intro to microeconomics problem set

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  1. Labor markets and wage determination

Table 1. Chocolate chip cookie output and number of workers. Cookies sell for $2.00 each.

Workers

cookie output

1

30.0

2

58.5

3

85.5

4

111.0

5

135.0

6

157.5

7

178.5

8

198.0

9

216.0

10

232.5

  1. (1 point) Nick has estimated the number of brownies produced for different numbers of workers (see table 1). Why does output increase with more workers? Why does output increase at a diminishing rate? Would output increase at a diminishing rate if there were additional ovens and workspace?
  1. (1 point) Cookies sell for $2 each and each requires $0.75 in ingredients. Graph the demand for labor as a function of the wage using the data in table 1. What happens to the number of workers hired when wages go up? How many workers will be hired and how many cookies made at a wage of $22.50?
  1. (2 points) Nick could buy a 2nd oven. He estimates that the 2nd oven would raise output for any given number of workers as indicated in table 2. When his workers form a union, they gain a wage increase from $22.50 to $24.38. What do you expect to happen to employment and output with one oven? (How many workers will be hired and how much produced at the new wage.) What would happen if Nick responds to the wage increase by buying a 2nd oven and then hiring workers at the wage $24.38? Would your answer change any if there is a limited market for chocolate chip cookies so that Nick would have to lower the price of cookies to sell more?

Workers

cookie output with 2 ovens

1

35.0

2

69.5

3

103.5

4

137.0

5

170.0

6

202.0

7

233.0

8

263.0

9

291.5

10

318.5

  1. (1 point) Like many retail employers, Nick experiences high turnover among his workers which forces him to devote much time to hiring and training workers. By establishing systems for seniority promotion and pension and insurance benefits as well as higher wages, the union discourages turnover saving Nick money by making each worker more productive at higher wages. Now draw a hypothetical labor demand curve assuming higher wages are associated with higher productivity

 

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