Econ 202

Module 8 Homework

1. Answer the following:

a. The demand for labor for a firm operating in a perfectly competitive output market equals
__ the value of the marginal product of labor. __.

b. The demand for labor for a firm with market power in the output market equals __ the
marginal revenue product ____.

2. Would you expect the presence of labor unions to lead to higher or lower pay for worker-
members? Would you expect a higher or lower quantity of workers hired by those
employers? Explain briefly.
The presence of labor unions will lead to higher pay for worker-members because labor
union uses its bargaining power to push for higher wages for its members. Labor union have
greater bargaining power than individual employees, and as such, they will be able to bargain
for higher pay. With higher labor cost, the company would be forced to embark on labor
saving strategy and this will further reduce the quantity of labor hired. With this in mind, we
would expect a lower quantity of workers hired by employers.

3. Researchers have found low-skilled immigration has a relatively small effect on the wages of
low-skilled workers. Explain this finding (Hint: there are multiple factors that can explain
this. You only need to explain one of them.)
Legal floor of federal and state minimum wage laws ensures that the compensation of low-
skilled does not fall below a certain level.

4. Answer the following:

a. What is the marginal cost of labor for a firm that operates in a competitive labor market?
The marginal cost of labor can be described as the extra cost incurred by firms from
employing additional units of labor. In competitive labor market, marginal cost of labor is
equal to the wage rate
b. How does this compare with the MCL for a monopsony? Monopsony is characterized by
a situation where there is only one sole employer demanding labor. Considering that the
firm does not face any competition in regard to hiring workers, the firm has full control
over the wage rate. Considering such firm faces positively sloped market labor supply
curve, it has to raise the market wage rate for its laborers to hire more workers and as
such the marginal cost of labor for monopsony is higher than that of competitive labor
market.
c. Who will pay higher wages: a monopsony or a competitive labor market? A competitive
labor market.
d. Who will employ more labor: a monopsony or a competitive labor market? A competitive
labor markets

5. If it is not profitable to discriminate, why does discrimination persist? Discrimination can

emerge at different levels in an organization: among managers, among workers, and among
 customers. For instance, consider a situation where a manager who is not personally
prejudiced, but leads workers or serves customers who are prejudiced. By treating minority
groups or women fairly, the manager will negatively affect the morale of prejudiced workers
or drive away prejudiced customers. In such a context, it is evident that a non-discrimination
policy would reduce the firm’s profit. Businesses operate in the context of society and as
such, they have to follow societal norms or risk suffering.

6. If a country had perfect income equality what would the Lorenz curve look like? Lorenz
curve would be a line sloping up at a 45-degree angle

7. Offer one reason why income inequality might increase productivity and efficiency in an
economy.
Considering the higher propensity to save of the rich relative to the poor, distribution of income
to the rich promotes savings and this increases investments and the level of economic activity
hence positively related to increased productivity and efficiency in an economy.
Offer one reason why income inequality might reduce productivity and efficiency in an
economy. Explain your answers.
Income inequality may increase ill health and health spending, and reduce educational
performance of for the poor which will lead to a reduction in the productive potential of the
workforce in an economy.

8. In country A, the population is 300 million and 50 million people are living below the
poverty line. What is the poverty rate?
Poverty rate= (50/300) *100
=16.67%

9. Susan is a single mother with three children. She can earn $8 per hour and works up to 2,000
hours per year. However, if she does not earn any income at all, she will receive government
benefits totaling $16,000 per year. For every $1 of income she earns, her level of government
support will be reduced by $1. The table below is patterned after Table 15.8 from the text.

Number of Work Earnings from Work Government Benefits Total Income

Hours
2000 $16,000 $0 $16,000
1600 $12,800 3200 $16000
1200 $9600 6400 $16,000
800 $6400 9600 $16000
400 $3200 $12,800 $16,000
0 $0 $16,000 $16,000

a. Complete the table.

 b. Is this program an example of a poverty trap? Explain your answer. Yes, the program is
an example of a poverty trap since Susan receives no net gain from working as each time,
she earns a specific amount she loses a similar amount in government support.
c. If this program is an example of a poverty trap, how can this program be altered to avoid
this problem? The program can be altered by designing an antipoverty program such that
instead of reducing government payments by $1 for every $1 earned, payments are
reduced by some smaller amount instead ($0.50). The bite of the poverty trap can also be
reduced by imposing requirements for work as a condition of receiving benefits and
setting a time limit on benefits.

10. A group of 10 people have the following annual incomes: $55,000, $30,000, $15,000,
$20,000, $35,000, $80,000, $40,000, $45,000, $30,000, $50,000. Complete the table.

Income Quintile Share of Income

$15,000 Bottom 8.75%
$20,000
$30,000 2nd 15%
$30,000
$35,000 3rd 18.75%
$40,000
$45,000 4th 23.75%
$50,000
$55,000 Top 33.75%
$80,000

a. If $4000 is taxed from the top earner and transferred to the lowest earner, would that
increase or decrease the share of income held by the top quintile? The share of income
held by top earner will decrease by 1%
b. Would this transfer increase or decrease the share of income held by the bottom quintile?
The share of income held by bottom quintile will increase by 1%
c. Would this have any effect on the 2nd quintile? The 3rd? The 4th? There would be no effect
on 2nd, 3rd, and 4th quintile
d. Would this transfer increase, decrease, or have no effect on income inequality in this
group? Decrease income inequality
e. Redistributing income from the highest earner to the lowest one would reduce the utility
of the top earner and increase the utility of the lowest earner. But what would happen to
overall utility in the economy? Would it increase, decrease, or remain the same? Explain
your answer. (Hint: does the marginal utility of income diminish as one earns more?)
According to marginal utility, each additional dollar is more valuable to those with
lower incomes because they have fewer dollars in total. For those with higher incomes,
the marginal utility of each additional dollar of income is lower. The idea is that income
redistribution from higher income earners to low-income earners will cause less loss of
utility for someone with a higher income. Overall utility in the economy will increase.