Chapter 21 — Exercises
Section A — Labor demand
A1. A worker at a firm produces 100 widgets per day. Each widget sells for $5. What is the worker's MRPL? If the wage is $400/day, should the firm hire the worker?
A2. A firm hires 10 workers at a wage of $200/day. The 11th worker would produce 30 additional widgets per day at a price of $5 each. Should the firm hire the 11th worker?
A3. Why does the labor demand curve slope downward? Apply diminishing marginal product.
A4. How does a rise in the price of the firm's output affect the demand for labor? Explain using MRPL.
Section B — Labor supply
B1. At a wage of $15/hour, a worker supplies 40 hours per week. At $25/hour, she supplies 45 hours. At $100/hour, she supplies 35 hours. Does this worker have a backward-bending supply curve? At what wage does the income effect start to dominate?
B2. Why does the substitution effect say "higher wages → more work" while the income effect says "higher wages → less work"?
B3. A new study shows that people who work from home are more productive. How does this affect the work-leisure tradeoff? Does it shift the supply curve?
Section C — Why wages differ
C1. Two workers with identical education and experience work at the same firm. One earns $70,000 and the other earns $55,000. List four possible explanations for the gap.
C2. "The college wage premium proves that college is valuable." Evaluate. Does the premium measure human capital, signaling, or both?
C3. Coal miners earn more than office workers of similar education. Apply compensating differentials. What exactly is the coal miner being compensated for?
C4. An audit study sends identical résumés to employers — half with "white-sounding" names and half with "Black-sounding" names. The white-named résumés get 50% more callbacks. What does this prove about discrimination? What doesn't it prove?
Section D — Monopsony
D1. In a small town, the only major employer is a factory paying $12/hour. Workers would need to commute 45 minutes to find an alternative job paying $14/hour. Is this a monopsony? Why?
D2. A monopsony employer pays $12/hour. The competitive wage would be $15/hour. A minimum wage is set at $14/hour. Using the monopsony model, predict what happens to: (a) the wage, (b) employment, (c) the employer's profit.
D3. "Amazon is a monopsonist in the warehouse labor market in many rural areas." Evaluate. What evidence would support or refute this claim?
D4. If monopsony is common in low-wage labor markets, what does this imply for the minimum wage debate?
Section E — The minimum wage synthesis
E1. Summarize the five explanations for why the empirical minimum-wage literature finds smaller employment effects than the competitive model predicts.
E2. "A $12 minimum wage is probably fine; a $25 minimum wage is probably not." Use the elasticity framework and the monopsony framework to evaluate this position.
E3. Compare the minimum wage to the EITC as anti-poverty tools. Which is better for: (a) workers who keep their jobs, (b) workers who lose their jobs, (c) non-working poor people, (d) the government budget?
E4. "The minimum wage is about dignity, not just dollars." Apply the three philosophical frameworks from Chapter 13 to this claim.
Section F — The gig economy
F1. Uber classifies drivers as independent contractors. What are the economic consequences of this classification? Who benefits, who is hurt?
F2. "Gig work is just monopolistic competition for labor." Evaluate. How does the gig economy differ from traditional employment markets?
F3. California's AB5 tried to reclassify gig workers as employees. Uber successfully lobbied for an exemption (Proposition 22). Apply the political economy framework: why did Uber win?
Section G — Automation and AI
G1. "Automation always destroys jobs." Apply the historical evidence to evaluate. Give two examples where automation destroyed jobs and two where it created them.
G2. "AI is different from previous technologies because it can perform cognitive tasks." Why might this make AI's labor-market impact larger than previous automation?
G3. What policy should government adopt in response to AI-driven automation? Apply the four anti-poverty policies from Chapter 13.
Section H — The Millbrook labor market
H1. Millbrook's largest employers are MSU (5,200 employees), Walden County Medical Center (3,100), and Riverside Foods (1,100). Is the Millbrook labor market monopsonistic? For which types of workers?
H2. MSU pays adjunct professors $3,200/course. Apply the monopsony framework. Does MSU have monopsony power over adjuncts?
H3. The proposed Walden County minimum wage increase to $14/hour (Chapter 7) would affect workers at Riverside Foods, restaurants, and retail. Apply the labor-market framework to predict: (a) wage effects, (b) employment effects, (c) price effects for consumers.
Section I — Reflection
- The labor market is the market you will participate in for most of your life. After this chapter, has your understanding of wages and employment changed?
- Do you find the monopsony explanation for small minimum-wage employment effects convincing?
- Which concerns you more about the future of work: the gig economy or AI automation? Why?
Selected answers in appendices/answers-to-selected.md.