Download Labor Exercise #5 Answers

Course
Course Number
University or College
Professor’s Name
Student Name: ____________________________
Section: __________________________________
Labor Exercise #5 Answers (
points)
Please limit your answers to the spaces provided. If necessary, write on the back of the page.
Do not attach printout or additional pages. All questions pertain to the Labor module in the
SimEcon® software package.
Make sure that you have read the “Labor Manual” and “SimEcon® Operation Instructions”.
These materials may be found at the Class Web site prior to beginning the exercise. For many of
the exercise’s questions, it will be necessary to refer to those instructions. For many of the
exercise’s questions, it will be necessary to refer to your text.
Open the Labor module of SimEcon®. You will see a table entitled, “Initial Labor Market
Conditions”. Click “Continue”. You will see a graph entitled, “Initial Equilibrium”. Draw this
graph below. Label all axes as well as the supply and demand curves and indicate the
equilibrium quantity and price of labor.
Wage
SL
We = $18.21
DL
8010.18
Labor (hours per week)
Are the employers (firm owners) buying or selling the labor in this market? The employers are
buying the labor. Thus, does the demand curve represent the workers or the employers? The
demand curve represents the employers. Are the workers buying or selling the labor in this
market? The workers are selling the labor in this market. Thus, does the supply curve
represent the workers or the employers? The supply curve represents the workers.
Click the button entitled “Discrimination”. You will be asked to select how much the Big
Pildians discriminate against the Little Pildians. Select the number “1” and click “Continue”.
Examine the resulting graphs. Suppose that an extremist political group of radical Little Pildians
burned the Pildian flag in public. What would happen to the discrimination against the Little
Pildians afterwards? It would increase.
Course
Labor Exercise #5 Answers
Page 2
Click the button entitled, “Change Discrimination”. Select the number “4” and click “Continue”.
Draw the resulting demand and supply curves for the labor market for both Big Pildians and
Little Pildians. On the same graph, draw the lines for before the terrorist incident and after the
terrorist incident.
Label all axes as well as the supply and demand curves. Use the
abbreviations for the labels that are indicated below the graphs.
Big Pildians
W
Little Pildians
SL
W
We
SL
W1
W2
W3
DL
Le
Labor
D3
L3
L2 L1
D2
D1
Labor
D1 = Demand for Little Pildian Labor without Discrimination
D2 = Demand for Little Pildian Labor with Discrimination Before the Incident
D3 = Demand for Little Pildian Labor with Discrimination After the Incident
What impact did discrimination have on the equilibrium wage earned by the Little Pildians
before the incident? _____________________________. What impact did the discrimination
have on the quantity of Little Pildians hired before the incident? _____________________
_________________. How did the flag burning change the impact of discrimination on the
Little Pildians? ________ _______________ _______________ _______________ _______
____ ____ _______________________________________________________. Did the Big
Pildians suffer any adverse effects throughout all these changes? No (Yes, No).
Consider the demand curve (D3) for Little Pildian labor with discrimination after the incident. If
the government instituted a human relations program for the Little Pildians, what impact would
these programs have on that demand curve (D3)? If it had any effect it would cause the
demand curve to shift to the right. What impact would this have on the equilibrium wage rate
of the Little Pildians? The wage rate would increase.
Leaving the level of discrimination at 4, click “Continue.” What is the cost to this society of
having this much discrimination? The cost to this society is the difference between total
output with this discrimination and total output with no discrimination. In this case that
means the cost is 106,175-101035.15 = 5139.85, or about 4.8% of potential output is being
Course
Labor Exercise #5 Answers
Page 3
lost. Now click on “Fight Discrimination” select “Equal Pay for Equal Work” and “Continue”.
How much did this society gain from instituting this policy? With no anti-discrimination
policy this society had total output of 101,035.15. With this policy it has total output of
96,710.6, a loss of the difference, 4,324.55, in addition to the cost of enforcement which is
1,133.28. Did the Little-Pildians gain overall from this policy? Before the policy the LittlePildians worked 3200 hours at a wage of $15.84, giving this group an income of $50,688.
After the policy was introduced they worked 2,559.64 hours at a wage of $17.71, giving the
group an income total of $45,331.22. Therefore overall this group lost out. Of course the
individuals who got to keep their jobs at the higher wage gained -- but not as much as the
ones who lost their jobs lost. Has the unemployment rate for Little-Pildians increased? Yes,
from 0 to 36%. (Yes, No). Is the increase in unemployment a good measure of the cost of the
policy? No. Some of the unemployment represents an increase the quantity of labor
supplied at the higher wage. Since these workers did not want jobs at the lower wage they
did not lose from the change. (Yes, No).
Click “Back” and this time choose “Equal Hiring,” then click “Continue”. How much did this
society gain from instituting this policy? With no anti-discrimination policy this society had
total output of 101,035.15. With this policy it has total output of 106,175, so the policy
caused a gain of the difference of 5,139.85, less the enforcement cost of 2,833.60, leaving a
net gain of 2,306.25, or about 2.2% of potential output. Have the Little-Pildians gained from
this policy? Yes. They are getting higher wages and more jobs. (Yes, No).
In this module which is a better choice of policy, “Equal Pay for Equal Work” or “Equal
Hiring?” Equal Hiring, it does better for both society and for the victims of discrimination.
Are there any drawbacks to this choice? Yes, the cost of enforcement is higher—more
government spending. (Yes, No) In the real world are there other considerations, not covered
in this module that might influence the choices of anti-discrimination policy? Yes, the issue in
the real world involves more complexities than this module can deal with. (Yes, No)
Click “Disturb the Market”. You will see a table with buttons representing various factors that
can affect the labor market. Select the button entitled, “Population” and click “Continue”.
