways do labor unions reducelabor turnover? How might such reductionsincrease productivity? LO7

Answer: The voice mechanism letsthe employer know dissatisfaction ispresent through communication,whereas the exit mechanism signalsdissatisfaction by workers quittingtheir jobs. Increasing the desirabilityof the job and maintaining asignificant wage gap. This mayincrease productivity because lesstraining is required and experienceis accumulated.

APPENDIX PROBLEMS 1. Suppose that a delivery company currentlyuses one employee per vehicle to deliverpackages. Each driver delivers 50 packages perday, and the firm charges $20 per package fordelivery. LO7a. What is the MRP per driver per day?b. Now suppose that a union forces thecompany to place a supervisor in each vehicleat a cost of $300 per supervisor per day. Thepresence of the supervisor causes the numberof packages delivered per vehicle per day torise to 60 packages per day. What is the MRPper supervisor per day? By how much pervehicle per day do firm profits fall aftersupervisors are introduced?c. How many packages per day would eachvehicle have to deliver in order to maintain thefirms profit per vehicle after supervisors areintroduced?d. Suppose that the number of packagesdelivered per day cannot be increased (only 50are delivered) but that the price per deliverymight potentially be raised. What price would



the firm have to charge for each delivery inorder to maintain the firms profit per vehicleafter supervisors are introduced? Answers: (a) Each drivers MRP is $1000 perday.(b) The MRP here is $200 per day. Firmprofits will fall by $100 per vehicle per day.(c) 65

(d) $26 per delivery

Feedback: Consider the followingexample. Suppose that a deliverycompany currently uses oneemployee per vehicle to deliverpackages. Each driver delivers 50packages per day, and the firmcharges $20 per package fordelivery. Part a:a. What is the MRP per driver perday?To find the marginal revenueproduct (MRP) for each drivermultiply the number of packagesthe driver delivers by the cost (price)of each package delivered.MRP = number of packages x price =50 x $20 = $1000 Part b:b. Now suppose that a union forcesthe company to place a supervisorin each vehicle at a cost of $300 persupervisor per day. The presence ofthe supervisor causes the numberof packages delivered per vehicleper day to rise to 60 packages perday. What is the MRP per supervisorper day? By how much per vehicleper day do firm profits fall aftersupervisors are introduced?By placing a supervisor in each truckthe total number of packagesdelivered increases from 50 to 60per truck. This implies that theaddition of the supervisor increasesdeliveries by 10 units.The additional revenue thesupervisor generates, the marginalrevenue product of the supervisor(MRP), is $200.MRP supervisor = 10 (additionalunits) x $20 (price) = $200Since the supervisor increases thefirm's cost by $300 per vehicle andonly generates $200 in additionalrevenue the firm's profits will fall by$100 per vehicle (= $200 (revenue) -$300 (cost)). Part c:



c. How many packages per daywould each vehicle have to deliverin order to maintain the firms profitper vehicle after supervisors areintroduced?By adding the supervisor to thevehicle, the company will need togenerate $300 in additional revenueto cover the additional cost. Thisimplies that each vehicle will needto generate a total of $1300 inrevenue (= $1000 (original revenue)+$300 (revenue needed to covercost of supervisor)).Given that the price the firmcharges for each package is $20,each vehicle will need to deliver 65packages (=$1300/$20) to maintainprofit per vehicle. Note that totalrevenue per vehicle is 65 x $20 =$1300. Part d:d. Suppose that the number ofpackages delivered per day cannotbe increased (only 50 are delivered)but that the price per delivery mightpotentially be raised. What pricewould the firm have to charge foreach delivery in order to maintainthe firms profit per vehicle aftersupervisors are introduced?Again, by adding the supervisor tothe vehicle, the company will needto generate $300 in additionalrevenue to cover the additional cost.This implies that each vehicle willneed to generate a total of $1300 inrevenue (= $1000 (original revenue)+$300 (revenue needed to covercost of supervisor)).

