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ECON 100 Tutorial 11

ECON 100 Tutorial 11. Rob Pryce www.robpryce.co.uk/teaching. Question 1a. 2 00. 100. 240. 120. 240. 120. 200. 100. 160. 80. 120. 60. 580. 40. 80. 620. 60. 30. 650. Question 1a. 2 00. 100. 240. 120. 240. 120. 200. 100. 160. 80. 120. 60. 580. 40. 80. 620. 60.

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ECON 100 Tutorial 11

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  1. ECON 100Tutorial 11 Rob Pryce www.robpryce.co.uk/teaching

  2. Question 1a 200 100 240 120 240 120 200 100 160 80 120 60 580 40 80 620 60 30 650

  3. Question 1a 200 100 240 120 240 120 200 100 160 80 120 60 580 40 80 620 60 30 650

  4. Question 1b How many workers will the firm employ (to maximise profits), if the wage rate were: £100 per week? 6 £220 per week? 3 £200 per week? 3 or 4 GENERAL RULE: If MRP > WAGE then employ the extra worker

  5. Question 1c “The demand curve for labour under perfect competition is given by the MRP (of labour) curve.” TRUE

  6. Question 1d W What is the effect of… A change in the productivity of labour? Demand curve shifts A change in the wage rate? Move along demand curve A change in the price of the good? Demand curve shifts D QD

  7. Question 2

  8. Question 2 (cont’d) How many workers will the monopsonist employ if it wishes to maximise profit? We need to see where marginal cost = marginal benefit Marginal benefit is marginal revenue product So 4 workers What hourly wage rate will the monopsonist pay? This time, we read average cost of labour And multiply by 4 (the number of workers) So £6 Assuming instead that this is an industry under perfect competition, and that the horizontal axis is now measured in thousands, how many workers would be employed? Now, marginal revenue = average cost So 6000

  9. Question 2 (cont’d) What would be the hourly wage rate now? £6.80 Returning to the monopsonist, with the horizontal axis once more measured in individual workers, assume that the government imposes a minimum hourly wage rate. What will be the average and marginal costs of labour at each of the following minimum wage rates: £5.60? The monopsonist carries on as before, and the average cost is £6 He was paying above minimum wage anyway, so it didn’t affect him Marginal cost is still £7.60 £8? Average cost now has to increase to £8 (he has to pay at least this) And marginal cost is also £8, since the marginal cost was below this before The marginal cost is now represented by the dashed line on next slide

  10. Question 2

  11. Question 2f How many workers would be employed by the monopsonist at each of the following minimum wage rates: BEFORE WE START To find these answers, we need to change the average cost curve The average cost curve is the labour supply curve A minimum wage will put a “floor” on the wages Let’s do 2f ii) as an example.

  12. Question 2f ii) We start with the original diagram. Remember, to start with, the monopsonist paid each worker £6, and faced a marginal cost of £7.60

  13. Question 2f ii) But now we are asked to impose a minimum wage of £6.80 We need to change both the ACL and MCL curves to reflect this. How?

  14. Question 2f ii) We need to change it so that the wage cannot go below £6.80 This is shown by the AC curve, so…

  15. Question 2f ii) AC = MC up until the 7th additional worker After 6 workers, the marginal cost jumps back to where it was

  16. Question 2f ii) The monopsonist profit maximises when MC = MRP So they’ll employ 6 people

  17. Question 2f How many workers would be employed by the monopsonist at each of the following minimum wage rates £6? This is the original wage rate anyway, so it doesn’t have an impact Answer is the same as 2a), which was 4 £6.80 We’ve done this – it was 6 £7.60 4 £8.40 2

  18. Question 2f iii) Worked example (if needed) Min wage is £7.60

  19. Question 3 We just saw that that wasn’t the case! If the minimum wage went from £6 to £6.80, the monopsonist would employ 6 people rather than 4.

  20. Question 4 In some parts of Europe towns are dominated by major employers and in some cases these employers account for over 60 per cent of the total employment in these towns. Consider some of the advantages and possible disadvantages of such a situation on the local labour force. Use diagrams as appropriate.

  21. Question 5 0.59 -2.16 -2.89 -0.14 2.75

  22. Question 5 (cont’d) • What was the purpose of comparing what happened in NJ with PA? • PA acts as a “control group” – it provides a guide to what might have happened if NJ had NOT changed the min wage • It does rely on PA and NJ being similar. • What is interesting about the figure in the corner? • It is interesting! • It’s the difference in difference • Shows that the minimum wage increased employment not only in gross terms (it added about 0.59 employees per restaurant)… • but also that it added 2.75 employees per restaurant in real terms (because we assume that NJ would’ve been the same as PA)

  23. Question 5 (cont’d) • Calculate the elasticity of employment with respect to the minimum wage • Doesn’t matter how you calculate it, because we only need a rough idea for now • Let’s just do • % increase in employment • __________________________ • % increase in minimum wage • Which is • (2.75)/(20.44) • ____________ • ($0.8)/($4.25)

  24. Question 5 (cont’d) • Which is • (2.75)/(20.44) • ____________ • ($0.8)/($4.25) • Giving 0.135 / 0.19 • Which is positive and close to 1. So employment rate rose even though minimum wage increased. • Upward sloping labour demand curve!

  25. Any Questions? My office hour is Wednesday, 9:45am, Charles Carter C Floor Email is r.pryce@lancaster.ac.uk All my slides are on www.robpryce.co.uk/teaching

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