Chap010Solutions - CHAPTER 10 10-1 Suppose blacks and...

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68 CHAPTER 10 10-1. Suppose blacks and whites are not perfect substitutes in production. The firm would like to minimize the costs of producing 100 units of output. Show that employers who discriminate against blacks earn lower profits. Does your conclusion depend on whether the market-determined black wage is lower than the white wage? As drawn in the figure below, the profit-maximizing position for a non-discriminating employer occurs at point P where the 100-unit isoquant is tangent to the lowest possible isocost line given by X . Discrimination against blacks implies that the utility-adjusted black wage is relatively high, and hence employers would move to a point like A , which is tangent to the utility-adjusted isocost given by line Y . Note, however, that at point A the true costs of production are given by isocost line Z , which is clearly higher than isocost line X . As a result, discrimination is costly. It is worth noting that this analysis assumes nothing about which wage, the black or the white, is higher. 10-2. Suppose black and white workers are complements in the sense that the marginal product of whites increases when more blacks are hired. Suppose also that white workers do not like working alongside black workers. Does employee discrimination lead to complete segregation? Does it create a wage differential between black and white workers? If blacks and whites are perfect substitutes, employee discrimination leads to complete segregation. If, however, blacks and whites are complements as in this problem, then there is an incentive for employers to employ blacks and whites together in the work place if the increase in productivity achieved by integrating the work force is higher than the extra wages employers must pay white workers to compensate them for working alongside blacks. The interpretation of the wage differential between black and white workers is more difficult. The wage differential between the two groups will reflect not only the effect of discrimination (a higher wage for whites to encourage them to work alongside blacks), but also the effect of differences in productivity. Overall, however, it is clear that whites must be paid a compensating differential. Capital Employment X Z Y 100 P A
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69 10-3. In 1960, the proportion of blacks in Southern states was higher than the proportion of blacks in Northern states. The black-white wage ratio in Southern states was also much lower than in Northern states. Does the difference in the relative black-white wage ratios across regions indicate that Southern employers discriminated more than Northern employers? Suppose employers in neither region discriminate, so that the equilibrium black-white wage differential in both regions is determined by the (relative) demand for and supply of black workers. If there are relatively many more black workers in the South than in the North, then the black-white wage ratio will be lower in the South than in the North, as the marginal black hired in the South is less valuable than the marginal black hired in the North. Thus, the fact that blacks earn relatively less in the South need not
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This note was uploaded on 08/06/2008 for the course ECON 324 taught by Professor Hamermesh during the Spring '05 term at University of Texas.

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Chap010Solutions - CHAPTER 10 10-1 Suppose blacks and...

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