1. Suppose a firm’s cost of hiring another worker is $100. The firm pays an hourly wage of $15 to all workers. Each additional worker adds 100 units to total production, holding constant capital and average hours per worker. If a current worker works an additional hour, holding constant capital and the number of employees, total production increases by 8. The firm faces diminishing marginal returns to workers and to hours per worker.

A. Is the firm maximizing profits? Why or why not? If not, what should it do given this setup?

B. Suppose the government offered a hiring subsidy that reduces the cost of hiring additional workers to $100. Would the firm do anything differently? If so, what and

4. Some observers (and players) allege that Major League Baseball (MLB) teams act like a cartel, including exercising monopsony power over players. Indeed, a series of Supreme Court decisions have largely held that the MLB is exempt from antitrust laws. (Caveat: I don’t even remotely claim to be an expert on sports economics or the MLB, so the details here may be not be perfectly correct.)

a) If the MLB has monopsony power, are players paid more or less than their marginal revenue product? Explain briefly and include a diagram with your answer.

b) The era of free agency started in about 1978. Free agency allows players to move across teams if they’ve been released by the team they signed with or have been with that team for a specified period (currently 6 years) and their contract has expired. Before that, baseball players were subject to a reserve clause that basically allowed their team to decide their destiny.

What would we expect to happen to players’ salaries after the era of free agency began, and why

c) Suppose the era of free agency begins, but it applies only to players who have been with their club for at least 6 years. What would we expect to happen to the salaries of players who are now eligible for free agency compared with those who are not? (This is basically a difference-in-differences, by the way!)

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