Problems dealing with Factor Markets: A review. 1.Why are some basketball players paid more than...

Problems dealing with

Factor Markets:

A review

1. 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 MRP=MRC. 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

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

2. True, false or uncertain, and explain why?

“If it were not for unions pushing up wages, we’d all be working 60 hours a week for $100 a month, just like people did a century ago, or do today in developing economies.”

2. True, false or uncertain, and explain why? “If it were not for unions pushing up

wages, we’d 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.

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.

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

D=MRP

QUANTITY OF LABOR

Inp

ut

RE

VE

NU

E a

nd

CO

ST

Q

Wag

e S=MRC

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”

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.

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

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.

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.

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 competitive labor market, a minimum wage increases quantity supplied and decreases quantity demanded

• Most any industry is an example of a 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

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?


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

• They set the level of athlete’s benefits and salaries so the universities receive the economic rent.


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


• (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 university’s MRP a lot


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


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

• Players in major-revenue sports would be helped

• Probably star athletes who would receive higher salaries and not just standard scholarships.


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


• (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


• (7e) True, false or uncertain and why?

• “The NCAA is a champion for amateur athletics, and its rules protect the rights of college athletes.”


• (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

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


Labor input

(workers per day)

Total Physical


Marginal Physical


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


Labor input

(workers per day)

Total Physical


Marginal Physical


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.


Labor input

(workers per day)

Total Physical


Marginal Physical


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.

9. Suppose you’re 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?

9. Suppose you’re 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 = 125x$2 = $250• ∆TR = $25

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?

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

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

MRP=D

Quantity of labor

Wag

e R

ate

(res

ou

rce

pri

ce)

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 MRC=MRP 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

MRP=D

Quantity of labor

Qm Qc

Wc

Wm

Wag

e R

ate

(res

ou

rce

pri

ce)

Problems dealing with Factor Markets: A review. 1.Why are some basketball players paid more than...

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