4 and the capital supply curve k 4 r or 140625 all of

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Essentials of Economics
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Chapter 6 / Exercise 6
Essentials of Economics
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4, and the capital supply curve K = 4 · R , or 140625. All of the firms’ surplus is paid out to factors. Firms earn zero profit, as we already knew from N1f). 15–11
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Chapter 6 / Exercise 6
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Chapter Sixteen: The Market for Labor General Discussion 1) I had originally intended to include a section on unemployment, but became convinced that the topic was too complex—and perhaps also too “macro”—to be dealt with here. However, if you cover labor markets, the subject may come up in class. It is important to distinguish between voluntary unemployment (people choos- ing not to work because the going wage is insufficiently high to attract them) and involuntary unemployment (people who can not find a job at the going wage). The distinction is subtle, both empirically and theoretically. Putting aside the difficult empirical questions, it is already hard just to pin down the definition of involuntary unemployment. Chuck Whiteman once told me that he was involuntarily unemployed as a quarterback for the Los Angeles Rams, in the sense that, given the going wage for that position, he preferred to supply more hours than he was able to. Clearly we must control for abilities. It has been suggested that you are involuntarily unemployed when you are identical to your neighbor in every way, except that he’s working, you’re not working, and he’s happier than you are. This seems a reasonable start. The next problem is to explain why there should ever be involuntary unemploy- ment, since our most basic models predict that competitive markets in general, and labor markets in particular, should achieve a price at which the quantity supplied and the quantity demanded are equal. Here we enter the realm of macroeconomics, and I think it is fair to tell students that they have now stepped beyond the bounds of the present course and will just have to wait a semester before they can find out what happens next. But there remain a few interesting tidbits we can throw out. One is that we really don’t know how much unemployment is voluntary, and that for all anybody really knows, it might all be voluntary. Half your students will have “involuntarily unemployed” relatives to hold up as counterexamples. Without getting into the unsavory details of their family lives, you can tell them that “all” does not mean literally every single case, but rather that models in which all unemployment is assumed to be voluntary fit the observed facts within reasonable statistical limits. The model of unemployment in section 9.2 is an example (in fact the archetypal example) of an attempt at such a model. An alternative you can mention is efficiency wage theory, which also appears in Chapter 9: Employees can not be monitored at all times, and are sometimes able to shirk or to otherwise steal from their employers. In order to discourage such behavior, the employer must be able to threaten a substantial punishment if the employee is caught. Since the harshest available punishment is to fire the

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