ECON 202 Exam 4 (Final)

Make sure to also study the other flashcards!!!

Derived Demand

demand for factors of production

What influences hiring decisions?

• budget

• Diminishing Marginal Product

• Marginal Product of Labor

When should a firm hire?

When expected revenue of hiring is greater than or equal to the expected cost of hiring (wage).

Marginal Product of Labor (MPL)

the additional output produced when one more unit of labor is employed

How to find the value of MPL?

P of output times MPL

What can firms NOT do in a competitive market?

Pay workers more than the value of the MP of their L.

What can we predict the long run wage of a worker to equal?

the value of MPLin a competitive labor market

True or False: Demand for labor is not the same as the value of marginal product.

False

What shifts labor demand?

• Value of MPL

• Changes in technologies (labor saving or labor augmenting)

How to find the value of MPL

P of product times MPL

Labor Saving Technology

allows firms to hire less workers because the technology will do the job in their place (ex: self checkout)

Labor Augmenting Technology

allows firms to hire more workers because the technology allows for workers to work more efficiently (ex: nail gun)

True or False: A firm should hire if the person they are wanting to hire is able to produce the same amount as the wage they will be paid.

True

True or False: Productivity of workers is linked to their wage.

True

Who sells labor?

workers (houeholds)

How do workers decide to work?

• opportunity cost (wage vs. leisure)

• nature of work (what shift?)

• people they work with

• pay: do they need the money?

What shifts supply of labor?

• wages

• changes in workers’ perspective about work (COVID)

• changes in alternative opportunities (will want to work in the more profitable market)

• immigration

What might hold wages artificially high (above the equilibrium)?

• Efficiency wages

• Minimum wage

• Labor unions

Efficiency Wages

when a firm decides to pay artificially high wages for the sake of competition

• better workers

• decrease worker turnover

• lower absenteeism

Minimum Wage

when a government places a price floor or “wage floor” on labor

Labor Unions

when a group of workers come together to collectively bargain with management

• typically successful because a firm does not want to lose all of its labor at once and have to rehire/retrain

What prevents equilibrium in Labor Markets?

Monopsony of Labor

Monopsony of Labor

A market condition where there is only one buyer for labor, giving the employer significant power over wages and employment conditions.

Milton Friedman

most famous economist of the 20th century; believed that if a firm attempts to lower wages, laborers should leave the firm

Why do some jobs pay more than others?

• compensating differentials

• Ability, effort, and chance

• Superstar phenomenon

• 2 views of education

• Case Study: The Benefits of Beauty

• Gender pay gap

Compensating differential

A difference in wages that arises to offset the no monetary characteristics of different jobs

Characteristics: Unpleasantness, difficulty, danger

Ex: coal miners, firefighters, night shift workers

Ability, effort, and chance

Greater ability or effort often command higher pay (more valuable to a firm)

Ex: sales

Wages also affected by chance

Ex: TV repairman (no longer needed)

Superstar Phenomenon

The best at certain jobs can earn significantly more than others in their field (does not apply to every field)

Ex: actors vs plumbers

2 Characteristics of the Superstar Phenomenon

1. Every customer wants the best producer

2. Technology allows the best producer to supply every customer at a low cost

2 views of education

1. Human capital: actually has the ability

2. Signaling: gives the vibes that they have the ability

Case Study: The Benefits of Beauty

Research by Hamermesh & Biddle

Found that people who are more attractive are paid more

Hypotheses of Case Study: The Benefits of Beauty

• good looks matter for productivity (appearance is important in some jobs)

• Good looks indirectly related to ability (people who make an effort to look good work harder)

• Discrimination

Discrimination

Offering different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics

Why is there a gender pay gap?

• discrimination

• Social norms/views

• Types of jobs (people oriented (women) vs thing oriented (men))

• Hours worked

• Social norms around child rearing

How much income puts a household in the top 10% of earners in the U.S.?

$235,000 per year for a family of four

Has income inequality increased or decrease over time in the U.S.?

It has increased since the ‘70s primarily due to the development of new technologies as higher-skilled jobs get paid more and lower-skilled jobs get replaced.

What country has the largest income inequality?

South Africa

Poverty line

A level of income set by the federal government below which a household is considered poor

• 2025: $32,150 for a family of four

Poverty Rate

The percent of the population below the poverty line

What percentage of Americans live below the poverty line?

Between 10%-15%

Why did the poverty rate decrease by almost half in the U.S. after the ‘60s?

• President Kennedy lowered income taxes

• Women started joining the work force

• Civil Rights Movement

What is poverty in the U.S. correlated with?

• Race

• Age

• Family Composition (single- vs two-parent household)

True or False: White Americans make up the highest earners in the U.S.

False

Problems with measuring poverty in the U.S.

• in-kind transfers (goods & services given to the poor)

• Economic Life Cycle (income varies dramatically overtime-college students)

• Transitory vs Permanent Income (permanent income focuses on typical income)

• Economic mobility (“rich” & “poor” are constantly changing)

What is done for those in poverty in the U.S.?

• minimum wage

• Welfare

• In-kind transfers: SNAP (for food) & Medicaid

• Earned Income Tax Credit

Earned Income Tax Credit

Working poor can receive more tax refunds than they pay

Asymmetric Information

A difference in access to relevant information in an interaction

• can take many forms

• Most common example is the selling of used cars

Moral Hazard

Since someone else will suffer the consequences, a seller will engage in reckless or dishonest behavior

Adverse Section

The tendency for the mix of I observed attributed to become undesirable from the standpoint of an uninformed party

Akerlof’s “Market for Lemons”

describes a market failure that arises due to asymmetric information

How to find expected value

50% (high price) + 50% (low price)

Signaling

Actions taken by the informed party to reveal information to the uninformed party

Ex: ads, education level

Screening

Actions taken by the uninformed party to reveal information

Behavior Economics

The sub field of economics that integrates the insights of psychology

• much of the recent advancements in economics have been in this field

Homo Economicus

The perfectly rational human

• never contradicts themselves

• Our assumptions so far have been based off this

Why assume rationality?

It makes model simpler

Satisficing

Accepting good enough

How are people irrational?

1. Overconfidence

2. Emphasize valid observations

3. Reluctant to change their minds

4. Care about fairness

5. Inconsistent preferences

6. Inconsistent overtime

Confirmation bias

People tend to interpret evidence in a way that reinforces the views they already hold

The ultimatum game

One player gets to decide how to split $100, and the other one can reject it so no one gets anything