Need Small 150-Word Responses To Each Question?

Need Small 150 Word Responses To Each Question1 Can You Think Of An E

1. Can you think of an example of how you or someone you know has experienced economic rent as a measure of labor market power?

Economic rent occurs when a worker or individual receives higher income than their marginal productivity justifies, often due to limited alternatives or market power. For instance, a highly specialized surgeon in a remote area might earn above-market wages because few replacements are available, giving them substantial bargaining power. Similarly, star athletes or entertainers can command wages far exceeding their marginal contribution to teams or productions, driven by their unique skills and limited substitutes. In these cases, the wages reflect economic rents—additional income beyond productivity—highlighting their market power. Such rents are often a result of market imperfections, geographic constraints, or regulatory barriers that restrict competition, allowing individuals with specific skills or resources to capture above-normal earnings. These situations exemplify how labor market power manifests in the form of economic rents, influencing income distribution.

2. Historically there has been a divergence between productivity and wage growth. During the 1973 to 2011 period, labor productivity rose 80.4 percent but real median hourly wage increased 4.0 percent, and the real median hourly compensation (including all wages and benefits) increased just 10.7 percent. So actually, the typical worker has lost bargaining power in the economy over the last three decades. Why do you think this is so? Does it defy the economic law that the wage rate should be equal to the MRP? Is it possible to reconnect growth in overall productivity and wage compensation?

The divergence between productivity and wages suggests declining bargaining power of workers, influenced by factors such as global competition, technological change favoring capital, and weakening labor unions. Firms have been able to retain a larger share of productivity gains through increased profits or executive compensation, rather than passing benefits to workers. While economic theory suggests wages should align with marginal revenue product (MRP), market distortions, monopsony power, and institutional factors often prevent this. Reconnecting productivity growth with wage compensation requires strengthening collective bargaining, policy measures to promote fair wage distribution, and addressing power asymmetries. Policies like raising the minimum wage, supporting unions, and improving worker training can help ensure wage growth more closely tracks productivity, fostering a more equitable income distribution that benefits the broader economy.

3. Do increasing marginal costs result from the rising wages of workers?

Increasing marginal costs can be influenced by rising wages, especially in industries where labor costs form a significant portion of total expenses. When wages increase, each additional unit of output becomes more costly to produce, leading to higher marginal costs. For example, in manufacturing, higher wages for workers mean that producing an extra product requires more expenditure, thus raising the marginal cost. However, marginal costs also depend on other factors such as input prices, technology, and productivity. If firms cannot offset wage increases through productivity gains or technological improvements, the overall marginal cost curve shifts upward. Therefore, rising wages can contribute to increasing marginal costs, but they are not the sole determinant—other factors like input prices and efficiency also play crucial roles.

4. Is the law of diminishing returns a result of firms hiring the best workers first?

The law of diminishing returns states that adding additional units of a variable input, like labor, to fixed inputs eventually leads to smaller increases in output. While hiring the best workers first maximizes productivity initially, the law itself stems from the physical and economic realities of resource constraints. As more workers are hired, the most skilled or efficient are employed early on, and subsequent hires tend to be less productive—either due to limited complementary resources or overcrowding. This diminishing marginal productivity is a natural outcome of finite resources and does not solely depend on the order of hiring but reflects fundamental economic principles of input substitution and capacity limits. Hence, it results from the inherent productivity limits when adding less optimal inputs over time.

5. A competitive firm breaks-even when economic profits are zero—that is, when the demand curve (the market price) just equals the minimum point on the average-total-cost curve. So why would a firm operate long term when economic profits are zero?

Firms operate long-term at zero economic profit because doing so covers all explicit and implicit costs, including opportunity costs, sustaining their existence and avoiding losses. Operating at this point is optimal for firms willing to continue production without earning excess profit. Additionally, in perfectly competitive markets, zero economic profit indicates efficient resource allocation; firms are producing at the lowest possible cost. Long-term operation without economic profits often reflects a competitive equilibrium where firms earn normal profit, incentivizing ongoing productivity and technological innovation. Moreover, firms might view zero economic profits as acceptable if they aim for market share, strategic positioning, or future gains. Thus, operating at this level ensures survival while contributing to market stability and economic efficiency.

References

• Blanchard, O. (2017). Macroeconomics (7th ed.). Pearson.
• Mankiw, N. G. (2020). Principles of Economics (9th ed.). Cengage Learning.
• Carbaugh, R. J. (2019). International Economics (8th ed.). Cengage Learning.
• Krugman, P., & Wells, R. (2018). Economics (5th ed.). Worth Publishers.
• Stiglitz, J. E. (2012). The Price of Inequality: How Today's Divided Society Endangers Our Future. W. W. Norton & Company.
• Piketty, T. (2014). Capital in the Twenty-First Century. Harvard University Press.
• Shapiro, C., & Varian, H. R. (1998). Information Rules: A Strategic Guide to the Network Economy. Harvard Business School Press.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
• Levitan, L. (2015). Wage stagnation and the decline of bargaining power. Journal of Economic Perspectives, 29(3), 79-102.
• Autor, D. H. (2014). Skills, Education, and the Rise of Earnings Inequality. Science, 344(6186), 843-851.