Module 9 – Income Distribution Flashcards
A profit-maximising monopsonist will hire a factor of production up to the point at which _____ is equal to the _____.
the benefit of hiring one additional unit of the factor (i.e. the value of the marginal product of the factor);
cost to the firm of hiring that factor (i.e. the marginal cost of the factor)
If a union negotiates a wage that’s higher than that which would have prevailed in a competitive factor market, …
then fewer people will be hired (given a downward sloping Marginal Product curve)
Given a monopsony and a trade union, by negotiating a wage that is higher then the going rate a trade union may…
…reduce the cost of hiring an additional person and so may increase in employment – this is because the MC will equal the negotiated rate
All market economies elect to alter distribution of income for equity reasons. Discuss.
- Provide income for aged, sick and unemployed
- Tax-transfer are a common method (progressive tax structure)
- Payments in kind (e.g. school meals, subsidised housing, family income supplements)
- Those tax receive less than contribution to total output
- Recipients receive more
A monopsonist will not hire until Marginal Cost = _____, but instead hires until MC = _____
going wage rate;
total cost of hiring one new employee
What do economists mean when they use the expression ‘exploitation of labour’? They mean employers are paying workers
A. a wage rate so low that workers’ living standards are below the minimum acceptable
B. from underdeveloped countries a lot less than they are paying domestic workers
C. a wage rate less than the value of the marginal product of labour
D. money wages which are less than foreign currency wages as measured by the purchasing power parity exchange rate
The correct answer is C. A profit maximising monopsonist will hire labour up to the point at which the benefit of hiring one more worker just equals the cost to the firm of hiring that factor. The monopsonist will not hire up to the point at which the value of the marginal product of labour equals the wage rate. This, the economists call ‘exploitation’.
The demand for goods and services determines the…
demand for the factors of inputs required to produce them
If all workers in this market become unionised and the union negotiated a wage rate significantly higher than ‘We’ then in this labour market
I. unemployment would appear
II. workers who remained employed would be better off
III. the total wage bill of all firms in the market would increase
Which of the following is correct?
A. I only
B. I and II only
C. II and III only
D. I, II and III
The correct answer is B. At a wage rate > We, S>D therefore unemployment will exist. I is true. Those who remain employed will have a higher wage rate and therefore a higher weekly income. Therefore II is true. Whether the total wage bill increases for all firms taken together will depend upon the wage elasticity of demand for labour. If inelastic, the total wage bill will increase ; if elastic, it will decrease. Thus III is not necessarily true.
A monopsonist
I. is the sole employer in a market
II. faces a completely wage elastic supply curve of labour
III. ’s marginal cost of labour exceeds the going wage rate
Which of the following is correct?
A. I only
B. II only
C. I and III only
D. I, II and III
The correct answer is C. By definition a monopsonist is the sole employer in a market. Thus I is true. The wage rate in a monopsony market will be determined by the demand for and supply of labour. However once that rate is determined if a monopsonist wishes to have more labour the monopsonist will have to offer a wage higher than the going rate to attract more people into the labour market but the higher rate will then have to be paid to all workers. Thus the marginal cost of labour will exceed the wage rate (III is true) and the monopsonist will not face an elastic labour supply curve. Thus II is wrong.
Under what condition can a trade union make the marginal cost of labour for an employer lower than it would have been in a non-unionised labour market? When the employer is
A. an imperfect competitor
B. a monopolist
C. an oligopolist
D. a monopsonist
The correct answer is D. Only a monopsonist faces a supply curve of labour where the marginal cost exceeds the wage rate; i.e. to have additional labour the monopsonist has not only to increase the wage to attract new labour but also offer the same new rate to existing labour. A trade union by negotiating a higher then equilibrium wage rate makes the marginal cost of hiring labour constant. Thus D is true. In competitive labour markets firms can hire as much labour as they wish at the going wage rate; unions, for those firms, make wage rates higher than they otherwise would have been.
The price paid for labor varies…
depending on how much demand there is for that persons skills
The supplies for factors of production are determined by ?
Resource owners
Definition of “exploitation of labour”
Paying a wage rate less than the value of the marginal product of the labour
Society’s total income is dependent on how _____
efficiently a society utilized resources
In terms of purchasing power where would you be best off?
