Unit 9: Factor Markets and the Distribution of Income
Why a worker's wage traces back to what one more hour of their labor is worth, and how unequal the paychecks that follow can get.
11 topics · 39 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Derived Demand for Labor
- How it worksHow does the demand for a good a worker produces translate directly into the firm's demand for that worker's labor?
- How it worksHow does a drop in demand for a firm's product ripple backward into a drop in its demand for labor?
- Going furtherWhat happens to the demand for labor in an industry once demand for its product rises sharply?
Your turn1 of 2
The price of coffee rises from 4 to 8 dollars per cup. A barista's marginal revenue product rises proportionally with it. If it was 19 dollars before the price rise, what is it after?The Marginal Revenue Product of Labor
- How it worksHow does marginal revenue product combine a worker's marginal product with the price their output sells for?
- Worked exampleFind the marginal revenue product of a worker whose marginal product is 8 units sold at 12 dollars each.
- Common mistakeWhy isn't a firm's hiring decision based on a worker's average product instead of their marginal product?
Your turn1 of 2
Find the marginal revenue product of a worker whose marginal product is 10 units, sold at 11 dollars per unit.Hiring Where Marginal Revenue Product Equals the Wage
- How it worksHow does a firm keep hiring workers up to the point where marginal revenue product equals the wage?
- Worked exampleFind the profit-maximizing number of workers to hire at a 15 dollar wage when MRP is 20, 15, and 10 dollars for the 8th, 9th, and 10th workers.
- How it worksHow does the firm's marginal revenue product curve double as its own demand curve for labor?
- Common mistakeWhy doesn't a firm keep hiring workers past the point where marginal revenue product falls below the wage, even if those workers still produce something?
Your turn1 of 2
A firm faces a wage of 23 dollars, and marginal revenue product is MRP = 122 minus 3 times L dollars. How many workers should the firm hire?The Supply of Labor and the Work-Leisure Tradeoff
- How it worksHow does every extra hour of work trade off directly against an hour of leisure at the going wage?
- How it worksHow does a labor supply curve trace out how many hours workers offer at each wage level?
- Going furtherWhat happens to a labor supply curve when a wage increase makes leisure time feel far more valuable to afford?
- Common mistakeWhy doesn't a labor supply curve always slope upward at every wage level?
Your turn1 of 2
As a worker's wage keeps rising, she initially works more hours, but past a certain very high wage, she starts working fewer hours instead. What does this pattern in her labor supply curve show?Wage Determination in a Competitive Labor Market
- How it worksHow does the wage settle where the labor demand curve, built from marginal revenue product, meets the labor supply curve?
- Worked exampleFind the equilibrium wage and quantity of workers when labor demand is Ld = 100 - 2W and labor supply is Ls = 3W - 20.
- Going furtherWhat happens to the equilibrium wage when demand for the industry's output rises sharply?
Your turn1 of 2
Find the equilibrium wage when labor demand is Ld = 122 minus 2 times W and labor supply is Ls = 3 times W minus 16.The Minimum Wage in a Competitive Labor Market
- How it worksHow does a minimum wage above equilibrium act just like a price floor, creating a surplus of available labor?
- Worked exampleFind the surplus of workers when a minimum wage of 15 dollars is set where Ld = 100 - 2W and Ls = 3W - 20.
- Going furtherWhat happens to unemployment in a competitive labor market as the minimum wage is set higher and higher above equilibrium?
- Common mistakeWhy doesn't raising the minimum wage guarantee every low-wage worker actually gets a raise?
Your turn1 of 2
Find the surplus of workers when a minimum wage of 32 dollars is set where labor demand is Ld = 94 minus 2 times W and labor supply is Ls = 3 times W minus 16.Unions and Collective Bargaining
- How it worksHow does a union act like a single seller of labor, restricting the quantity supplied to push the wage up?
- How it worksHow does collective bargaining let unionized workers negotiate wages and benefits above the competitive level?
- Going furtherWhat happens to employment in a unionized market once the negotiated wage rises well above the competitive wage?
- Ties togetherHow does a union's effect on the labor market resemble a minimum wage set above equilibrium?
Your turn1 of 2
A union representing all workers at a factory threatens to withhold labor entirely unless the factory agrees to a wage above the competitive level. How does this let the union push the wage up?Discrimination in Labor Markets
- How it worksHow does wage discrimination show up as a pay gap unrelated to differences in marginal revenue product?
- How it worksHow does competition for the most productive workers create a profit incentive that erodes discriminatory wage gaps over time?
- Common mistakeWhy doesn't a competitive labor market automatically eliminate discrimination the instant it appears?
Your turn1 of 2
Two equally qualified workers each work 37 hours a week, but Worker A is paid based on a marginal revenue product of 35 dollars per hour while Worker B, doing identical work, is paid based on 23 dollars per hour due to discrimination. What is the weekly pay gap between them?The Lorenz Curve
- How it worksHow does plotting the cumulative share of income against the cumulative share of population draw the Lorenz curve?
- Worked exampleFind a point on the Lorenz curve when the poorest 40 percent of households earn 15 percent of total income.
- Common mistakeWhy isn't a Lorenz curve that touches the diagonal line at both ends already a sign of income equality throughout?
Your turn1 of 2
In a country, the poorest 27 percent of households earn 10 percent of total income, and the poorest 69 percent earn 39 percent. By how many percentage points does the cumulative income share rise between these two points on the Lorenz curve?The Gini Coefficient
- How it worksHow does the area between the Lorenz curve and the line of perfect equality get turned into the Gini coefficient?
- Worked exampleFind the Gini coefficient implied by a Lorenz curve enclosing an area of 0.15 out of a total triangle area of 0.5.
- Worked exampleFind which of two countries has more income inequality when one has a Gini of 0.28 and the other has a Gini of 0.41.
- Common mistakeWhy doesn't a Gini coefficient of zero mean every household in that country is wealthy?
Your turn1 of 2
Find the Gini coefficient implied by a Lorenz curve enclosing an area of 0.182 out of a total triangle area of 0.5.Poverty and Redistribution Programs
- How it worksHow does a government draw a poverty line from the cost of a minimum basic basket of goods?
- How it worksHow do progressive taxes, cash transfers, and in-kind transfers each redistribute income toward the bottom of the distribution?
- Going furtherWhat happens to a household's incentive to earn more income as redistribution programs phase out with rising income?
- Common mistakeWhy doesn't more generous redistribution automatically mean less overall economic output?
Your turn1 of 2
A government wants to redistribute income toward the bottom of the income distribution. What are the main tools it uses to do this?