Exam 3 - Chapter 10 - Factor Markets

Question 1

What do all factors of production have in common?

Answer 1

the payment they receive should be based on their economic contribution to the firm.

Question 2

Marginal physical product (MPP)

Answer 2

The additional output created by employing one more unit of a factor of production is it’s marginal physical product. The marginal physical product (MPP) is a measure of the economic value of the worker to the firm.

Question 3

In general, we expect that the MPP of workers is

Answer 3

subject to the Law of Diminishing Returns. That is, we expect that as we add more workers, without adding the other factors of production, the output per worker will decline.

Question 4

The Marginal Revenue Product (MRP)

Answer 4

is the additional revenue generated by adding one unit of a factor of production.

Question 5

The Marginal Revenue Product (MRP) of a factor of production is the

Answer 5

marginal revenue times the marginal physical product. MRP = MR x MPP

Question 6

What two factors will affect the MRP?

Answer 6

1. diminishing returns, affects the physical productivity of the workers.
2. marginal revenue often declines as output increases. These two things together tell us that the MRP will decline as output increases, ceteris paribus

Question 7

Factors Affecting the MPP

Answer 7

First is the human capital of the workers. This is their native skills, plus their education, training and experience. We get better at our jobs as we learn how to do them, discover tricks that make them easier, figure out how to please our boss and so on. People who have stronger education and training will usually do better at a job requiring their training

Question 8

Why workers in the US might be paid higher wages?

Answer 8

at least in part, because they have greater human capital in the form of education and training. Or, they might, on average, be more experienced in their jobs, taking advantage of tricks learned on the job.

Question 9

What is the second factor that influences the MPP?

Answer 9

physical capital. This is buildings, machines, trucks, and other goods made by people to make other goods. The worker who employs the most capital will likely be the worker who produces the most.

Question 10

In general, capital makes

Answer 10

workers more productive.

Question 11

Combination of advanced technology and capital will produce

Answer 11

the highest income for labor.

Question 12

Marginal Factor Cost

Answer 12

The additional cost of hiring one more unit of an input is called the Marginal Factor Cost, and represents the supply of that factor.

Question 13

What is the optimal amount of labor, or any factor of production, to employ?

Answer 13

Workers should be hired up to the point that the additional benefits obtained from hiring them is just equal to the additional costs.

Question 14

What is the rule of hiring factors of production for the profit-maximizing firm?

Answer 14

MRP = MFC.

- that supply should equal demand.

Question 15

The MRP curve is downward sloping curve

Answer 15

because of diminishing returns and the decline in MR as quantity sold increases. MFC is upward sloping because a higher wage is required to entice resources to enter the market.

Question 16

The MRP of each worker is

Answer 16

not the MRP that existed when they were hired, but the MRP of the last worker hired.

Question 17

The demand for a factor of production is a

Answer 17

derived demand. This means that we do not value land, labor or capital for themselves, but we value them for what they can produce for us

Question 18

What rule should we follow to make this happen?

Answer 18

Clearly, the rule needs to be related to two things: the productivity of the factors of production and their costs.

Question 19

In economists terms, the relationship of the marginal physical productivity of labor (or land or capital) to its price will determine

Answer 19

the optimal amount to employ

Question 20

Monopoly occurs when there

Answer 20

is one seller of a good.

Question 21

A monopsony occurs when there is

Answer 21

one buyer.

Question 22

The monopoly restricts

Answer 22

output to raise price.

Question 23

The monopsonist will restrict

Answer 23

employment to lower wages.

Question 24

A union

Answer 24

is a monopoly!

Question 25

A labor union is

Answer 25

an association of workers who unite for a common purpose.

Question 26

What are the three basic kinds of unions used in the United States?

Answer 26

1. Craft or Trade Unions.
2. Industrial Unions.
3. Public Employee Unions.

Question 27

Craft or Trade Unions.

Answer 27

A trade union is a union made up of workers who share the same skill. This includes the carpenters union, electricians union, or, perhaps, the teachers union.

Question 28

Industrial Unions.

Answer 28

An industrial union is made up of all workers who work within an industry, regardless of their respective skills. Examples include the United Auto Workers, the Oil, Chemical and Atomic Workers, or the Culinary Union, which represents hotel and restaurant industry workers.

Question 29

Public Employee Unions.

Answer 29

These are forms of the industrial union, however, the workers involved are government employees.

Question 30

these unions operate under

Answer 30

different rules than private sector unions.

Question 31

Company unions.

Answer 31

This means that only the employees of a single company form a union. These occur in countries where the relationship between labor and management is cooperative, not combative.

Question 32

professional associations

Answer 32

such as the American Medical Association, which may act like unions, but are not legally one

Question 33

Why are the activities of unions are critical for two reasons.

