second semester study guide

Unions are necessary to counter the market power of

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Unions are necessary to counter the market power of firms that hire workers o Company Town – One company in a town, great market power over wages Efficient Wage Theory – Above-equilibrium wages paid by firms increase worker productivity and efficiency Paying high wages might be profitable because they raise the efficiency of a firm’s workers o Worker Health – Better paid workers eat a more nutritious diet and are therefore healthier and more productive o Worker Turnover – The more a firm pays its workers, the less often its workers will choose to leave ! Training new workers is expensive and new workers are not as productive o Worker Effort – High wages make workers more eager to keep their jobs and, thereby, give workers an incentive to put forward their best efforts o Worker Quality – By paying a high wage, the firm attracts a better pool of workers to apply for its jobs Convergence o Since poorer countries typically have less capital per worker (lower K/L), diminishing marginal returns dictates that additional capital will yield higher returns in the poor country than in a rich country because it means more to the poor country o Absolute Convergence – All else equal, the poorer country could potentially have a comparable GDP to that of a rich country ! Investment – The higher returns to capital in the poor country will encourage increased domestic saving by consumers and attract investment, both from domestic and foreign entities
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Brought to you by ! Technology – The poorer country can take advantage of technological advances already made by richer countries and therefore does not have to spend money on research and development o Conditional Convergence – There are many other factors that influence the growth rate of a country and often times poorer countries have negative features that inhibit their growth relative to richer countries, and therefore can never achieve absolute convergence ! Limitations of natural resources ! Rule of law ! Economic system (capitalist, socialist, etc.) ! Social division in society (oppression, discrimination, etc.) ! Institutional foundations (education, roads, infrastructure) ! Property rights ! Government stability Helpful Hints: Options Option – The right to buy or sell some asset in the future at a price that is agreed upon today ( ex. The right to sell a certain amount of stock at $20 a share on December 31) Call Option – Gives the holder of the option to buy assets at the pre-specified price o Expected Value – The amount that a stock would be worth on average ! (Probability of Price 1)(Price 1) + (Probability of Price 2)(Price 2) + … o The expected value of the option can be calculated similarly o ex. Call option is set at $20 and the three equally likely prices for the stock in a certain amount of time are $18, $21, $24 ! If the stock is $18 the option is worth $0, if the stock is $21, the option is worth $1 because you would have the option to but the stock for less than it is traded, etc.
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