Essentials of Economics 10th Edition

Schiller

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ANSWERS TO QUESTIONS FOR DISCUSSION AND PROBLEMS

QUESTIONS FOR DISCUSSION

1. Why are you doing this homework? What are you giving up? What utility do you
expect to gain? If homework performance determined course grades, would you
spend more time doing it?

LO: 1 AACSB: Reflective Thinking BT: Create

You could say that this homework is being done in exchange for a payoff in the form
of a good grade for the course and, eventually, a degree. The opportunity cost of
doing this homework is a forgone income-earning opportunity or leisure of some
sort. The utility expected is the satisfaction of a good grade. If homework
performance determined your course grades, the opportunity cost of not doing the
homework would be larger and you would probably spend more time doing it.

2. Why does the opportunity cost of doing homework increase as you spend more time
doing it?

LO: 1 AACSB: Analytic BT: Analyze

 As you spend more time doing homework, your marginal productivity falls. In other
words, your first few hours doing homework is generally very productive. However,
as more time is spent your marginal productivity falls as you get tired or you have
already answered most of the questions. For example, let's say that you are able to
answer 5 questions in the first hour, 4 questions in the second hour and only 1
question in the third hour. Since your productivity is falling, i.e., less homework is
produced in the last hour than in the first, what you are giving up per problem
completed increases.

3. How does “supply and demand” explain the wage gap between engineering and
sociology majors (News Wire “Unequal Wages,” page 163)?

LO: 3 AACSB: Reflective Thinking BT: Create

There are fewer engineering majors graduating than sociology majors. Therefore the
supply of engineers is lower and since the demand for engineers is higher than for
sociologists, employers are forced to "bid higher" or pay more for engineers since
other employers are also seeking to hire them.

4. Explain why marginal physical product would diminish as

(a) More secretaries are hired in an office.
(b) More professors are hired in the economics department.
(c) More construction workers are hired to build a school.

LO: 2 AACSB: Analytic BT: Analyze

Each of these examples can be illustrated with the basic point that more and more
people create problems of overworked machines, facilities, schedules, etc. Some
students might also comment on the increasing difficulty of finding equally qualified
individuals, although the text assumes equal quality for units of labor and relies on
the use of equipment as the primary explanation for diminishing returns.

5. Under what conditions might an increase in the minimum wage not reduce the
number of low-wage jobs? How much of a job loss is acceptable?

LO: 4 AACSB: Reflective Thinking, Ethics BT: Create

 The impact on jobs due to an increase in the minimum wage is controversial. While
competitive market theory says that a minimum wage results in a surplus of labor
and therefore an increase in that wage will result in a larger surplus, some empirical
studies have found the opposite to be true. Finally, an increase in the minimum
wage will not reduce the number of low-wage jobs when the equilibrium wage is
above the minimum wage. In such a case, the minimum wage is ineffective.

From the viewpoint of the minimum wage workers, no job losses are acceptable if it
is their job that is eliminated. A higher minimum wage might be acceptable if you
are not the worker losing your job. If a higher minimum wage reduces profits or
raises prices, then it might not be acceptable to businesses or consumers,
respectively.

6. The United Farm Workers want strawberry pickers to join their union. They then
hope to convince consumers to buy only “Union” strawberries. Will such activities
raise picker wages? What else might help? Increase employment?

LO: 3 AACSB: Reflective Thinking BT: Create

Unions generally seek to raise wage rates above equilibrium. To do so, they bargain
collectively with employers. Yet, in order to get and maintain an above-equilibrium
wage, a union must exclude some workers from the market, in effect, decreasing the
number of workers employed.

Recall that the demand for strawberry pickers depends on the demand for
strawberries. In this situation, if the United Farm Workers Union actually convinces
consumers to buy more of these union strawberries, the demand for strawberry
pickers should increase as well. Thus, there is at least the potential for strawberry
picker wages to increase and the number of employed to increase as well (due to an
increase in demand for pickers).

