1. Chapter 11
Labor Markets
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2000 South-Western College Publishing
1

2. In this chapter, you will
learn to solve these
economic puzzles:
What determines unions
Howthe NCAAthe wage
Does do labor exploit
influence wagespays?
an employer and
ratecollege athletes?
employment?
2

3. In a Perfectly
Competitive Market,
what determines the
level of Wages?
The intersection of the
demand for labor and
the supply of labor
3

4. Market Supply and Demand
S
Wages
D
Quantity of Labor
4

5. What does the Demand
Curve for Labor show?
The different quantities of
labor employers are
willing to hire at different
wage rates in a given time
period, ceteris paribus
5

6. 60 Production Function
50
Total Output
40
30
Total Output
20
10
Quantity of Labor
1 2 3 4 5 6
6

7. What is Marginal
Revenue Product?
The increase in total
revenue to a firm
resulting from hiring an
additional unit of labor or
other variable resource
7

8. 12 Marginal Product Curve
10
Marginal Product
8
6
Law of
4 Diminishing
Returns
2
Quantity of Labor
1 2 3 4 5 6
8

9. What is the Demand
Curve for Labor equal to?
It is equal to the marginal
revenue product of labor
9

10. $350 Demand Curve for Labor
$280 M
RP
$210 =d
em
$140 an
d
$70
1 2 3 4 5Q
10

11. Increase in Quantity
of labor an employer
will hire
Decrease in
Wage Rate
11

12. How do we measure MRP
in Perfect Competition?
A perfectly competitive
firm’s marginal revenue
product is equal to the
marginal product of its labor
times the price of its product
12

13. What is
Derived Demand?
The demand for labor and
other factors of production
that depends on the
consumer demand for final
goods and services the
factors produce
13

14. What does the Supply
Curve for Labor show?
The different quantities of
labor workers are willing to
offer employers at different
wage rates in a given time
period, ceteris paribus
14

15. $350 Supply Curve of Labor
Wage Rate per day
$280
S
$210
$140
$70 D
Quantity of Labor
10 20 30 40 50
15

16. Increase in Quantity of
labor willing to work
Increase in
Wage Rate
16

17. What is Human Capital?
The accumulation of
education, training,
experience, and health
that enables a worker
to enter an occupation
and be productive
17

18. $350 Competitive Labor Market
Wage Rate per day
$280
E S
$210
$140
$70 D
Quantity of Labor
10 20 30 40 50
18

19. $350 Competitive Labor Market
$280 Wage Rate per day
E
$210 S
$140
$70 D
Quantity of Labor
1 2 3 4 5
19

20. Does the Perfectly
Competitive model apply
to workers in unions?
No
20

21. What are examples
of Unions?
• Teamsters
• United Auto Workers
• National Education Assoc.
• American Federation of
Government Employees
21

22. How do Unions attempt
to raise wages?
• Increase demand for labor
• Decrease supply for labor
• Power
22

23. What is Featherbedding?
Unions force firms to hire
more workers than are
required or to impose
work rules that reduce
output per worker
23

24. What else can Unions
do to increase the
demand for labor?
Decrease competition
from other nations
24

25. Unions cause an increase
$350 in the demand for labor
$280 Wage Rate per day
E2 S
$210
E1
$140
$70 D2
Quantity of Labor D1
10 20 30 40 50
25

26. Increase in wages
and employment
Increase in the
demand for labor
Union
featherbeds
26

27. Unions cause a decrease
$420 in the supply for labor
$350 Wage Rate per day
E2 S2
$280 S1
E1
$210
$140 D1
Quantity of Labor
10 20 30 40 50
27

28. How else can Unions
raise wages?
Collective bargaining
28

29. What is
Collective Bargaining?
The process of negotiations
between the union and
management over wages
and working conditions
29

30. $350 Collective Bargaining causes
a Wage Rate increase
$280 Wage Rate per day Unemployment
S
$210
$140
$70 D
Quantity of Labor
10 20 30 40 50
30

31. What factors can cause
a change in the
Demand for Labor?
• Unions
• Prices of substitute goods
• Demand for final products
• Marginal product of labor
31

32. What factors can
cause a change in the
Supply for Labor?
• Unions
• Demographic trends
• Expectations of future income
• Changes in immigrations laws
• Education and training
32

33. What has happened to
Union Membership
since WWII?
Union power has declined
33

34. In which sectors has
union membership
increased since 1989?
Public sector and services
34

35. How does union
membership in the
U.S. compare to
other countries?
Union membership is far
below that of other
industrialized countries
35

