Quiz 12: Market Structures Ii: Monopolistic Competition

USES OF TIME Describe the three possible uses of an individual's time, and give an example of each.

WORK AND UTILITY Explain the concept of the "net utility of work." How is it useful in developing the labor supply curve?

UTILITY MAXIMIZATION How does a rational consumer allocate time among competing uses?

SUBSTITUTION AND INCOME EFFECTS Suppose that the substitution effect of an increase in the wage rate exactly offsets the income effect as the hourly wage increases from $12 to $13. What would the supply of labor curve look like over this range of wages? Why?

SUBSTITUTION AND INCOME EFFECTS Suppose that the cost of living increases, thereby reducing the purchasing power of your income. If your money wage doesn't increase, you may work more hours because of this cost-of-living increase. Is this response predominantly an income effect or a substitution effect? Explain.

NONWAGE DETERMINANTS OF LABOR SUPPLY Suppose that two jobs are exactly the same except that one is performed in an air-conditioned workplace. How could you measure the value workers attach to such a job amenity?

WHY WAGES DIFFER Why might permanent wage differences occur between different markets for labor or within the same labor market?

Case Study: Winner-Take-All Labor Markets What characterizes a winner-take-all labor market? Offer some reasons why corporate heads now earn relatively more than they did in 1980.

MEDIATION AND ARBITRATION Distinguish between mediation and binding arbitration. Under what circumstances do firms and unions use these tools? What is the role of a strike in the bargaining process?

THE STRIKE Why might firms in industries with high fixed costs be inclined to prevent strikes or end strikes quickly?

INDUSTRIAL UNIONS Why are unions more effective at raising wages in oligopolistic industries than in competitive industries?

CRAFT UNIONS Both industrial unions and craft unions attempt to raise their members' wages, but each goes about it differently. Explain the difference in approaches and describe the impact these differences have on excess quantity of labor supplied.

Case Study: Federal Bailout of GM, Chrysler, and the UAW How would the UAW benefit for increased demand for GM and Chrysler vehicles? Reference Case Study: Public Policy Federal Bailout of GM, Chrysler, and the UAW In the 1970s, the United Auto Workers (UAW) negotiated what have been called "gold-plated benefits" for their workers and retirees. General Motors, Ford, and Chrysler, the so-called Big Three, believed that because they dominated the U.S. auto market and because they all faced the same labor costs, any higher costs could simply be passed along to car buyers. What could go wrong? Well, what went wrong was an onslaught of fierce competition from foreign automakers who would develop a reputation for high quality at competitive prices. These foreign automakers also began building plants in the United States operated by mostly nonunion workers. Pay and benefits for these nonunion workers, while still attractive, amounted to about three quarters of what UAW workers were getting (and UAW pay was double what average Americans earned). Not only were UAW wages higher, but union work rules-some 5,000 pages detailing what each worker could and could not be asked to do-imposed expensive inefficiencies on production. If work rules were violated, a union representative could shut down the assembly line. General Motors, Ford, and Chrysler, were making costly vehicles that not enough people wanted to buy, and the companies were losing money by the truckload. GM, for example, lost over $60 billion between 2005 and 2008. Hard hit by fallout from the global financial crisis of 2008 and facing bankruptcy, the Big Three turned to the federal government for help. After some UAW pressure and political wrangling, federal officials agreed on a bailout of about $85 billion, with most of that going to GM (Ford ultimately decided not to accept federal aid). The agreement called for GM and Chrysler to file for bankruptcy. By doing so, both companies were able to walk away from huge debt burdens built up from years of making costly products that didn't sell well enough. Those who had owned the companies, the stockholders, got wiped out in the bankruptcy-they got nothing. Bondholders and other creditors also took a beating-they would get back less than a third of what they had lent the automakers. Some suppliers were also left hanging and many dealerships were shut down. The group that benefited most from the bailout was UAW workers. They ended up owning 10 percent of the new GM and a majority of the new Chrysler. In years leading up to the bailout, many workers had taken buyouts, meaning that the company paid them a chunk of money to leave their jobs. The union also made some concessions, but mostly on the pay and benefits of workers hired in the future. Existing workers gave up little in the bailout agreement-certainly little compared to the drubbing suffered by company stockholders, creditors, suppliers, and car dealers. The new GM emerged from bankruptcy with the federal government owning 61 percent in return for its $43 billion "investment." Much of the federal bailout money would be used to buy out existing workers and shore up the health care fund for union retirees. The Big Three are hoping to hire new workers at lower wages, but recently-laid-off workers still have first claim on any job openings, and they must be rehired at their previous high wages, not the lower wages to be paid new workers. The Congressional Budget Office estimated that the government bailout would ultimately cost taxpayers $34 billion. That translates into $300 per U.S. household to support the pay and benefits of those making twice what average American workers earn. We can't necessarily blame the UAW for the demise of the American auto industry. Demanding higher pay, better benefits, and more restrictive work rules sounds like the job description of union representatives. But we can blame the managements for going along with these demands. Top auto executives lost their jobs in the bankruptcy. UAW workers gave up little in the bankruptcy. In today's competitive marketplace, only an efficient, flexible work force will thrive. Technology advances too rapidly to drag along wages that exceed the market rate and featherbedding work rules that slow down production.

MARKET SUPPLY OF LABOR The following table shows the hours per week supplied to a particular market by three individuals at various wage rates. Calculate the total hours per week ( Q T ) supplied to the market. Which individuals, if any, have backward-bending supply curves in the wage range shown? Does the market supply curve bend backward in the wage range shown in the table?

INDUSTRIAL UNIONS Review the logic underlying Exhibit 5. Then determine the effect, on the industry and a typical firm, of an increase in the demand for industry output. Show your conclusions on a graph. Does the magnitude of the increase in demand make a difference?

Login to www.cengagebrain.com and access the Global Economic Watch to do this exercise. Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter the phrase " nonmarket work." On the Results page, go to the News Section. Click on the link for the January 7, 2008, article "Research on Marriage and Family Described by Scientists at University of California." According to the article, what are some differences between work by boys and girls in Indonesia?

Login to www.cengagebrain.com and access the Global Economic Watch to do this exercise. Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter the term "union strike." Find a website with a date within the two most recent years. Analyze the union situation described.