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Unformatted text preview: Wage Determination ANSWERS TO END-OF-CHAPTER QUESTIONS 26-1 Explain why the general level of wages is higher in the United States and other industrially advanced countries. What is the single most important single factor underlying the long-run increase in average real-wage rates in the United States? The general level of wages is higher in the United States and other industrially advanced nations because of the high demand for labor in relation to supply. Labor productivity is high in the U.S and other industrially advanced countries because: (1) capital per worker is very high; (2) natural resources are abundant relative to the size of the labor force particularly in the U.S.; (3) technology is advanced in the United States and other industrially advanced countries relative to much of the rest of the world; (4) labor quality is high because of health, vigor, training, and work attitudes compared to labor; (5) other factors contributing to high American productivity are the efficiency and flexibility of American management; the business, social, and political environment that greatly emphasizes production and productivity; and the vast domestic market, which facilitates the gaining of economies of scale. The most important single factor underlying the long-run increase in average real wage rates in the United States is the increase in output per worker, that is, in productivity. 26-2 Why is a firm in a purely competitive labor market a wage taker ? What would happen if it decided to pay less than the going market wage? A firm in a purely competitive labor market is a wage taker because there are a large number of firms wanting to buy the labor services of the workers in that market and a large number of workers with identical skills wanting to sell their labor services. As a result, the individual firm has no control over the price of labor. If a firm attempted to pay a wage below the going wage, no workers would offer their services to that firm. 26-3 ( Key Question ) Describe wage determination in a labor market in which workers are unorganized and many firms actively compete for the services of labor. Show this situation graphically, using W 1 to indicate the equilibrium wage rate and Q 1 to show the number of workers hired by the firms as a group. Show the labor supply curve of the individual firm, and compare it with that of the total market. Why the differences? In the diagram representing the firm, identify total revenue, total wage cost, and revenue available for the payment of nonlabor resources. The labor market is made up of many firms desiring to purchase a particular labor service and of many workers with that labor service. The market demand curve is downward sloping because of diminishing returns and the market supply curve is upward sloping because a higher wage will be necessary to attract additional workers into the market. Whereas the individual firms supply curve is perfectly elastic because it can hire any number of workers at the going wage, the market...
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- Spring '08