Unit 9

Question 1

Nominal wage is

Answer 1

The actual amount received in payment for work in a particular currency

Question 2

How do firms set wages

Answer 2

They set them high enough for the worker to receive an employment rent (the economic rent a worker receives when the value of their job exceeds the net value if their next best alternative) cost of job loss.

Question 3

Price setting is the business of the

Answer 3

Marketing department

Question 4

Wage setting is the business of the

Answer 4

Human Resources department

Question 5

Real wage is

Answer 5

The nominal wage adjusted to take account for the change in product prices between different periods. It is a measure of the goods and services a worker can buy (real wage = nominal wage/goods price)

Question 6

The real wage and level of employment in the economy are determined by a two stage process, explain stage 1

Answer 6

Stage 1 is the setting of wages, product prices and how many people to hire.

HR department determines lowest possible wage it can offer (by examining product prices, wages at other firms and unemployment in the country), thus nominal wage is set

Then the marketing department sets the price based on the nominal wage and shape/position of the demand curve. Elastic demand curve means high comp from other firms resulting in lower price being set. Once they’ve decided on a price, Given the curves position a desired output (how much products to be made ) is agreed upon and given to the production department

Production department calculates the number of employees that need to be hired in order to reach the desired output.

Question 7

The real wage and level of employment in an economy are determined by a two stage process, explain stage 2

Answer 7

Once firms have settled on a wages and prices (markups), the output per worker is divided into the real wage that each worker receives and and the real profits that each owner receives.

If all firms set the same wage and prices then a higher real wage (W/P) results in a lower markup (1-W/P)

Real wage and employment are jointly determined in the labour market by the following concepts, wage setting and price setting curves

Question 8

Explain the wage setting curve

Answer 8

Wage setting curve provides the real wage necessary at each level of economy wide employment to incentivise workers to work hard and well

Question 9

Explain the price setting curve

Answer 9

The price setting curve provides the real wage paid when firms choose their profit maximising price

Question 10

Define unemployment

Answer 10

A situation in which an individual who is able to and willing to work is not employed

Question 11

Participation rate formula

Answer 11

Labour force/ population of working age

Question 12

Unemployment rate

Answer 12

Unemployed/labour force

Question 13

Employment rate

Answer 13

Employed/population of working age

Question 14

Explain the things included in a standard wage setting curve

Answer 14

Y axis labelled Real Wage (W)
X axis labeled Prop of working age population

Labour force line on the right (unemployment rates drawn from where wage meets the curve down, from labour force line)

Curve slopes up. Lower unemployment means higher wage, higher unemployment means lower profit maximising wage

Question 15

Define labour productivity

Answer 15

labour productivity is the total output divided by the number of hours or some other measure of labour

Question 16

what is the profit maximising markup

Answer 16

Price - Nominal wage divided by price.

Question 17

What is the formula for unit labour cost?

Answer 17

Nominal wage divided by labour productivity

Question 18

Where does a firms profit maximising price lie?

Answer 18

A firm’s profit maximising price lies where an isoprofit curve is tangential to a demand curve.

Question 19

Define cyclical unemployment

Answer 19

The increase in unemployment above equilibrium unemployment caused by a fall in aggregate demand associated with a business cycle, this is also known as demand deficient unemployment.

Question 20

Define monetary policy

Answer 20

Central bank (or government) actions aimed at influencing economic activity through changing interest rates or the prices of financial assets.

Question 21

Define Fiscal policy

Answer 21

Fiscal Policy is changes in tax or government spending in order to stabilise the economy

Question 22

general question, what is a Lorenz curve?

Answer 22

A. Lorenz curve is a graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have, and the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, it would be a straight line with a slope of one. The extent to which the curve falls below this perfect equality line is a measure of inequality (Gina coefficient).

Question 23

General question, what’s the Gini coefficient and how can it be calculated?

Answer 23

The Gini coefficient is a measure of inequality of any quantity such as income or wealth, varying from zero (if there is zero inequality) to 1 (if a single individual receives all of it.

More precisely, the Gini coefficient (g) is defined as half the relative mean difference in income between among all pairs of individuals in the population.

1st, find the difference in income between every possible pair in the economy.

2nd, take the mean of these differences

3rd, divide this number by the mean income (total income/total population)

4th, divide this number by 2.

Question 24

Explain the effect of an increase in size of the labour supply.

Answer 24

An influx of immigrants results int he pool of unemployed people within a given economy, larger. Due to the increased number of unemployed people, the assumed waiting period to find work whilst unemployed is extended and as a result the cost of job loss for those that are employed increases. Firms realise this and lower wages as they can afford to pay the workers less without the risk of them shirking due to the newly increased employment rent.

Question 25

Explain the union voice effect.

Answer 25

The union voice effect is an increased willingness to work by employees (lower cost of effort) as a result of the firm and trade union having a good relationship and solving any qualms employees may have. In this scenario, employees feel as though the firm has their best interests at heart and as a result feel that effort is less of a burden.

Question 26

How does an improvement in the education and training of employees shift the price setting curve?

Answer 26

The markup remains unaffected as this is based on competition with other firms. because the markup remains the same, the proportional real wage of employees stays the same as well (the division of revenue between profit and wages remains the same), but because the output per worker has increased, prices and real wage must increase as well in order to maintain the same markup. Equilibrium employment and and the real wage both rise.