In
A. New York with $500
B. London with £350
C. Bangkok with 20 000 Baht
D. Abu Dhabi with 2 500 Dirham
The correct answer is D. Converting each to dollars yields:
London $525 (£350 × 300/200)
Bangkok $500 (Baht 20 000 × 300/12 000)
Abu Dhabi $625 (Dirham 2 500 × 300/1 200)
In the US in the 1930s John L. Lewis successfully negotiated wage increases for coalminers. His union, it is alleged, achieved for the workers wage rates approximately 100 per cent higher than they would have been in the absence of the union. One cost associated with Lewis’s efforts was a dramatic decrease in the number of coalminers employed. If total wage income increased because of the union efforts, then
I. employers were no longer paying employed coalminers the value of their marginal product.
II. the employed coalminers could have compensated those laid off and each would have been better off. Which of the following is correct?
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
The correct answer is B. The fact that employers were forced to pay a higher-than- competitive equilibrium wage rate does not imply that they did not equate wage and marginal product. Indeed, the laying-off of workers indicates that they moved in that direction. Thus, there is no reason to suppose that response A is correct. Since total wage income rose, however, not only were the employed coalminers better off than before but they were in a position to pay the laid-off workers their original wage income, themselves their original wage income, and still have some income left over.
What is the name of the exchange rate which is calculated by comparing the costs of a basket of representa-tive goods in each country’s currency and converting them all to one currency?
A. The international exchange rate
B. The official exchange rate
C. The purchasing power parity exchange rate
D. The consumer price index exchange rate
The correct answer is C. This is a definitional question.
Definition of trade union.
A trade union represents a group of or all the resource owners in a market
If the market supply curve of labour were to shift to the left what would the profit maximising firm do?
A. Shift its VMP to the left
B. Move up its VMP and hire fewer man hours
C. Nothing in the short run
D. Leave the industry in the long run
The correct answer is B. The shift in the market supply curve to the left would produce a higher than We equilibrium wage rate. The profit maximising firm would equate the new wage rate with the value of the marginal product of labour, i.e. move up its VMP and hire fewer man hours.
At the equilibrium wage rate what is the return to all factors employed by the firm other than skilled labour?
A. (0We X 0Q) - (0we x oq)
B. Total Revenue - (0we xoq)
C. Total Revenue - (0We x 0q)
D. VMP X 0q X 0we
The correct answer is B. In equilibrium the return to skilled labour is the number of man hours × wage rate, i.e. owe×oq. The return to all factors is total revenue from the sale of the products (S). Thus the return to all factors other than skilled labour equals TR − (owe×oq).
In a resource market, the demand and supply of a factor of production determine…
equilibrium price and equilibrium quantity supplied
The income earned by factors of production are:
- the wages/salaries paid for labor
- the interest and dividends paid to owners of capital
- the rent paid to owners of land and mineral deposits
What is the relationship between the market supply curve (S) and the firm’s value of the marginal product curve (VMP)?
A. There is no relationship between the market S curve and the firm’s VMP curve
B. S is the summation of the all the VMPs of firms in the market
C. S determines the position of VMP
D. S determines the equilibrium wage rate, We
The correct answer is A. D is the summation of all firms’ VMP; both are unrelated to the market supply curves.
At the equilibrium wage rate what is the firm’s total wage bill for skilled labour
A. The area under the VMP curve
B. 0Q X OWe
C. 0q X 0we
D. The answer cannot be determined from the figure
The correct answer is C. The firm will have labour up to the point at which the wage rate We equals the value of the marginal product of labour; this occurs when oq man hours are hired. The wage bill for the firm for skilled labour therefore will be owe×oq.
To maximise profit, how many pickers should the farmer hire and why?
A. One tomato picker because his contribution to output is greatest.
B. Three tomato pickers because the fourth costs more than he earns.
C. Eight tomato pickers because costs will equal revenue.
D. Nine tomato pickers because the value of the marginal product of the tenth picker is zero.
The correct answer is B. A profit-maximising firm will hire an additional worker if that worker contributes more to revenue (value of his marginal product) than to cost (going wage rate). In the table the value of the marginal product of labour steadily declines as workers are hired. The third worker adds $1.40
The local authorities, in an attempt to make tomato pickers better off, legislate that tomato pickers must be paid a wage no less than $1.60 per day.