Now we assume that 50 packagesare delivered (no change inpackages delivered, supervisor MRP=0), but the firm can adjust price.Given that 50 packages aredelivered by each vehicle the firmwill need to charge $26 per packageto maintain profit per vehicle (=$1300/50). Note that total revenueper vehicle is 50 x $26 = $1300.

2. Suppose that a car factory initially hires1500 workers at $30 per hour and that eachworker works 40 hours per week. Then thefactory unionizes, and the new uniondemands that wages be raised by 10 percent.The firm accedes to that request in collectivebargaining negotiations but then decides tocut the factorys labor force by 20 percent dueto the higher labor costs. LO7a. What is the new union wage? How many



workers does the factory employ after theagreement goes into affect?b. How much in total did the factorys workersreceive in wage payments each week beforethe agreement? How much do the factorysremaining workers receive in wage paymentseach week after the agreement?c. Suppose that the workers who lose theirjobs as a result of the agreement end upunemployed. By how much do the total wagesreceived each week by the initial 1500 workers(both those who continue to be employed atthe factory and those who lose their jobs)change from before the agreement to afterthe agreement?d. If the workers who lose their jobs as a resultof the agreement end up making $15 per hourat jobs where they work 40 hours per week, byhow much do the total wages received eachweek by the initial 1500 workers change frombefore the agreement to after the agreement? Answers: (a) $33.00 is the union wage. Thefactory employs 1200 workers at that wage.(b) $1,800,000 before. $1,584,000 byremaining workers after.(c) Total wages fall by $216,000.(d) Total wages fall by $36,000.

Feedback: Consider the followingexample. Suppose that a car factoryinitially hires 1500 workers at $30per hour and that each workerworks 40 hours per week. Then thefactory unionizes, and the newunion demands that wages beraised by 10 percent. The firmaccedes to that request in collectivebargaining negotiations but thendecides to cut the factorys laborforce by 20 percent due to thehigher labor costs. Part a:a. What is the new union wage? Howmany workers does the factoryemploy after the agreement goesinto affect?The original wage rate was $30.00per hour. The new union wage is10% higher, or $33.00 (= 1.10 x$30.00)The original level of employmentwas 1500. After unionization the carfactory reduces its work force by20% due to higher labor costs. Thus,the unionized level of employmentis 1200 (= 0.8 x 1500). Note thecompany cuts 20% of its labor force,which equals 300 (= 0.2 x 1500). Part b:b. How much in total did thefactorys workers receive in wagepayments each week before the



agreement? How much do thefactorys remaining workers receivein wage payments each week afterthe agreement?Total earnings = hourly wage xhours worked x number of workers.We have total earnings beforeunionization of $1,800,000.00 (= $30x 40 x 1500).We have total earnings afterunionization of $1,584,000.00 (= $33x 40 x 1200).

Part c:c. Suppose that the workers wholose their jobs as a result of theagreement end up unemployed. Byhow much do the total wagesreceived each week by the initial1500 workers (both those whocontinue to be employed at thefactory and those who lose theirjobs) change from before theagreement to after the agreement?Since the workers no longeremployed with the car factory afterunionization remain unemployedtheir effective earnings fromemployment are zero.Thus, the total wages received eachweek by the initial 1500 workers(both those who continue to beemployed at the factory and thosewho lose their jobs) decreases by$216,000 (= $1,584,000 - $1,800,000)from before the agreement to afterthe agreement. That is, the workersas a group earn $216,000 less thanbefore the agreement. Part d:d. If the workers who lose their jobsas a result of the agreement end upmaking $15 per hour at jobs wherethey work 40 hours per week, byhow much do the total wagesreceived each week by the initial1500 workers change from beforethe agreement to after theagreement?The 1200 workers who continue towork for the company earn$1,584,000 (= $33 x 40 x 1200).The 300 workers who are no longeremployed earn $180,000 (= $15 x 40x 300).The 1500 workers combined earn$1,764,000 ($1,584,00 (car factory) +$180,000 (other employment)).The change in total compensation inthis case is $36,000 less than beforeunionization (= $1,764,000 -



$1,800,000).

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