Problems dealing with

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Problems dealing with

• Factor Markets
• A review

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Why are some basketball players paid more than
brain surgeons?-Explain using the concept of
marginal revenue project.
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Why are some basketball players paid more than
brain surgeons?-Explain using the concept of
marginal revenue project.

• A professional basketball team will pay for a
  player until MRPMRC. A star player can generate
  a lot of extra revenue for a team, increasing
  demand for ticket seats at games as well as
  demand by advertisers for air time of radio tv
  broadcasts
• People place a high value on brain surgeons but
  not in comparison to the availability of brain
  surgeons
• A lot more people place a high value on watching
  star basketball players relative to the number of
  stars

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2. True, false or uncertain, and explain why?
If it were not for unions pushing up wages,
wed all be working 60 hours a week for 100 a
month, just like people did a century ago, or do
today in developing economies.
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2. True, false or uncertain, and explain why?
If it were not for unions pushing up wages,
wed all be working 60 hours a week for 100 a
month, just like people did a century ago, or do
today in developing economies.

• FALSE
• Although unions may raise the wages of members,
  the biggest factor in increasing real wages is
  productivity. Increases in real wages depend on
  increases in real output. Unions may have been
  responsible for social legislation, but
  increasing MRP is much more important.

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3. Use a graph to explain why firms, that want to
maximize profits, use a resource until the
marginal revenue product of this resource equals
the marginal resource cost.
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3. Use a graph to explain why firms, that want to
maximize profits, use a resource until the
marginal revenue product of this resource equals
the marginal resource cost.

• as long as TR increases and does exceed TC the
  firm will improve its profits by hiring more of
  the resource

SMRC
Wage
Input REVENUE and COST
DMRP
Q
QUANTITY OF LABOR
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4. True, false or uncertain, and explain
why? American workers who are paid 10 an hour,
cannot possibly compete with workers who are paid
1 an hour in developing countries
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4. True, false or uncertain, and explain
why? American workers who are paid 10 an hour,
cannot possibly compete with workers who are paid
1 an hour in developing countries

• FALSE
• Some American workers still have jobs and are
  paid more than 10 an hour (lol)
• Americans are paid more because their
  productivity is higher. Increases in real wages
  depend on increases in real output.

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5. Why might a university pay a Nobel
Prize-winning faculty member more than its
president?Does this make economic sense for the
university?
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5. Why might a university pay a Nobel
Prize-winning faculty member more than its
president?Does this make economic sense for the
university?

• The Nobel Laureate increases the reputation of
  the university, and may attract more students,
  increasing revenue. Therefore because the MRP of
  the professor may be greater than the MRP of the
  president the wage rate of the professor would be
  greater.

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6. What are the effects of a minimum wage that is
above the equilibrium wage in a perfectly
competitive market? What about a market in which
the employer is monopsonistic? Give an example
of a relatively competitive labor market, and a
less competitive labor market.
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6. What are the effects of a minimum wage that is
above the equilibrium wage in a perfectly
competitive market? What about a market in which
the employer is monopsonistic? Give an example
of a relatively competitive labor market, and a
less competitive labor market.

• In a monopsonistic labor market, a minimum wage
  may increase both wage and employment up to the
  equilibrium point of the competitive market,
  after which wage only would rise while employment
  remains constant at the Qm amount of labor
• The NYC MTA subway
• A small town newspaper

• In a competitive labor market, a minimum wage
  increases quantity supplied and decreases
  quantity demanded
• Most any industry is an example of a competitive
  labor market

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• (7a) What effect do these regulations have on
  who receives the economic rent from college
  athletics?

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• (7a) What effect do these regulations have on
  who receives the economic rent from college
  athletics?

• They set the level of athletes benefits and
  salaries so the universities receive the economic
  rent.

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• (7b) Which colleges have greater incentive to
  cheat? Why?

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• (7b) Which colleges have greater incentive to
  cheat? Why?

• Colleges that do not have national academic
  prestige
• Colleges that have big arenas or stadiums that
  they need to fill
• A star athlete can increase the universitys MRP
  a lot

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• (7c) Who would gain if the NCAA could no longer
  set rules for college athletics? Why?

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• Players in major-revenue sports would be helped
• Probably star athletes who would receive higher
  salaries and not just standard scholarships.

• (7c) Who would gain if the NCAA could no longer
  set rules for college athletics? Why?

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• (7d) Who would lose if the NCAA could no longer
  control college athletics? Why?

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• (7d) Who would lose if the NCAA could no longer
  control college athletics? Why?

• The universities, they would have to pay a wage
  determined by supply and demand
• Players in low-revenue sports would be hurt

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• (7e) True, false or uncertain and why?
• The NCAA is a champion for amateur athletics,
  and its rules protect the rights of college
  athletes.

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7. The National Collegiate Athletic Assn. (NCAA)
regulates all college athletics in the United
States. It sets the amount of scholarships, the
number of scholarships granted, and regulations
for recruiting athletes. The NCAA has hundreds
of rules regulating intercollegiate athletics.

• (7e) True, false or uncertain and why?
• The NCAA is a champion for amateur athletics,
  and its rules protect the rights of college
  athletes.

