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Lecture 23

Lecture 23-Workers are Paid Their VMP

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Department
Economics
Course
ECO101H1
Professor
Jack Carr
Semester
Winter

Description
SS 15,000 DD = VMP w L Tuesday, January 12, 2010. Workers are Paid Their VMP What determines wage rate of: Day-care workers ($15,000 per year) Computer programmers ($50,000 per year) Baseball stars ($5 million per year) P = MC Choose q to maximize profits W = VMP Choose labour to maximize profits Insight ,IODERXULVRQO\YDULDEOHIDFWRUWKHQILUP¶VFKRLFHRIRXWSXWLVDOVRWKHILUP¶VFKRLFHRIODERXU Equilibrium wage (W) is VMP of last worker hired Day Care Workers l SS w1 DDL = VMP w L www.notesolution.com SS 15,000 DD = VMP 40,000 SS1 Q1 Q Elastic supply of (low opportunity cost) workers Day Care Workers: A Counterfactual Example What if all daycare workers could earn $40, 000 per year as computer programmer? Result: wage rises from $15,000 to $40,000 1RRIGD\FDUHZRUNHUVIDOOVIURP4WR4¶ True or False? ³7KHSULFHRIKRFNH\WLFNHWVLVKLJKEHFDXVHWKHVDODULHVRIKRFNH\VWDUVDUHVRKLJK´ Insight Supply of hockey stars is perfectly inelastic (Would doubling salaries increase the number of stars? NO) Result Salaries are high because the demand for tickets is high Perfectly Inelastic Supply of Hockey Stars w SS DD = VMP w1 DD1 = VMP1 L www.notesolution.com Notes: (1) If demand for tickets Is high, wage will be high [w1 = VMP = 3¶[email protected] (2) If demand for tickets is low, wage will be low [w = VMP = P*MP] Observations 1. Celine Dion (singer): $30 million per year Tiger Woods (golfer): $30 million per year 2. Slightly less talented professionals: $50,000 per year 3. Earnings differential has increased sharply over time &DQ903³(FRQRPLFV´([SODLQ" ³:LQQHU-Take-$OO´0DUNHWV VMP (plus impact of technology) Singers Now: income derLYHGIURP&'VHYHU\RQHFDQFRQVXPHWKH³EHVW´ 19th century: income derived from concerts Golfers Now: LQFRPHGHULYHGIURP79HYHU\RQHFDQFRQVXPHUWKH³EHVW´ 19th century: income derived from ticket sales at tournaments ³%HVW´SOXPEHUHDUQVPRGHVtly) above-average hourly wage 5HDVRQDOOFXVWRPHUVFDQQRWFRQVXPHVHUYLFHVRI³EHVW´SOXPEHU www.notesolution.comTuesday, January 12, 2010. Workers are Paid Their VMP What determines wage rate of: Day-care workers ($15,000 per year) Computer programmers ($50,000 per year) Baseball stars ($5 million per year) P = MC Choose q to maximize profits W = VMP Choose labour to maximize profits Insight ,1O,-4:7L843O;,7L,-O01,.9479K031L728.K4L.0414:95:9L8,O849K01L728.K4L
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