7. Why did Hewlett-Packard eliminate so many jobs (News Wire, p. 162)?

LO: 1 AACSB: Reflective Thinking BT: Create

A firm’s demand for labor depends on the demand for the products the firm
produces. Hewlett-Packard has seen customer demand for its PCs plummet in favor
of tablets and smartphones made by companies such and Apple. Thus, the demand
for the workers who manufacture those Hewlett-Packard PCs is also declining.

8. Why are engineering professors paid more than English professors?

LO: 5 AACSB: Analytic BT: Analyze

 The demand for engineering instructors is strong because the demand by students
for their courses is very strong. (Derived Demand) The opportunity for non-teaching
employment also pushes up the salaries of engineering professors relative to those of
English literature professors (Opportunity Cost).

9. How might you measure the marginal revenue product of (a) a quarterback, (b) the
team’s coach, and (c) the team’s owner? ?

LO: 5 AACSB: Reflective Thinking BT: Create

It is easy to measure marginal revenue product of a strawberry picker or even a sales

clerk because we are able to measure each employee’s productivity directly (or
nearly directly). Measuring the MRP of a quarterback, coach, and team owner is
another story altogether. The MRP of a quarterback might be measured based on
passing yardage, running yardage, number of fumbles, or number of scores
generated. The MRP of a coach might be based on the number of team wins, the
number of playoff game wins, or the number of players in newspaper headlines (both
positive and negative publicity). The MRP of a team owner might be based on the
amount of team apparel sold, the percentage of the stadium filled with fans, the
number of advertising dollars generated, or the number (and value of ) media
contracts.

10. POLICY PERSPECTIVES Why did Swiss voters overwhelmingly reject government-set
pay limits on CEO paychecks (News Wire "Cap CEO Pay," p. 174)?

Answer: The Swiss worried that government-set pay limits would discourage
companies from locating in Switzerland. They also worried that such limits would
encourage companies to evade the pay limits with creative compensation packages
that would spawn inequalities.

LO: 5 AACSB: Reflective Thinking BT: Create

11. POLICY PERSPECTIVES Why do people want to cap Bob Iger’s salary but not Dale
Earnhardt Jr.’s?

Answer: There is a general sense that "corporate America" doesn't deserve more
money but individual athletes do. The achievements of an athlete are more visible
and understandable than the contributions of a corporate CEO.

LO: 5 AACSB: Reflective Thinking BT: Create

PROBLEMS
1. (a) If each of the companies at the Rutgers Job Fair was hiring two people, what was
the quantity of labor demanded by the companies?
(b) What was the quantity supplied? (See News Wire p. 160) (LO 8-3)
Answers:
(a) 348 people
(b) 3000 people
Explanation:

a. According to the article, representatives from 174 companies attended the job fair
at Rutgers. If each of these 174 companies were hiring 2 people, the quantity of
labor demanded would have been 348 (= 174 × 2).

b. The quantity supplied is equal to the number of people attending and hoping for
work, which is 3,000 job seekers.

LO 08-03
Topic: Labor Supply
AACSB: Analytic
Blooms: Level 5 Evaluate

2. According to Figure 8.4, how many workers would be hired if the prevailing wage
were
(a) $8 an hour?
(b) $4 an hour?

Answers:
(a) 3 workers
(b) 5 workers

Explanation:
The marginal revenue product (MRP) curve is the firm’s labor demand curve, and an
employer is willing to pay a worker no more than his or her marginal revenue
product. As long as the MRP is greater than or equal to the wage rate, the firm will
hire the next worker.
a. According to the figure, if the prevailing wage were $8 per hour, the firm would
hire 3 workers.
b. If the prevailing wage were $4 per hour, the firm would hire 5 workers.
LO 08-03
Topic: The Hiring Decision
AACSB: Analytic
Blooms: Level 4 Analyze
3. The following table depicts the number of grapes that can be picked in an hour with
varying amounts of labor:

Number of pickers
(per hour) 1 2 3 4 5 6 7 8
Output of grapes
(in flats) 10 28 43 54 61 64 65 61

Use this information to graph the total and marginal physical product of grape
pickers.

