19.7 PROBLEMS

Question 19.10

In 2012, national income in Canada was $1819.97 billion. In the same year, 17.73 million workers were employed, at an average wage of $45 204 per worker per year (excluding employers’ social contributions).

  1. How much direct compensation of employees was paid in Canada in 2012?

  2. Analyze the factor distribution of income. What percentage of national income was received in the form of direct compensation to employees in 2012 (excluding employers’ social contributions)? In light of Figure 19-1, what percentage of national income do employers’ social contributions represent?

  3. Suppose that a wave of corporate downsizing leads many Canadians to open their own businesses. What is the effect on the factor distribution of income?

  4. Suppose the supply of labour rises due to an increase in the retirement age. What happens to the percentage of national income received in the form of compensation of employees?

Question 19.11

Marty’s Frozen Yogourt has the production function per day shown in the accompanying table. The equilibrium wage rate for a worker is $80 per day. Each cup of frozen yogourt sells for $2.

  1. Calculate the marginal product of labour for each worker and the value of the marginal product of labour per worker.

  2. How many workers should Marty employ?

Question 19.12

Patty’s Pizza has the production function per hour shown in the accompanying table. The hourly wage rate for each worker is $10. Each pizza sells for $2.

  1. Calculate the marginal product of labour for each worker and the value of the marginal product of labour per worker.

  2. Draw the value of the marginal product of labour curve. Use your diagram to determine how many workers Patty should employ.

  3. The price of pizza increases to $4. Calculate the value of the marginal product of labour per worker, and draw the new value of the marginal product of labour curve in your diagram. Use your diagram to determine how many workers Patty should employ.

Question 19.13

The production function for Patty’s Pizza is given in the table in Problem 3. The price of pizza is $2, but the hourly wage rate rises from $10 to $15. Use a diagram to determine how Patty’s demand for workers responds as a result of this wage rate increase.

Question 19.14

Patty’s Pizza initially had the production function given in the table in Problem 3. A worker’s hourly wage rate was $10, and pizza sold for $2. Now Patty buys a new high-tech pizza oven that allows her workers to become twice as productive as before. That is, the first worker produces 18 pizzas per hour instead of 9, and so on.

  1. Calculate the new marginal product of labour and the new value of the marginal product of labour.

  2. Use a diagram to determine how Patty’s hiring decision responds to this increase in the productivity of her workforce.

Question 19.15

Jameel runs a driver education school. The more driving instructors he hires, the more driving lessons he can sell. But because he owns a limited number of training automobiles, each additional driving instructor adds less to Jameel’s output of driving lessons. The accompanying table shows Jameel’s production function per day. Each driving lesson can be sold at $35 per hour.

Determine Jameel’s labour demand schedule (his demand schedule for driving instructors) for each of the following daily wage rates for driving instructors: $160, $180, $200, $220, $240, and $260.

Question 19.16

Dale and Dana work at a self-service gas station and convenience store. Dale opens up every day, and Dana arrives later to help stock the store. They are both paid the current market wage of $9.50 per hour. But Dale feels he should be paid much more because the revenue generated from the gas pumps he turns on every morning is much higher than the revenue generated by the items that Dana stocks. Assess this argument.

Question 19.17

In 2007 the wage of farmworkers in Mexico was $11 an hour but the wage of immigrant Mexican farmworkers in California was $9 an hour.

  1. Assume that the output sells for the same price in the two countries. Does this imply that the marginal product of labour of farmworkers is higher in Mexico or in California? Explain your answer, and illustrate with a diagram that shows the demand and supply curves for labour in the respective markets. In your diagram, assume that the quantity of labour supplied for any given wage rate is the same for Mexican farmworkers as it is for immigrant Mexican farmworkers in California.

