1. Instructions You are expected to answer all of these questions in coherent pa
ID: 1250245 • Letter: 1
Question
1. InstructionsYou are expected to answer all of these questions in coherent paragraphs, not a series of bullet points. Do not treat the subquestions within each larger question as individual questions. Think of each question as being a little, mini essay. None of these questions require you to use graphs, though you can if you would like. Please answer the questions in order (meaning, don’t answer 6, 4, 1, and 3, instead answer 1, 3, 4, and 6). If you answer more than four questions, I will grade the first four questions you answered. Under no circumstances will I give more points if you answer more than four questions
2. Questions
2.1 Required
1. The fundamental building block of labor economics is the perfectly competitive labor market. Explain what it means for a labor market to be perfectly competitive. Explain the central implications of a perfectly competitive labor market for (1) what determines how much an individual is paid, (2) why any two individuals may be paid a different wage ( hint: use the simplest explanation possible), and (3) unemployment.
2. Of course, in the real world there are many labor markets that are not perfectly competitive. On such structure is Monopsony. What is a monopsonistic labor market? What is the fundamental difference between monopsony and perfect competition (hint: it is not that monopsony only has one buyer of labor)? In the context of monopsony, explain the central implications for (1) what determines how much an individual is paid, (2) why any two otherwise identical individuals at two different firms might be paid different wages, (3) why monopsony can result in individuals paid different wages for reasons that do not exist in perfect competition, and (4) unemployment.
Explanation / Answer
I'm not going to write this up in paragraph form, but I will give you the info that you need. ;) 1. Perfectly competitive labor market. (1.) A worker's wage is determined by his productivity -- specifically, the marginal revenue brought in by his additional productivity. (2.) The simplest explanation for differences in pay is differences in productivity, caused by differences in skills, or differences in hours worked, or differences in effort provided. (3.) Unemployment is the result of frictions in the labor market. When things don't work perfectly *smoothly* (the opposite being that there is some roughness, or some *friction*), workers don't immediately transfer into their ideal jobs. Instead, they spend some time being disemployed, and then searching for a new job. This is the explanation for unemployment. 2. Monopsony: imperfect labor markets. (1.) In a monopsony, wages are decided based on how much the firm needs to pay in order to hire a certain number of workers. (2.) "Reservation wages" might explain why a monopsonist pays different wages to its works. If the monopsonist knows that Mr. Jones is willing to work for $8/hr but Ms. Smith expects $10/hr, then it will pay Mr. Jones his "reservation wage" of $8 and Ms. Smith her "reservation wage of $10. (3.) In a competitive world, people are paid according to productivity. If Mr. Jones and Ms. Smith are *producing* the same amount (say, $10 worth of output), then Mr. Jones probably wouldn't stay at any firm that pays him only $8/hour. Some other firm would find it profitable to recruit him by offering a wage of $9/hour (he'd love this, because it's more money for him; also, it's profitable for the new firm, but he's producing more than they pay him). Firms would keep offering him jobs with higher wages until his productivity really does match his wage. Does this help? I love labor economics. ;)
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