1. Product Elasticities and the Wage Job Trade-Off. Consider two unions, one in an industry where the price elasticity of demand for the product is 3.0 (industry E), and one where the price elasticity of demand is 2.0 (industry I). In both industries, the initial wage is $30 and labor is responsible for half the cost of production, so the percentage change in the product price is half the percentage change in the wage. In each industry, the initial employment is 100 workers. Suppose each union increases its wage by 10 percent.
a. Compute the output effect of the wage increase for each industry: Total employment in industry E drops from 100 to ______; total employment in industry I drop from 100 to ______.
b. Assume that there is no substitution effect from changes in wages. Use two graphs to show the effects of the increase in the wage on the quantity of labor demanded.
2. Trade-Offs from Featherbedding. Suppose that featherbedding increases the labor time per unit of output from five hours to six and increases the firms production cost and its price by 15 percent. The firm initially produces and sells 100 units of output. If the price elasticity of demand for the firm’s product is 2.0, how will featherbedding affect the firm’s total demand for labor?
3. Labor Demand Elasticity and Total Income. Suppose a union s objective is to maximize the total income of nurses (total money spent by firms on nurses). At the current wage, the price elasticity of demand for nurses is 0.75 (in absolute value).
a. Should the union increase or decrease the union wage? Explain.
b. Is there a trade-off between wages and total employment?
4. No Substitution Effect. Suppose the union wage rises by 10 percent in an industry where input substitution is impossible. Comment on the following: Firms cannot substitute capital for the more expensive labor, so the higher wage won t affect the quantity of labor demanded.
5. Equalizing Teacher Salaries. Consider a school that can hire two types of teachers, average and high quality. The vertical intercept of the supply curve for average teachers is $50, and the slope is $1 per average teacher. The vertical intercept of the supply curve for high quality teachers is $120, and the slope is $1 per high quality teacher.
a. Initially, the wage for average teachers is $100 and the wage for high-quality teachers is $160. Draw the supply curves and compute the number of average and high-quality teachers.
b. Suppose that unionization levels-up the wage to $130: Both types of teachers earn a wage of $130. Use your supply curves to compute the number of average and high-quality teachers. How has the composition of the workforce changed?
c. Where have the high-quality teachers gone?