Labor Demand and Elasticity: Impact of Wage Changes on Employment and Expenditures, Schemes and Mind Maps of Economics

Download Labor Demand and Elasticity: Impact of Wage Changes on Employment and Expenditures and more Schemes and Mind Maps Economics in PDF only on Docsity! Answers To Chapter 4 Review Questions 1. Answer b. % 5.25 1.5. % 3.5 i ii i E W η Δ −= = = − Δ 2. Answer b. % % ( )(% ) % ( .5)(3.5) 1.75. % i ii i ii i i i E E W E W η ηΔ = ⇒ Δ = Δ ⇒ Δ = − = − Δ 3. Answer c. The expression for ηii simplifies to 7 ( 5) 1.4. 25 i i ii i i E W W E η Δ = = − = − Δ 4. Answer b. Expenditures on labor fall from $175 to $160, a change of −$15. If demand is elastic, expenditures on labor always fall as the wage rises. 5. Answer d. According to the Hicks-Marshall laws, demand is less elastic when it is difficult to substitute capital for labor (answer a), product demand is less elastic (answer b), and the supply of capital is inelastic (answer c). 6. Answer d. The demand curve facing an individual firm will always be more elastic than the market demand curve since from the point of view of any individual firm, consumers have many substitution possibilities. If consumers do not like the prices at one airline, they can often choose another. But from the point of view of the market as a whole, the only alternatives to air travel are the train, bus, or automobile, each considerably more time consuming for long trips. 7. Answer d. When labor and capital are used in fixed proportions, they can not be substituted for one another. Holding all else constant, the smaller the substitution effect of a wage change, the more inelastic the demand for labor. 8. Answer a. Letting (t) stand for teenagers and (a) for adults % 1 0.2. % 5 a at t E W η Δ = = = − Δ − 260 Ehrenberg/Smith • Modern Labor Economics: Theory and Public Policy, Tenth Edition 9. Answer a. If the cross-wage elasticity is negative, a rise in the price of teenage labor should reduce adult employment. Since teenage labor will also be reduced, teenagers and adults are gross complements. 10. Answer c. Adults and teenagers will be gross complements if the scale effect associated with the rise in teenage labor dominates the substitution effect. Answers a and b make for a large substitution effect, while d makes for a small-scale effect. When the cost of teenage labor accounts for a large share of total costs, a rise in teen wages will lead to a large increase in the marginal cost of production. The larger the increase in marginal cost, the larger the reduction in output and the more employment in both categories of labor will fall. 11. Answer d. As long as the labor demand curve is downward sloping, an increase in the minimum wage should move the firm up the demand curve, resulting in a lower employment level. The only way the actual level of employment can increase is if the curve also shifts out at the same time the movement along the curve is taking place. In this case, the employment increase would have been even larger had the minimum wage not been imposed. 12. Answer b. Because the share of total costs attributable to low-wage workers varies across firms, increases in the minimum wage affect some firms more than others, and this can lead to significant changes in the relative prices of the goods sold by these firms. These relative price changes can in turn cause changes in consumer buying patterns (intersectoral shifts in demand) and result in some firms actually seeing an increase in the demand for their product. The scale effect of this demand increase can lead to employment increases for some firms even though their costs are higher. Consequently, looking at the employment effects on individual firms may give a misleading impression of the overall employment effects of the minimum wage. For this reason, it is better to look at the employment effects on broader groupings of firms serving many different industries (e.g., the retail sector of the economy). 13. Answer d. In addition to the demand shifts, technological change makes for a more elastic labor demand because product demand will become more elastic as the number of substitution possibilities for consumers increase. 14. Answer b. A reduction in the price of capital stimulates the demand for labor only if there is a large- scale effect associated with the price decrease. A more elastic product demand contributes to a large-scale effect. 