If our profit-maximising farmer complies with the legislation, then
I. each of the tomato pickers our farmer had previously hired will become better off. II. the value of the average product of labour will fall.
III. the quantity of tomato output will fall. Which of the following is correct?
A. I only.
B. II and III only.
C. III only.
D. I, II and III.
The correct answer is C. Prior to the $1.60 minimum-wage legislation, the farmer was hiring three pickers. However, profit-maximising behaviour dictates that the farmer now hires only two pickers because the third picker’s marginal product of $1.40 ($6.20 − $4.80) is less than the wage rate of $1.60. Thus that picker will be fired and become worse off, although the other two workers will benefit. Output per worker (the value of the average product of labour) will rise, but total output will fall.
Which of the following contains the purchasing power parity dollar exchange rates?
A.
Baht per Dollar .025
Dirham per Dollar .25
Pound per Dollar 1.5
B.
Baht per Dollar .25
Dirham per Dollar 2.5
Pound per Dollar 1.5
C.
Baht per Dollar 4
Dirham per Dollar 0.4
Pound per Dollar .67
D.
Baht per Dollar 40
Dirham per Dollar 4
Pound per Dollar .67
The correct answer is D. Each of the sums quoted is equivalent in terms of purchasing power to $300. To find the exchange rate, i.e. what $1.00 is worth in each of the currencies each sum has to be divided by 300 yielding 40, 4 and .67 respectively.
If the firm were to hire oq+ 1 man hours, i.e. just greater than oq
I. the VMP curve would shift to the left
II. the market demand curve would shift to the left
Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is D. By hiring more labour than oq the firm is only moving along its VMP curve. This will shift neither the market D or S curves.
If a minimum wage law were enacted which introduced a minimum wage rate for child labour lower than OWe what impact would this have on the firm and in the labour market?
A. Firm: Increased employment; Labour market: None
B. Firm: None; Labour market: Shift to the right of supply curve
C. Firm: Decreased employment; Labour market: Shift to the left of supply curve
D. Firm: None; Labour market: None
The correct answer is D. Since the minimum wage is lower than the market determined equilibrium wage rate it would have no impact on either the behaviour of the firm or the position of the D and S curves in the market.
Which of the following contains the purchasing power parity pound sterling exchange rate?
A.
Baht per Pound 60
Dirham per Pound 6
Dollar per Pound 1.5
B.
Baht per Pound 6
Dirham per Pound 0.6
Dollar per Pound .15
C.
Baht per Pound .0167
Dirham per Pound .167
Dollar per Pound .67
D.
Baht per Pound .167
Dirham per Pound 1.67
Dollar per Pound .67
The correct answer is A. Each of the sums quoted is equivalent in terms of purchasing power to £200 sterling. Thus £4 is equivalent to each sum divided by 200, i.e. 60, 6 and 1.5 respectively.
Assuming the market is composed of perfectly competitive firms and assuming the market is in equilibrium initially what would happen if the firm hired oq− 1 man hours, where oq− 1 is less that oq?
A. The market demand curve would shift to the left
B. The market supply curve would shift to the left
C. The firm would earn less than normal returns
D. The firm would go out of business.
The correct answer is C. By hiring only oq − 1 man hours the firm is moving up its VMP curve. The position of the market D and S curves will not move. Thus A and B are wrong. By not hiring oq man hours the firm will produce less than the profit maximising output; it will produce at a point where AR > ATC and as a consequence will earn less than normal returns. Thus C is correct. The firm however might not go out of business. Thus D is wrong.
What is the relationship between the market demand curve (D) for a factor input and the firm’s value of the marginal product curve (VMP) of that factor input?
A There is no relationship; one refers to the market, the other to a firm.
B. D is the summation of all the VMPs of firms in the market
C. D determines the position of VMP
D. D determines the equilibrium wage rate, We
The correct answer is B. The market demand curve is the summation of the individual firms’ demand curves for labour. Each firm’s demand curve for labour is determined by the value of the marginal product of labour.