36. What is a Monopsony?
A labor market in which a
single firm hires labor
36

37. 87%
40%
37%
32%
29%
24%
15%
U.S. Japan CanadaU.K. Germany Italy Sweden
37

38. What is Marginal Factor
Cost (MFC)?
The additional total cost
resulting from a one-
unit increase in the
quantity of labor
38

39. What conclusion can be
drawn from a
Monopsonistic Market?
Because the monopsonist
can hire additional
workers only by raising
the wage rate for all
workers, the MFC > W
39

40. A Monopsonist determines its Wage Rate
$5
$4 Dollars per hour MFC
$3
S
$2
D (MRP)
$1
Quantity of Labor
1 2 3 4 5
40

41. How are wages compared
between the two markets?
A monopsony hires fewer
workers and pays a lower
wage than a firm in a
competitive labor market
41

42. Key Concepts
42

43. Key Concepts
• In a Perfectly Competitive Market, what deter
• What is Marginal Revenue Product?
• What is the Demand Curve for Labor equal to
• How do we measure MRP in Perfect Competit
• What does the Supply Curve for Labor show?
43

44. Key Concepts cont.
• How do Unions attempt to raise wages?
• What is Featherbedding?
• What is Collective Bargaining?
• What factors can cause a change in the Dema
• What factors can cause a change in the Suppl
44

45. Key Concepts cont.
• What has happened to Union Membership sinc
• How does union membership in the U.S. comp
• What is a Monopsony?
• What is Marginal Factor Cost (MFC)?
• How are wages compared between the
two markets?
45

46. Summary
46

47. Marginal revenue product (MRP)
is determined by a worker’s
contribution to a firm’s total revenue.
Algebraically, the MRP equals the
price of the product times the
worker’s marginal product (MP).
47

48. The demand curve for labor is
the curve showing the quantities of
labor a firm is willing to hire at
different prices of labor. The
marginal revenue product (MRP) of
labor curve is the firm’s demand
curve for labor. Summing individual
demand for labor curves gives the
market demand curve for labor.
48

49. $350 Demand Curve for Labor
$280 M
RP
$210 =d
em
$140 an
d
$70
1 2 3 4 5Q
49

50. Derived demand means that a
firm demands labor because labor is
productive. Changes in consumer
demand for a product cause changes
in demand for labor and for other
resources used to make the product.
50

51. The supply curve of labor is the
curve showing the quantities of
workers willing to work at different
prices of labor. The market supply
curve of labor is derived by adding
the individual supply curves of labor.
51

52. $350 Supply Curve of Labor
Wage Rate per day
$280
S
$210
$140
$70 D
Quantity of Labor
10 20 30 40 50
52

53. Human capital is the
accumulated people make in
education, training, experience, and
health in order to make themselves
more productive. One explanation
for earnings differences is
differences in human capital.
53

54. Collective bargaining is the
process through which a union and
management negotiate a labor
contract.
54

55. Monopsony is a labor market in
which a single firm hires labor.
Because the monopsonist faces the
industry supply curve of labor and each
worker is paid the same wage, changes
in total wage cost exceed the wage rate
necessary to hire each additional
worker. As a result, the marginal factor
cost (MFC) of labor curve lies above
the supply curve of labor.
55

56. The monopsonist’s wage rate and
quantity of labor are determined where
the MFC equals MRP . Since at this
point the worker’s MRP is greater than
the wage paid, the monopsonist
exploits the workers.
56

57. A Monopsonist determines its Wage Rate
$5
$4 Dollars per hour MFC
$3
S
$2
D (MRP)
$1
Quantity of Labor
1 2 3 4 5
57

58. Chapter 11 Quiz
©2000 South-Western College Publishing
58

59. 1. Marginal revenue product measures the
increase in
a. output resulting from one more unit of
labor.
b. TR resulting from one more unit of
output.
c. revenue per unit from one more unit of
output.
d. total revenue resulting from one more
unit is the increase in total revenue to a
D. MRP of labor.
firm resulting from hiring an additional unit
of labor or other variable resource.
59

60. 2. Troll Corporation sells dolls for $10.00
each in a market that is perfectly
competitive. Increasing the number of
workers from 100 to 101 would cause
output to rise from 500 to 510 dolls per day.
Troll should hire the 101st worker only
when the wage is
a. $100 or less per day.
b. more than $100 per day.
c. $5.10 or less per day.
d. none of the above.
A. Under perfect competition, the firm hires
workers until the MRP equals the wage rate.
MRP equals $10 x MP (510 - 500) = $100.
60