Answers:

Explanation:
The marginal physical product of labor is the increase in total production (also called
total product or output) that results when one additional worker is hired. MPP =
(TP2 – TP1)/(Qworkers2 – Qworkers1).

Marginal Physical
Number of Output of
Product
Pickers Grapes
per Picker
(per hour) (in flats)
(in flats)
0 0 —
1 10 10
2 28 18
 3 43 15
4 54 11
5 61 7
6 64 3
7 65 1
8 61 –4

When graphing the total product curve, the number of workers is along the
horizontal axis and output (in flats of grapes) is along the vertical axis. One point
on the total product curve would be 0 workers and 0 flats of grapes. Another
point would be 1 worker and 10 flats of grapes.

When graphing the marginal physical product curve, the number of workers is
along the horizontal axis and output (in flats of grapes) is along the vertical axis.
One point on the marginal physical product curve would be 1 worker and 10 flats
of grapes. Another point would be 2 workers and 18 flats of grapes.
LO 08-02
Topic: Supply Behavior
AACSB: Analytic
Blooms: Level 2 Understand

4. (a) Assuming that the price of grapes is $3 per flat, use the data in Problem 3 to
calculate total revenue and marginal revenue product (MRP) and graph the MRP
curve.
(b) How many pickers will be hired if the going wage rate is $9 per hour? (LO 8-2)

Answers:
(a)
(b) 6 pickers

Explanation:
Total revenue is the price of the product multiplied by the quantity of output in a
given time period (TR = P × Q). The marginal revenue product is the change in total
revenue that results when one additional worker is hired. MRP = (TR 2 –
TR1)/(Qworkers2 – Qworkers1).

Number
Output Marginal
of
of Total Revenue
Pickers Price
Grapes Revenue Product
(per ($)
(in flats) ($ per hour) ($)
hour)
0 0 3 0 —
1 10 3 30 30
2 28 3 84 54
3 43 3 129 45
4 54 3 162 33
5 61 3 183 21
6 64 3 192 9
7 65 3 195 3
8 61 3 183 –12
 a. When graphing the marginal revenue product curve, the number of workers is
along the horizontal axis and the marginal revenue product (in $) is along the
vertical axis. One point on the marginal revenue product curve would be 1
worker and $30. Another point would be 2 workers and $54.

b. Remember that the marginal revenue product curve is the firm's labor
demand curve and the firm will hire until the wage rate equals MRP. In this
example, if the wage rate was $9 per hour, 6 pickers would be hired.

LO 08-02
Topic: Profit Maximization
AACSB: Analytic
Blooms: Level 4 Analyze

5. Using the production information contained in Table 8.1 and assuming that the price
of strawberries is $3 per box, how many workers would be hired at a wage of (a) $12
per hour, and (b) $6 per hour? (8-3)

Answers:
(a) 3 workers
(b) 5 Workers

Explanation:

The marginal revenue product is the change in total revenue that results when one
additional worker is hired. MRP = (TR2 – TR1)/(Qworkers2 – Qworkers1).

Output of

Number of Strawberries Marginal Revenue

Pickers (boxes Price Total Revenue Product

(per hour) per hour) ($ per box) ($ per hour) ($)

0 0 3 0 —
1 5 3 15 15
2 10 3 30 15
3 14 3 42 12
4 17 3 51 9
5 19 3 57 6
6 20 3 60 3
7 20 3 60 0
 8 18 3 54 –6
9 15 3 45 –9

The marginal revenue product curve is the firm's labor demand curve and the firm
will hire until the wage rate equals MRP.

(a) If the wage rate was $12 per hour, 3 workers would be hired.

(b) If the wage rate was $6 per hour, 5 pickers would be hired.