Answer 33

1. unions tend to occur in large, economically vital industries such as airlines, automobile manufacturing and mining.
2. union contracts often affect wage increases for non-unionized workers. That is, union workers set the size of wage increases for much of the country

Question 34

Unions have a

Answer 34

wide variety of goals, and the goals fluctuate over time.

• good times increases wages
• bad times (recession) maintain employment of members.

Question 35

What are the many goals of unions?

Answer 35

The many goals of unions may include:

1. Maximizing wages and benefits.
2. Maximizing total wages and benefits paid.
3. Employment
4. Work rules and working conditions

Question 36

Maximizing wages and benefits.

Answer 36

the union may be interesting in raising wages as high as possible. This strategy may have a negative impact because high wages may cause the firm to substitute additional capital for labor. However, if the union has 100,000 members, and it can get a 10% raise for 95,000 of them, with 5,000

Question 37

Maximizing total wages and benefits paid.

Answer 37

. The firm might want to bargain for the largest possible payment from the firm to the workers. This means it would find the optimal balance between raising wages and the reduction in employment it would cause.

Question 38

Employment

Answer 38

The union protected employment at the expense of wages.

Question 39

Work rules and working conditions

Answer 39

Unions may bargain for improvements in working conditions, or for a set of rules to be applied in the workplace.

Question 40

Union tactics include:

Answer 40

1. Collective Bargaining
2. Boycotts and public pressure
3. Legislature lobbying.
4. Strikes.

Question 41

Collective Bargaining

Answer 41

occurs when the union bargains for the workers as a group, rather than each bargaining separately. This creates the monopoly union against the monopsony firm, theoretically creating a more equal bargaining position. Surprisingly, this was only made possible in many industries in the 1920s

Question 42

Boycotts and public pressure

Answer 42

A union may try to bring public opinion to bear on an employer. They will advertise against an employer they see as unfair to the union, and in the extreme case, organize a boycott. For example, in the 1960s, the farm workers organized a boycott of grape producers. Consumers were urged not to buy grapes that had not been picked by union workers.

Question 43

Legislature lobbying.

Answer 43

Unions lobby state legislatures and the US Congress to create laws more favorable to unions and their goals. In addition to concern for its relationship with the employers, a union may argue for laws that protect the industry, such as tariffs or trade restrictions against foreign competitors. In that sense, the union and firm may have a common interest.

Question 44

Strikes.

Answer 44

A strike occurs when workers refuse to work. Typically, they will march in picket lines outside the firm to alert customers to the existence of the strike.

Question 45

Unions can “belong” to the firm and its workers in three ways.

Answer 45

1. closed shop
2. union shop
3. right to work law

Question 46

closed shop

Answer 46

occurs when workers must already belong to the union before they can be hired by the firm. Closed shops are illegal in the United States, prohibited by the Taft-Hartley Act of 1947 (which was passed over the veto of President Truman)

Question 47

union shop

Answer 47

is legal in most states. A union shop exists when workers are required to join the union after being hired.

Question 48

right to work law

Answer 48

prohibits all requirements for workers to join the union. The union may exist in the industry, but each firm will have both union and non-union workers on its payroll.

Question 49

unionized workers.

Answer 49

union workers pay union dues,

Question 50

non-unionized workers

Answer 50

Since only the union workers pay union dues, the union and its members will believe that some workers get value for nothing.

Question 51

Effects of Unions

Answer 51

1. The most obvious would be the increase in wages possible with the exercise of their monopoly power.
2. raising wages and benefits.
3. maximize employment - they would sacrifice wage increases if it means preventing layoffs of their members.

Question 52

Some argue that unions are positive factors in the workplace, because

Answer 52

they have increased worker safety (lowering costs to the firm), and they provide a more stable labor force, lessening training and hiring costs for the firm

Question 53

Violence Against Unions

Answer 53

When the union movement began in the US, violence by companies against the founding of the union was common. Unions organizers were often often killed and sometimes killed

Question 54

Violence By Unions

Answer 54

Unions are also sometimes guilty of violence. Striking workers have attacked workers who cross the picket line and continue to work (scabs). They may also attack customers entering businesses where the workers are on strike.

Question 55

Discrimination

Answer 55

In the past, unions often limited the types of members allowed, often on the basis of race. Union labels, today thought to symbolize “Made in America”, once meant “Made By Whites.”

Question 56

Unions Around the World

Answer 56

developing countries, there are no unions and workers are at the mercy of the business. In other countries, unions are seen as partners with the business.

Question 57

Many unions outside the United States

Answer 57

are company or even factory unions.

Question 58

federations

Answer 58

groups of unions that band together to seek political or social aims. These federations usually do not conduct bargaining

Question 59

Japanese labor federations

Answer 59

such as the Japanese Trade Union Confederation (Rengo), and The National Confederation of Trade Unions (Zenroren) have strong social and political agendas

Question 60

Rengo

Answer 60

by far the largest, includes in its goals improving working conditions, particularly for “non-regular” workers, promoting gender equality, and “to help create sustainable societies through fair globalization.”