• Uncertain
• A case can be made for the majority of amateur
  athletes who are not in major-revenue sports
• However, successful athletes in major-revenue
  sports are harmed
• major collegiate football and basketball programs
  are money makers, and those benefits go to the
  universities, not the amateur athletes

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8. The table below gives you information about a
firm operating in a competitive product market.
Assume all factors of production are fixed with
the exception of labor. The other factors of
production cost the firm 50 a day, which may be
thought of as a fixed cost. Assume the firm is a
profit maximizer. Assume the firm sells its
product at 3 per unit.
Labor input (workers per day) Total Physical Product (output / day) Marginal Physical Product (?output / day) Marginal Revenue Product (?TR/worker)
0 0
1 22
2 40
3 56
4 70
5 82
6 92
7 100
8 106
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8. The table below gives you information about a
firm operating in a competitive product market.
Assume all factors of production are fixed with
the exception of labor. The other factors of
production cost the firm 50 a day, which may be
thought of as a fixed cost. Assume the firm is a
profit maximizer. Assume the firm sells its
product at 3 per unit.
Labor input (workers per day) Total Physical Product (output / day) Marginal Physical Product (?output / day) Marginal Revenue Product (?TR/worker)
0 0 - -
1 22 22 66
2 40 18 54
3 56 16 48
4 70 14 42
5 82 12 36
6 92 10 30
7 100 8 24
8 106 6 18
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8. The table below gives you information about a
firm operating in a competitive product market.
Assume all factors of production are fixed with
the exception of labor. The other factors of
production cost the firm 50 a day, which may be
thought of as a fixed cost. Assume the firm is a
profit maximizer. Assume the firm sells its
product at 3 per unit.
Labor input (workers per day) Total Physical Product (output / day) Marginal Physical Product (?output / day) Marginal Revenue Product ?TR/worker
0 0 - -
1 22 22 66
2 40 18 54
3 56 16 48
4 70 14 42
5 82 12 36
6 92 10 30
7 100 8 24
8 106 6 18

• If the equilibrium market wage is 36 per day,
  the firm will hire ___ workers per day and
  produce ___ units of output.
• At this output, the firm will have a total
  revenue of ____ per day and a total cost of ____
  per day.
• The firm will experience a profit/loss of ___ per
  day.

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8. The table below gives you information about a
firm operating in a competitive product market.
Assume all factors of production are fixed with
the exception of labor. The other factors of
production cost the firm 50 a day, which may be
thought of as a fixed cost. Assume the firm is a
profit maximizer. Assume the firm sells its
product at 3 per unit.
Labor input (workers per day) Total Physical Product (output / day) Marginal Physical Product (?output / day) Marginal Revenue Product ?TR/worker
0 0 - -
1 22 22 66
2 40 18 54
3 56 16 48
4 70 14 42
5 82 12 36
6 92 10 30
7 100 8 24
8 106 6 18

• If the equilibrium market wage is 36 per day,
  the firm will hire 5 workers per day and produce
  82 units of output.
• At this output, the firm will have a total
  revenue of 246 per day and a total cost of 230
  per day.
• The firm will experience a profit of 16 per day.

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9. Suppose youre the HR director for a firm that
sells its output in a monopolist market.

• If you hire an additional worker, output goes up
  by 50 units to 125 units per day. If you want to
  sell the additional 50 units, you must lower your
  price from 3 per unit to 2 per unit. What is
  the maximum wage you would be willing to pay the
  additional worker?

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9. Suppose youre the HR director for a firm that
sells its output in a monopolist market.

• If you hire an additional worker, output goes up
  by 50 units to 125 units per day. If you want to
  sell the additional 50 units, you must lower your
  price from 3 per unit to 2 per unit. What is
  the maximum wage you would be willing to pay the
  additional worker?

• 25
• TR1 75 x 3 225
• TR2 125x2 250
• ?TR 25

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9b. Suppose you hired the additional worker.
Output now stands at 125 units per day at a
product price of 2 per unit.

• If you hire an additional worker, output goes up
  by 40 units to 165 units per day. If you want to
  sell the additional 40 units, you must lower your
  price from 2 per unit to 1 per unit. What is
  the maximum wage you would be willing to pay the
  additional worker? Would you hire this
  additional worker?

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9b. Suppose you hired the additional worker.
Output now stands at 125 units per day at a
product price of 2 per unit.

• If you hire an additional worker, output goes up
  by 40 units to 165 units per day. If you want to
  sell the additional 40 units, you must lower your
  price from 2 per unit to 1 per unit. What is
  the maximum wage you would be willing to pay the
  additional worker? Would you hire this
  additional worker?

• 0
• No, you would not hire the worker nor pay the
  worker a wage because the MRP is negative
• TR1 125 x 2 250
• TR2 165 x 1 165
• ?TR -85

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Use a graph to explain why the monopsonist will
always hire fewer workers and pay lower wages
than firms operating in competitive labor markets
MRC
S
Wage Rate (resource price)
MRPD
Quantity of labor
33
Use a graph to explain why the monopsonist will
always hire fewer workers and pay lower wages
than firms operating in competitive labor markets

• Because the monopsonist is the only firm hiring,
  it faces an upward sloping supply curve.
  Therefore each additional worker hired must be
  paid more and it must increase the wages of all
  previous workers, therefore its MRC is above the
  supply curve at each amount of labor
• The firm hires workers such that MRCMRP but sets
  the wage for these workers at the supply curve
• The firm wants to pay the lowest wage it can and
  still have an input of Qm workers
• This is a lower number of workers and a lower
  wage than the competitive firm would pay its
  workers

MRC
S
Wage Rate (resource price)
Wc
Wm
MRPD
Qm
Qc
Quantity of labor