ECON 103, 2008-2
ANSWERS TO HOME WORK ASSIGNMENTS
Due the Week of July 21
Chapter 12
WRITE [3] Describe wage determination in a labour market in which workers are unorganized and many firms
actively compete for the services of labour. Show this situation graphically, using W1 to indicate the equilibrium
wage rate and Q1 to show the number of workers hired by the firms as a group. Compare the labour supply
curve of the individual firm with that of the total market and explain any differences. In the firm’s diagram,
identify total revenue, total wage cost, and revenue available for the payment of nonlabour resources.
ANS: This describes a near “perfectly” competitive labour market. Go to Figure 12-3 and its description of the
operation of this market.
WRITE [4]
Complete the accompanying labour supply table for a firm hiring labour competitively.
a.
Show graphically the labour supply and marginal factor
(labour) cost curves for this firm. Explain the relationships of these
curves to one another.
b.
Plot the labour demand data of question 2 in Chapter 11
on the graph used in (a). What are the equilibrium wage rate and
level of employment? Explain.
ANS Total labour cost data- see table.
(a)
The labour supply curve and MRC curve coincide as a
single horizontal line at the market wage rate of $14. The firm can
employ as much labour as it wants, each unit costing $14; wage
rate = MRC because the wage rate is constant to the firm. See the
graph below.
(b)
Graph: equilibrium is at the intersection of the MRP and
MRC curves. Equilibrium wage rate = $14; equilibrium level of
employment = 5 units of labour. Explanation: From the tables:
MRP exceed (or is just equal to) MRC for each of the first five units
of labour, but MRP is less than MRC for the sixth unit. NOTE:
since we graph the marginal value at the halfway point between
each unit of labour trying to use the graph to generate the
equilibrium would yield partial units of labour. Therefore, go to the
schedule (the table), ask yourself: after what unit of labour does
MRC>MRP? That is the last unit of labour to be hired.
Units of
Wage rate
labour
Total
Marginal
labour resource
cost
(labour)
(wage bill)
cost
0
$14
0
1
$14
14
$14
$14
2
$14
28
$14
3
$14
42
4
$14
56
$14
$14
5
$14
70
$14
6
$14
84
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Question 12-4
Quantity of labour
(MRP is plotted at the halfway points
on the horizontal axis)
WRITE [6]
Assume a firm is a monopsonist that can hire the first worker for $6, but must increase the wage rate by $3 to
attract each successive worker. Draw the firm's labour supply and marginal labour cost curves and explain their
relationships to one another. On the same graph,plot the labour demand data of question 2 in Chapter 11. What
are the equilibrium wage rate and the level of employment? Why do these differ from your answer to question
4?
ANS The monopsonist faces the market labour supply curve S—it is the only firm hiring this labour. MRC lies
above S and rises more rapidly than S because all workers get the higher wage rate that is needed to attract
each added worker. Equilibrium wage rate = $12; equilibrium employment = 3 (where MRP = MRC). The
monopsonist can pay a below competitive wage rate by restricting its employment.
Question 12-6
Quantity of labour
(MRP is plotted at the halfway points
on the horizontal axis)
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WRITE [7] Assume a monopsonistic employer is paying a wage rate of W m and hiring Qm workers, as indicated
in Figure 12-8. Now suppose that an industrial union is formed and that it 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.
ANS The union wage rate Wc becomes the firm’s MRC, which we would show as a horizontal line to the left of
S. Each unit of labour now adds only its own wage rate to the firm’s costs. The firm will employ Q c workers, the
quantity of labour where MRP = MRC (= W c); Qc is greater than the Qm workers it would employ if there were no
union.
CONSIDER [1] Explain why the general level of wages is high in Canada and other industrially advanced
countries.. What is the most important single factor underlying the long-run increase in average real wage rates
in Canada?
ANS The general level of wages is high in Canada and other industrialized countries because of the high
demand for labour in relation to supply. Moreover, demand for labour is high in industrialized countries, including
Canada, because of its high productivity, which has several causes: (1) capital per worker is very high; (2)
technology is advanced; (3) labour quality is high because of health, vigor, training, and work attitudes; (4) other
factors contributing to high productivity are the efficiency and flexibility of management; and a business, social,
and political environment that greatly emphasizes production and productivity.
The most important single factor underlying the long-run increase in average real wage rates in Canada
is the increase in output per worker, that is, in productivity.
CONSIDER [5] Suppose that the formerly competing firms in question 3 form an employers’ association that
hires abour as a monopsonist would. Describe verbally the impact on wage rates and employment. Adjust the
market graph, showing the monopsonistic wage rate and employment level as W2 and Q2 respectively. Using
this monopsony model, explain why hospital administrators frequently complain about a “shortage” of nurses.
Do you have suggestions for correcting this shortage?
ANS: The equilibrium wage in the monopsonistic market declines from the competitive market’s Wl rate to W2.
The employment level in this market will decline from Q1 to Q2.
If there are only one or two hospitals in an area, there exists a monopsonistic market for nurses. Their wages
have been found to be less than those for nurses where there is competition among employers (numerous
hospitals and/or clinics). Because hospitals prefer to hire more nurses at a wage W2, they view the difference
between Q3 and Q2 as a shortage. However, since their profits are maximized at W2, they are unwilling to raise
wages voluntarily. One solution would be for nurses to organize and demand higher wages. This would allow
nurses to earn wages closer to their MRP and as wages rise toward W1, the shortage would disappear. (Note,
this answer is more appropriate for the US health system than for ours.)
CONSIDER [10]
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 Canada.
ANS: Investment in human capital is any action that improves the skills and abilities, the productivity, of workers.
Expenditures on health and education are such investments as are any others that will shift workers from
relatively low to relatively high productivity jobs.
(a)
Wage differentials are explainable to some extent through the concept of human capital investment.
There is a strong positive correlation between time spent acquiring a formal education and lifetime earnings. Of
course, it can be said that the brain surgeon who spent over twenty years in training, starting in grade 1, had the
qualities to succeed in the labour market without spending over twenty years in school. Though this counterargument has some merit, the point still is that this highly skilled individual would never have become a brain
surgeon without the over twenty years in school and might not have achieved the particular high income that
goes with being a medical specialist.
(b)
The long-run rise in real wage rates in Canada is positively correlated to investment in human capital.
Without the increase in education and training of the Canadian labour force that has occurred over the years,
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productivity (output per person per hour) would still have risen because of the investment in real capital,
improved technology, and our abundant natural resource base. But the real wage would undoubtedly now be
very much lower, because an unskilled labour force could not possibly have made efficient use of the material
resources and advancing technology of the economy.
CONSIDER: Why do labour unions often resist the deregulation (e.g., airlines, telecommunications) of the
industries in which their members work?
ANS: These industries have entry regulation (i.e., government erects barriers to market entry). As a result they
face less competition, are able to raise prices above ATC and reap economic rents. The higher prices result in
a higher MRP for labour than would exist if the firm were selling into a competitive market. Unions know this,
and in wage negotiations try to obtain some of the rents. If the industries were deregulated, barriers fall, prices
fall, and the ability and willingness of the employer to pay higher wages falls.
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