Question 61

Zenroren

Answer 61

is far more extreme in its goals, which include the end to the US/Japan defense treaty, organization of all workers, changes to the Japanese tax system, higher wages, and many more

Question 62

Unions in China

Answer 62

are company and factory based, and belong to the government-controlled All-China Federation of Trade Unions (ACFTU). Union leaders are selected by the government and unions in general are considered to be “laoban gonghui,” meaning they are the “boss’ union.”

Question 63

In the United Kingdom

Answer 63

unions represent industries (e.g., the Association of Flight Attendants) and companies (e.g., Accord, which represents workers at Lloyd’s Bank).

Question 64

Almost all unions in England belong to the

Answer 64

Trades Union Congress, which lobbies the government on behalf of workers.

Question 65

In Germany,

Answer 65

unions may represent industries or single companies, and they negotiate wages, benefit, and working conditions.

Question 66

“worker’s councils”

Answer 66

that work with management, and often have voting membership on the board of directors of German companies.

Question 67

why in many countries, union membership has been declining since the 1970s or 1980s.

Answer 67

In part, this is due to anti-union policy changes at the governmental level such as the Thatcher administration in England and the Reagan administration in the US.

• decline in manufacturing in these nations, and the increase in service industries which are

Question 68

Only three major countries have more than 50 percent of their workforce unionized:

Answer 68

Norway, Denmark, and Sweden.

Question 69

How is capital is different than labor in one fundamental way?

Answer 69

Labor is purchased for a short period of time: an hour, a day, a week, a month. Labor can quit and walk away

Question 70

How do we value capital?

Answer 70

by comparing the income it will earn us over a long period of time to the costs of buying it, which may be paid in advance

Question 71

Production with capital is

Answer 71

“round about.”

• That means we spend money to buy the factory or airplane, and then get our money back over time.

Question 72

Land has value because

Answer 72

it has alternate uses.

Question 73

So while the value of labor is defined by what is

Answer 73

producing, the value of land will be based, at least in part, on the value of what it could produce in its best alternative use.

Question 74

Why are profits necessary?

Answer 74

1. some profits are necessary to keep entrepreneurs in business. Without profit, there would be no businesses.
2. profits are signals to other entrepreneurs

Question 75

allocation is

Answer 75

made most efficiently in an economy where profit maximizing entrepreneurs are free to move resources to their most profitable uses.

Question 76

Factors of production should be paid based upon

Answer 76

their economic contribution to the firm.

Question 77

The output created by an additional unit of input is called

Answer 77

the marginal physical product.

Question 78

The marginal revenue product

Answer 78

equals the marginal physical product times the marginal revenue.

Question 79

The MRP represents

Answer 79

the demand for factors, their economic contribution to the firm.

Question 80

Human capital is the

Answer 80

skills, training and abilities of a person.

Question 81

The MPP of people depends on

Answer 81

their human capital and on the amount of physical employed with them.

Question 82

The additional cost of hiring one more unit of input is the

Answer 82

marginal factor cost.

• This is the supply of that factor.

Question 83

Equilibrium in factors markets occurs where the

Answer 83

MRP = MFC

Question 84

Demand for factors of production is a

Answer 84

derived demand, based on the demand for the products they produce.

Question 85

Monopsony exists when there is

Answer 85

only one buyer of a good, such as one employer in a town. Monopsony firms will try to lower wages by restricting the number hired. C

Question 86

Craft or trade unions

Answer 86

cover people with similar skills.

Question 87

Industrial unions

Answer 87

cover all persons within an industry regardless of skill.

Question 88

public employee unions

Answer 88

which are a form of industrial union for government workers.

Question 89

Unions may be interested in

Answer 89

maximizing wages, employment, benefits, working conditions or some combination of goals.

Question 90

Unions achieve their goals

Answer 90

via collective bargaining, strikes, political lobby efforts, boycotts and public pressure.

Question 91

Unions do raise wages in their industries,

Answer 91

but may have negative impacts on the productivity of workers.

Question 92

Union shops exist

Answer 92

in most states. These require workers to join unions after they are hired.

Question 93

In right to work states

Answer 93

workers can never be forced to join a union.

Question 94

Capital has value only when

Answer 94

it is expected to create revenue over its life span. It differs from labor in that it is paid and creates a return for many years.

Question 95

Land has value based on

Answer 95

its alternative uses (its opportunity cost). Land that can be used in many ways will be more valuable than land with no obvious uses.

Question 96

Profit is important in that

Answer 96

it is necessary to allow businesses to operate, but it is economically important as a signal to entrepreneurs to guide the allocation of resources in society.