  2. Now suppose that farmwork in Mexico is more arduous and more dangerous than farmwork in California. As a result, the quantity supplied of labour for any given wage rate is not the same for Mexican farmworkers as it is for immigrant Mexican farmworkers in California. How does this change your answer to part (a)? What concept best accounts for the difference between wage rates for Mexican farmworkers and immigrant Mexican farmworkers in California?

  3. Illustrate your answer to part (b) with a diagram. In this diagram, assume that the quantity of labour demanded for any given wage rate is the same for Mexican and Californian employers.

Question 19.18

Kendra is the owner of Wholesome Farms, a commercial dairy. Kendra employs labour, land, and capital. In her operations, Kendra can substitute between the amount of labour she employs and the amount of capital she employs. That is, to produce the same quantity of output she can use more labour and less land; similarly, to produce the same quantity of output she can use less labour and more land. However, if she uses more land, she must use more of both labour and capital; if she uses less land, she can use less of both labour and capital. Let w* represent the annual cost of labour in the market, let rL* represent the annual cost of a unit of land in the market, and let rK* represent the annual cost of a unit of capital in the market.

  1. Suppose that Kendra can maximize her profits by employing less labour and more capital than she is now using but the same amount of land. What three conditions must hold for Kendra’s operations (involving her value of the marginal product of labour, land, and capital) for this to be true?

  2. Kendra believes that she can increase her profits by renting and using more land. What three conditions must hold (involving her value of the marginal product of labour, land, and capital) for this to be true?

Question 19.19

For each of the following situations in which similar workers are paid different wages, give the most likely explanation for these wage differences.

  1. Test pilots for new jet aircraft earn higher wages than airline pilots.

  2. College and university graduates usually have higher earnings in their first year on the job than workers without post-secondary degrees have in their first year on the job.

  3. Full professors command higher salaries than assistant professors for teaching the same class.

  4. Unionized workers are generally better paid than non-unionized workers.

Question 19.20

Research consistently finds that despite nondiscrimination policies, visible minority workers on average receive lower wages than white workers do. What are the possible reasons for this? Are these reasons consistent with marginal productivity theory?

Question 19.21

Greta is an enthusiastic amateur gardener and spends a lot of her free time working in her yard. She also has a demanding and well-paid job as a freelance advertising consultant. Because the advertising business is going through a difficult time, the hourly consulting fee Greta can charge falls. Greta decides to spend more time gardening and less time consulting. Explain her decision in terms of income and substitution effects.

Question 19.22

Wendy works at a fast-food restaurant. When her wage rate was $5 per hour, she worked 30 hours per week. When her wage rate rose to $6 per hour, she decided to work 40 hours. But when her wage rate rose further to $7, she decided to work only 35 hours.

  1. Draw Wendy’s individual labour supply curve.

  2. Is Wendy’s behaviour irrational, or can you find a rational explanation? Explain your answer.

Question 19.23

You are the premier’s economic policy adviser. The premier wants to put in place policies that encourage employed people to work more hours at their jobs and that encourage unemployed people to find and take jobs. Assess each of the following policies in terms of reaching that goal. Explain your reasoning in terms of income and substitution effects, and indicate when the impact of the policy may be ambiguous.

  1. The provincial income tax rate is lowered, which has the effect of increasing workers’ after-tax wage rate.

  2. The provincial income tax rate is increased, which has the effect of decreasing workers’ after-tax wage rate.

  3. The provincial property tax rate is increased, which reduces workers’ after-tax income.

Question 19.24

A study by Employment and Social Development Canada showed that between 1976 and 2010 the average hours worked per week by a Canadian worker fell from 38 hours per week to 36.6 hours per week. Some believe that the fall in weekly working hours is driven by a rise in wage rate.

  1. Use the income and substitution effects to describe the labour supply for the average Canadian. Which effect dominates?

  2. There has also been an increase in female labour force participation—more women chose to hold jobs rather than exclusively perform household tasks. For the average woman who has newly entered the labour force, which effect dominates?

  3. Draw typical individual labour supply curves that illustrate your answers to part (a) and part (b) above.