LO 08-03
Topic: Labor Demand
AACSB: Analytic
Blooms: Level 4 Analyze

6. The University of Alabama increased the capacity of its Bryant-Denny stadium by

10,000 seats when it hired Nick Saban as its football coach. (a) If the average price of
a season ticket is $1,000, how much additional revenue is the university getting from
those added seats? (b) Does that exceed coach Saban's pay (see the News Wire
"Marginal Revenue Product" on page 169)? (08-05)

Answers:
(a) $10,000,000
(b) Yes

Explanation:

a. If the average price of a season ticket is $1,000 and 10,000 more seats were
created, there will be $10,000,000 in additional revenue per year (= $1,000 per seat
× 10,000 seats).

b. Yes, the $10 million in additional revenue per year exceeds the coach's pay per
year (= $7 million to $7.5 million according to the News Wire).

LO 08-05
Topic: Market Structure
Topic: Perfect Competition
AACSB: Analytic
Blooms: Level 2 Understand

7. In Figure 8.7,
 (a) How many workers lose their jobs when the minimum wage is enacted?
(b) How many workers are unemployed at the minimum wage? (LO 8-4)

Answers:
(a) qe - qd
(b) qs - qd

Explanation:

At the equilibrium, qe workers are hired at the wage rate we.

a. If a minimum wage is enacted and equal to wm, qd workers will be hired at this
higher wage rate. This means that qe workers minus qd workers lose their job.

b. If a minimum wage is enacted and equal to wm, qd workers will be hired and qs
workers are looking for jobs at this higher wage rate. This means that qs workers
minus qd workers are unemployed.

Keep in mind that the number of people who lose their jobs is different from the
total number unemployed because an increase in the minimum wage has two
effects. It decreases the quantity demanded from the initial equilibrium and this
results in a job loss. At the same time, the increase in the minimum wage results in
an increase in the number of workers looking for employment. Since these
additional workers are new entrants to the labor force, the result is an increase in
unemployment.

LO 08-04
Topic: Industry Entry and Exit
AACSB: Analytic
Blooms: Level 4 Analyze

8. In November 2014 the Miami Marlins agreed to pay Giancarlo Stanton $325 million
over 10 years. If this salary were to be covered by ticket sales only, how many more
tickets per game would the Marlins have to sell to cover Stanton’s salary in the 81
home games per year if the average ticket price is $60? (LO 8-4, 8-5)

Answer: 6,687 tickets per home game each year.

Explanation:
To cover the $32.5 million per year (= $325 million/10 years) through additional ticket
revenue, the Marlins will need to sell an additional 6,687 tickets per game. This is calculated
as: $32.5 million/$60 per ticket/81 home games = 6,687 tickets per home game. The Marlins
will also generate other sources of revenue such as parking fees, concessions, stadium
advertising, broadcast fees (television and radio), and sports memorabilia that will help pay
 the cost of Stanton’s salary. If Stanton helps them to make the playoffs, there would be
even more revenue from the additional games.

LO 08-04, LO 08-05
Topic: Labor Demand
AACSB: Analytic
Blooms: Level 2 Understand

9. Assuming that a college graduate on average earns their MRP, what is the MRP for a
newly hired Economics major? (See the News Wire “Unequal Wages” on p. 167.)
(LO 8-4, 8-5)

Answers:
$51,400

Explanation:
If the Economics graduate earns their MRP, then it will be equal to the MRC to that
employer, which is the Median Starting Salary of $51,400.

LO 08-04, 05
Topic: Labor Demand
AACSB: Analytic
Blooms: Level 2 Understand

10. If Nick Saban (News Wire "Marginal Revenue Product", p. 169) were offered a CEO
position at a sporting goods company, What would his opportunity cost be? (LO 8-2)

Answer:
His opportunity cost would be equal to his salary from being a football coach.

Explanation:
Nick Saban's opportunity cost to take a CEO position at a sporting goods company is the
salary from the job he currently has (= $7 million to $7.5 million according to the News
Wire).

LO 08-02
Topic: Market Equilibrium
AACSB: Analytic
Blooms: Level 2 Understand