61. 3. Derived demand for labor depends on the
a. cost of factors of production used in the
product.
b. market supply curve of labor.
c. consumer demand for the final goods
produced by labor.
d. firm’s total revenue less economic
profit.
C. If consumers do not purchase goods, there
is no MRP and no workers are hired.
61

62. 4. If demand for a product falls, the
demand curve for labor used to produce
the product will shift
a. leftward.
b. rightward.
c. upward.
d. downward.
A. If consumers demand for a product
decreases and supply remains the
constant, the price of the product falls
and the MRP (P x MP) decreases.
62

63. 5. The owner of a restaurant will hire
waiters if the
a. additional labor’s pay is close to the
minimum wage .
b. marginal product is at the maximum.
c. additional work of the employees adds
more to total revenue than to costs.
d. waiters do not belong to a union.
C. If MRP exceeds the wage rate paid
waiters, it is profitable for the restaurant
to hire more waiters.
63

64. 6. In a perfectly competitive market, the
demand curve for labor
a. slopes upward.
b. slopes downward because of
diminishing marginal productivity.
c. is perfectly elastic at the equilibrium
wage rate.
d. is described by all of the above.
B. As output expands in the short run, a
fixed factor results in diminishing returns
causing MP to decrease. Correspondingly,
MRP decreases.
64

65. 7. A union can influence the equilibrium
wage rate by
a. featherbedding.
b. requiring longer apprenticeships.
c. favoring trade restrictions on
foreign products.
d. all of the above.
e. none of the above.
D. Featherbedding and trade protectionism
increase the demand for labor. Requiring
longer apprenticeship decreases the
demand for labor.
65

66. 8. In which of the following market
structures is the firm not a price taker
in the factor market?
a. Oligopoly.
b. Monopsony.
c. Monopoly.
d. Perfect competition.
B. Monopsony is a labor market in which a
single firm hires labor. For example, the
“company town” where everyone works
for the same employer.
66

67. 9. The extra cost of obtaining each
additional unit of a factor of production
is called the marginal
a. physical product.
b. revenue product.
c. factor cost.
d. implicit cost.
C. The assumption of MFC is that the firm
must pay a higher wage to each additional
worker as well as to all previously hired
workers.
67

68. 10. A monopsonist’s marginal factor cost
curve lies above its supply curve because the
firm must
a. increase the price of its product to sell
more.
b. lower the price of its product to sell more.
c. increase the wage rate to hire more labor.
d. lower the wage rate to hire more labor.
C. The monopsonist can hire an
additional worker only by raising the
wage rate for all workers. Therefore,
the MFC exceeds the wage rate along
the labor supply curve.
68

69. 11. In order to maximize profits, a
monopsonist will hire the quantity of labor
to the point where the marginal factor cost
is equal to
a. marginal physical product.
b. marginal revenue product.
c. total revenue product.
d. any of the above.
B. The MRP curve is the contribution of each
worker to total revenue and MFC the
addition to total cost. When MRP > MFC,
the firm hires more workers.
69

70. Marginal Factor Cost (MFC) and
$10 Marginal Revenue Product (MRP)
$8 Dollars per hour Surplus MFC
$6
$4 Shortage D (MRP)
$2
Quantity of Labor
1 2 3 4 5
70

71. 12. BigBiz, a local monopolist, currently hires
50 workers and pays them $6 per hour. To
attract an additional worker to its labor
force, BigBiz would have to raise the wage
rate to $6.25 per hour. What is BigBiz’s
marginal factor cost?
a. $6.25 per hour.
b. $12.50 per hour.
c. $18.75 per hour.
d. $20.00 per hour.
C. Its total cost would increase by $18.75 to
hire that additional worker (25 x 50 + 6.25).
71

72. 13. Suppose a firm can hire 100 workers at
$8.00 per hour, but must pay $8.05 per hour
to hire 101 workers. Marginal factor cost
(MFC) for the 101st worker is
approximately equal to
a. $8.00.
b. $8.05.
c. $13.05.
d. $13.00.
C. The firm’s total cost would increase $13.05
to hire the 101st worker (.05 x 100 + 8.05).
72

73. 14. A monopsonist in equilibrium has a
marginal revenue product of $10 per worker
hour. Its equilibrium wage rate must be
a. less than $10.
b. equal to $10.
c. greater than $10.
d. equal to $5.
A. Because of its monopoly in the labor
market, a monopsony hires fewer workers
and pays a lower wage than a firm in a
competitive labor market.
73

74. A Monopsonist determines its Wage Rate
$5
$4 Dollars per hour MFC
$3
S
$2
D (MRP)
$1
Quantity of Labor
1 2 3 4 5
74

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76. END
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