15. Answer c. While some industries and jobs are eliminated through technological change, the efficiency and competition it promotes tends to open up new consumption and employment possibilities. The increased productivity and technological change have helped to bring about higher real wages. Problems 16a. The slope is −2. For every one unit change in W, L changes by 2. This slope is the same for a wage change between $20 and $21 as it is for a change between $5 and $6. (Note that the slope as it appears on the graph is actually −0.5. Notice that when W is plotted on the vertical axis and L on the horizontal, the slope as it appears on the graph is actually ΔW/ΔL. Answers To Chapter 4 263 Applications 20. The total income flowing to labor is the wage multiplied by the quantity of labor hired. When demand is elastic, small percentage increases in the wage cause large percentage reductions in the quantity of labor demanded. With the quantity of labor demanded falling faster than the wage is increasing, total income falls as the wage increases. 21a. An airline pilot has a job that requires rather specialized knowledge, and so it is difficult to substitute other types of labor for the pilots. It is also rather difficult to substitute any kind of capital for the pilots, although running fewer flights with larger planes is one way to do this. Firms that try this latter approach, however, may require new planes. The supply of such planes is likely to be inelastic, since planes are complex items not quickly produced. In the airline industry, the labor costs associated with pilots are a small share of total costs, with fuel being one of the largest. Finally, before deregulation, the number of competitors was tightly controlled, making the product demand facing individual firms more inelastic. Garments workers, on the other hand, are unskilled labor, and so it is relatively easy for firms to find other labor to substitute. Also the firm can probably hire as much or as little of this substitute labor as necessary at a constant price. It does not have to worry about the price of the substitutes being bid up significantly. Garment work like cutting and sewing fabric is labor intensive, and overseas competition tends to make for elastic product demand. 21b. Airline deregulation has tended to increase competition, making product demand more elastic. As the product demand becomes more elastic, so does labor demand. Similarly, reducing tariffs and import quotas on textiles and apparel should increase product demand elasticity and make the demand for garment workers even more elastic. 22a. Plan B should have the least impact on employment since it involves a change in the price of capital. As C increases (holding output constant), there is a tendency for the firm to substitute labor for capital. There will also be a scale effect pushing both labor and capital down, but this scale effect is also present in Plan A and Plan C. Plan A has a substitution effect that will reinforce the reduction in L coming through the scale effect, not counteract it as in B. Plan C has no substitution effect. 22b. Plan A would lead to a large reduction in employment if there were a large substitution effect and a large-scale effect associated with the increased labor cost. There would be a large substitution effect if it were easy to substitute capital for labor and if the supply of capital were elastic. There would be a large-scale effect if labor costs were a large share of total costs and if the product demand were elastic. Plan B would lead to a large reduction in employment if there were a small substitution effect and a large-scale effect associated with the capital price increase. There would be a small substitution effect if it were difficult to substitute labor for capital and if the supply of labor were inelastic. There would be a large-scale effect if capital costs were a large share of total costs and if the product demand were elastic. Plan C is a direct increase in the marginal cost of production. It reduces labor only through a scale effect. This scale effect would be large if the product demand were elastic. 23a. At W = 4, the original employment level would have occurred where 4 = 25 – 0.5L ⇒ L* = 42. When W increases to 6, employment occurs where 6 = 25 − (1/3)L ⇒ L* = 57. 264 Ehrenberg/Smith • Modern Labor Economics: Theory and Public Policy, Tenth Edition 23b. Without the minimum wage, employment would have occurred where 4 = 25 − (1/3)L ⇒ L* = 63. Therefore, even though employment increased from 42 to 57, it would have increased to 63 had it not been for the minimum wage. (Similarly, one could argue that it would have fallen from 42 to 38 had it not been for the demand shift.) 24a. A better indicator of a country’s standard of living would be its per capita output and consumption levels. 24b. At the same time that technology destroys jobs, it also opens up new opportunities. Instead of automatically becoming farmers, young people are now free to become doctors, teachers, engineers, computer programmers, and so on. 24c. Making plant closings more difficult is like banning farm machinery in that both policies are attempts to stop the transfer of resources out of obsolete or inefficient uses into new and more efficient uses. Some of these new uses may not be currently envisioned.