Suppose that a massive wave of refugees from a foreign nation migrated into this society.
Increase the population to 120,000 and click “Continue”. What will happen to the supply of
labor? It will increase. This is because, as the population increases (increases, decreases,
remains the same), the number of persons in the labor force also increases (increases,
decreases, remains the same), other things being equal. What will happen to the equilibrium
quantity of labor? It will increase. What will happen to the equilibrium wage rate? It will
decrease.
However, all these refugees who are now working in Pildian society will use their paychecks to
purchase goods and services. For example, they will need bread to eat at the dinner table.
Important: in this paragraph only, we are dealing with the goods market for bread. What will
happen to the demand curve for bread? The demand curve for bread will shift to the right.
Course
Labor Exercise #5 Answers
Page 4
This shift in the demand curve for bread will cause both the equilibrium price and quantity of
bread to increase (increase, decrease, remain the same). Would consideration of these results
change the correct answers for the labor market? It would still be true that the amount of
labor hired would rise and the wage rate would fall. Since other resources (ovens, flour)
have had no supply increases the marginal product of labor will definitely be lower and
that is what the real wage ultimately depends on.
Now, let’s return to the labor market. Note that we are dealing with the labor market for bakery
workers and the price of bread has increased. Click “New Disturbance”. This time, select
“Price of Bread” and click “Continue”. Increase the price of bread to $3 and click “Continue”.
What will happen to the demand for the labor of bakery workers? It will increase. This is
because, as the price of bread increases, other things being equal, the revenue to the bakery
owner will also increase (increase, decrease, stay the same). This will cause the profits of the
bakery to go up (up, down). This will encourage the bakery owner to increase (increase,
decrease) his/her output. This increase (increase, decrease) in output will mean that the bakery
owner will want to employ more (more, fewer, the same amount of) workers. Considering the
effects discussed in this paragraph only, what will happen to the equilibrium wage rate earned by
bakery workers? It will increase. Likewise, what will happen to the equilibrium quantity of
bakery workers employed? It will increase.
Now suppose that a movement developed in Little Pildian society. This movement led many
people to consider leisure time as wasted time and work as something noble. What would this do
to the labor force participation rate of the entire Pildian society? __________ (increase it,
decrease it, leave it the same) Click the button entitled, “New Disturbance”. Then, select the
button entitled, “Participation Rate” and click “Continue”. Increase the participation rate to 85%
and click “Continue”.
What does the participation rate represent? The participation rate represents the percentage
of the total population that is in the labor force. In this case, what will happen to the supply
curve for labor? It will shift to the right. What will thus happen to the equilibrium quantity of
labor? It will increase. What will happen to the equilibrium wage rate, other things being
equal? It will decrease.
Now, suppose that a new technology makes it cheaper to produce ovens and that lowers the cost
of ovens. Click “New Disturbance”. Select the button entitled, “Cost of an Oven” and click
“Continue”. Decrease the cost of the oven to $200 and click “Continue”. The oven represents
which factor of production? Capital (Land, Labor, Capital, Enterprise). If the cost of an oven
decreases, what happens to the cost of capital? It also decreases. Thus, would it be
advantageous for the firm owner to use relatively more labor or more capital in manufacturing
his/her product? It would be advantageous for the firm to use more capital. Thus, what
will happen to the demand for labor? If labor and capital are substitutes in production, it
will decrease. What will happen to the equilibrium quantity of labor (in the bakery industry)?
It will decrease. What will happen to the equilibrium wage rate? It will also decrease.
Course
Labor Exercise #5 Answers
Page 5
Now, suppose more people started going out to dinner instead of cooking at home, so restaurant
owners increased the wage rate that cooks earn in restaurants. Click “New Disturbance”.
Select the button entitled, “Cook’s Wage Rate” and click “Continue”. Note that the supply and
demand curves that you drew at the beginning of this exercise were for the bakery industry. The
wage rate of a cook represents an alternative industry, such as the restaurant industry. Change
the cook’s wage rate to $10.5 and click “Continue.” If the restaurant industry offered a relatively
higher wage rate, what would happen to the number of workers looking for work in the bakery
industry? The number of workers would go down. Thus, what would happen to the supply
of labor in the bakery industry? The supply of labor would decrease. Thus, what would
happen to the equilibrium wage rate in the bakery industry? The equilibrium wage rate would
increase. What would happen to the equilibrium quantity in the bakery industry?
The
equilibrium quantity would decrease.
Finally, suppose that the Pildians imported most of their flour from the Nimrods. Suppose that
the Nimrodites successfully enforced a worldwide cartel of flour production in order to increase
the price of flour. Now, click “New Disturbance.” Select “Price of Flour” and click “Continue.”
Increase the price of flour to 0.19 and click “Continue.” If flour becomes more expensive, what
will happen to the production costs of the bakery, other things being equal? The production
costs will increase. Will there be more or fewer jobs in this industry? There will be fewer
jobs. Thus, in this industry, will the demand for labor increase or decrease? The demand for
labor will decrease. Why would the results of the rise in the price of flour be different than the
results of the rise in the cost of ovens? It appears that while workers and ovens are
substitutes in production, labor and flour are complements -- so if less flour is used less
labor is also used.
Other things being equal, what will happen to the equilibrium quantity of labor? It will
decrease. Other things being equal, what will happen to the equilibrium wage rate? It will
decrease. Illustrate the changes in the labor market resulting from an increase in the price of
flour by drawing the graph that you see on your computer screen. Label all axes as well as the
supply and demand curves for labor and indicate the old and new equilibrium quantities and
wage rates.
Wage
S
$18.21
$18.18
D2
7,856.58
8,010.18
D1
Labor (hours per week)