Homework 4 ECON3810 name Fall, 2016 Dr. Isbell 

  1. Suppose you are consulting with a labor union that is bargaining for higher wages. Explain to the Union leaders how a large increase in wages may actually have the effect of lowering the incomes of union members. What specific economic measure would this depend on? 

Labor Unions are legal bodies, which are constituted through various processes, represent group of employees or workers. The core objective, of any labor union, is to negotiate/bargain (collective bargaining) on behalf of the workers, regarding their wages and rights. Labor unions mostly use strikes as an instrument to mount pressure on management to accept the demands of a Union. 

By keeping in consideration prevailing economic conditions (global and domestic), I would advice labor union to not to assert or mount pressure for higher wages. This is because the increase in the wages would be reflected in cost of production and the price of a good produced and the increase in wage would also be used as pretext by other labor unions to increase pressure for higher wages. 

As mentioned earlier, the increase in wages would be reflected in cost and if all labor unions started to demand higher wages and were able to increase wages (on macro/national scale), cost-pull inflation would occur. This would not only increase prices of goods and services, but this would also decrease output. In addition, because of the cost-pull inflation, real income would decrease. However, this also depends upon the difference in the size of increase in over-all wages (on macro level) and increase in cost-pull inflation. For instance, If the increase in cost-pull inflation is greater than increase in nominal wages, the real income would decrease. 

  1. Suppose a U.S. firm is considering moving production facilities to another country with wages considerably less than what the firm pays in the U.S. (that is, the firm is “outsourcing” its labor – the product will be sold in the U.S.). There has been no change in the demand for its product, so the firm will produce the same level of output in either country. Explain, using isocosts and isoquants, why the number of jobs “lost” in the U.S. will likely be smaller than the number of jobs “gained” in the low-wage country. Will labor productivity be higher or lower if the firm moves its plant?  

According to the studies, developed countries are capital-intensive countries, which means that the size of capital is larger than labor in labor/capital ratio (K/L). The data also reveals that developing countries are labor intensive countries, which implies that the size of labor is greater than capital, in labor/capital ratio (K/L). This can explained through Iso-quant, which depicts labor capital for both an economy and an organization. 





The Figure (a) shows K/L ratio of a developing country, which is identified as labor intensive economy. The next figure (b) is depicts the capital/labor (K/L) ratio of a developed country, in which use of capital is greater than the employment of labor for the production of good or service. 

As the mobilization of resources, both financial and technological, have become simple; therefore, organizations are increasingly shifting their operations or outsourcing their production. Statistics reveal that because of the shifting of production operations or manufacturing to labor-intensive economies result little unemployment in developed countries, like US, as these economies are capital intensive economies, which imply that more capital is being used than labor. However, because of outsourcing of production to developing economies, employment generates on large scale, because of the labor-intensive nature of economies. 

From the evidence it is evident that labor productivity of US is higher, which means not only fewer labor units would be required to produce an output, but also quality of the output would be higher. 

This immediate impact, because of the shifting of manufacturing operations to labor intensive country, would be that organization would be able to buy more labor of units without expanding its budget. The iso-cost below depicts the increased access to more units of labor. 

  1. In many beach resorts on the East Coast of the United States, business is brisk in the summers but slow in the winters. In summers, resort rentals are sold out at high weekly rates, but in winters they are only partially rented at much lower rates. If you were to calculate expenses and revenues on a monthly basis, you would almost certainly find these resorts with revenues greater than expenses in the summers, and expenses greater than revenues in the winters. How come these resorts don’t just shut down in winters? 

If we carefully study the statement and the information, regarding business, which has been provided, we immediately identifies that Summer and Winter represents short-run. In addition, from the study of economics we know that an organization would remain operation, in short-run, as long it is covering its variable cost. If these resorts are covering their variable costs in winter, they will remain operation. However, if they are not able to cover their variable cost in winter, they organizations will shut down their operations. In addition, these resorts must be making zero economic profit, which is why these resorts have not left the industry.  

  1. Suppose a firm is operating at a point where MRTSLK > w/r. Explain how this firm could increase its output without changing its total costs.

The Marginal Rate Of Technical Substitution describes the change in inputs, Labor or and Capital, (increase or decrease), while maintaining same level of output. However, in this case the Marginal Rate of Technical Substitution is greater than the slope of units of labors and capital (Change in Capital/Change in Labor). 

The scenario suggests that by changing an input (L/K), which has higher productivity, the output could be increased. This increase in the output would not require additional financial resources to by that resource or input. 

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