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Question 2
a) The diagrams are shown below. The key difference between the two industries is the
position of the supply curves. The demand curves can be the same or different, reflecting
the marginal product of labour in each industry. We have assumed that all workers have
the same inherent skills and the same preferences, but that non-monetary aspects of the
two jobs are different. These differences tend to increase the supply of workers to the
Pleasant industry and reduce the supply of workers to the Grimy industry.
b) Wages are higher in the Grimy industry. Since workers all have the same skills, this
wage differential does not reflect differences in skills. Instead, it reflects the undesirable
working conditions in the Grimy industry. In equilibrium, workers must be indifferent
between working in the two industries (otherwise they will move and the equilibrium will
change). So wages must be higher in the Grimy industry to offset the negative nonmonetary aspects of the job in that industry. As we discussed in Chapters 13 and 14, this
wage differential is called a compensating differential.
c) At the initial high wage, the improved working conditions in the Grimy industry will
make the Grimy jobs more attractive than those in the Pleasant industry. Workers will
then shift away from the Pleasant industry and move toward the Grimy industry. This
movement will shift the supply curves to S′ in both diagrams, reducing the wage in the
Grimy industry and increasing the wage in the Pleasant industry. This adjustment will
continue until wages are once again equated across the two industries at wage w*.
Question 4
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The key to determining whether there is discrimination is to determine whether black and
white players are, on average, equally skilled or whether black players, on average, are
© 2005 Pearson Education Canada Inc.
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more highly skilled than white players. Clearly, one possible explanation for black
players earning higher wages than white players (on average) is that they are more
skillful (on average). The tough part of the analysis is to determine by how much black
players are more skilled than white players and thus whether the existing skill differences
can fully explain any observed wage differentials. Sophisticated statistical analysis is
required to do this analysis, which students may learn if they take courses in
Question 6
various hourly wages. This is shown by the first two columns in the table. The demand
curve for labour is the firms’ MRP of labour, shown in the last column. The scale
diagrams are shown below. (Note that to keep the vertical scale large, the top of the
demand curve is not shown.)
b) The MRP curve is the firms’ demand for labour. The competitive equilibrium is where
the quantity of labour demanded equals the quantity of labour supplied, which in this case
occurs at a wage of $20 and a level of employment of 300 workers.
c) The marginal cost of labour (as seen by a single buyer of labour — a monopsonist) is
the change in total labour cost divided by the change in the number of workers hired. We
compute this marginal cost as a change from one row in the table to the next. For each
interval of employment (L), the values are shown below.
© 2005 Pearson Education Canada Inc.
L= 50 to L= 100: MC = (1200 – 500)/50 = 700/50 = 14
L= 100 to L= 150: MC = (2100 – 1200)/50 = 900/50 = 18
L= 150 to L= 200: MC = (3200 – 2100)/50 = 1100/50 = 22
L= 200 to L= 250: MC = (4500 – 3200)/50 = 1300/50 = 26
L= 250 to L= 300: MC = (6000 – 4500)/50 = 1500/50 = 30
L= 300 to L= 350: MC = (7700 – 6000)/50 = 1700/50 = 34
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d) The monopsonist maximizes profits when employment is set such that the marginal
cost of labour equals the marginal revenue product of labour. In the diagram this occurs
where the MC curve intersects the MRP curve. In this case, the monopsonist maximizes
profits by employing only 200 workers and offering a wage (along the S curve) of only
$16. So the single buyer of labour uses its market power to reduce employment and
reduce the wage it pays to its workers (relative to what would occur in a competitive
labour market).
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Question 8
a) wages; employment
b) 10 percent; 15 percent
c) very low (less than 2 percent); very high (approximately 80 percent)
d) rising
e) increase
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