 |  Principles of Microeconomics, 1st Canadian Edition Robert H. Frank,
Cornell University
Ben S. Bernanke,
Princeton University
Lars Osberg,
Dalhousie University
Melvin Cross,
Dalhousie University
Brian MacLean,
Laurentian University
Labour Markets
Graphing ExercisesExtending the Text In the running example of Adirondack Woodworking the authors of your text explore the decision of how many workers to hire in several different scenarios. In Example 13.5 (Part 4 of the example) the decision is complicated by the introduction of the assumption of monopsony on the part of Adirondack. Working from a supply of labour consisting of five workers and a selling price for Adirondack's cutting boards of $20 each, an equilibrium employment level is found. Equilibrium occurs where the VMP of the last worker hired (in this case Carrie) exceeds the marginal labour cost of hiring her, but the next worker's (Donna) MLC exceeds her VMP. As a result, Alisha, Bertham and Carrie are hired while Donna and Ernesto are not hired. |
| | 1. | Look over the table and graph carefully. Notice that they mirror the conditions of Example 13.5 in your text. The information contained in Tables 13.4-13.6 is all included in the table and the graph is simply a linear representation of the VMP and MLC from this example. The initial selling price is $30, not $20 as in the book. Notice that this answers the example in the book of what happens if the selling price is increased from $20 to $30. The equilibrium occurs between the fourth and fifth workers, indicating we should hire four rather than the three we would hire at a selling price of $20. How many should we hire if the selling price were $35 rather than $30?
See our suggested answer. |
| | 2. | At what selling price for cutting boards would Adirondack hire all five workers?
See our suggested answer. |
| | 3. | What is the link between the selling price of output and the number of workers Adirondack wishes to hire?
See our suggested answer. |
| On Your Own: What happens if the selling price of boards follows a demand that is not perfectly elastic? OR How are changes in the productivity and reservation wages of labour played out in labour markets? Case 1: While the Adirondack case is quite interesting and can shed light on a great number of questions, what is likely to happen if the demand for Adirondack's boards is not perfectly elastic? In other words, suppose that to sell additional boards Adirondack has to lower the price along some demand curve. The result will involve having the VMP depend not only on the marginal product of each worker, but on a declining selling price as more are produced for sale. The model below incorporates this extra twist. To begin your analysis, open a new window containing the interactive VMP/MCL model graph or, if the window is already open, click the Reset button and then click the Output Markets button so that "Output Markets are Imperfectly Competitive" appears below the wage rate box. |
| | 4. | Notice the addition of variable price for cutting boards. In this case the price follows a pattern where at a price of $60 no boards would be sold but each $0.25 reduction in price increases the number Adirondack can sell by one. So, if Adirondack asks $59.75 for their boards only one will sell and if they ask $40 they can sell 80 boards. How many boards should Adirondack produce, how many workers should they hire and what should be their asking price for cutting boards?
See our suggested answer. |
| | 5. | Suppose a new technology is developed which increases the ability of each worker to produce cutting boards. This may be in the form of faster setting glue, a more efficient sanding and finishing process or some other production-enhancing development. Under any circumstances the result is an increase in labour productivity. With all else remaining the same, if the increase in productivity is 20%, how many workers should Adirondack hire to produce boards, how many boards should they produce and how much should they charge for boards?
See our suggested answer. |
| | 6. | Who benefits from the increased productivity?
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| | 7. | Suppose the workers decide among themselves that any benefits from this increase in productivity should come to them, since they are the ones actually making the boards—or so it seems. As a result they increase their minimum wage requests by 20%. What will be the result of this action?
See our suggested answer. |
| | 8. | Suppose another increase in productivity takes place, driving productivity all the way to 30% higher than the original. If this occurs after the workers at Adirondack have negotiated a 20% wage increase above, what will be the outcome?
See our suggested answer. |
| Question to Think About... - How does the fact that unions provide training for their members and, additionally, negotiate for increased wages, affect their bargaining position with companies?
- When a new technology is developed, is it always the case that workers will be reduced? How does the underlying demand for the product which is being produced affect the worker / employer relationship?
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2003 McGraw-Hill Higher Education