Question

1) What is the implication of saying that regulation is likely to affect incentives?

2) What forces and factors determine the wage rate for a particular type of labor?

Answer 1

1. It implies that a firm’s behavior without regulation is likely to be different than it is with regulation. For example, if government were to regulate a natural monopoly by mandating that it could earn only zero economic profits—and it was not allowed to earn more or less—then we would expect that the firm would have less reason to keep its costs down.

2. The wage rate in a competitive market is determined by the forces of supply and demand. But these forces are what they are because of different factors.

On the demand side is the price or marginal revenue of the product that labor produces. This is related to the demand for and supply of the product. Also on the demand side is the marginal physical product of labor. This, in turn, is dependent upon a number of factors: the other factors labor works with, labor, a person’s innate and learned abilities, and the degree of effort a person applies to the job.The supply of labor in a particular labor market depends upon the wage rates in other labor markets, the non money or non pecuniary aspects of a job, the number of persons who can do a job, the costs of moving across labor markets, and training costs necessary to join the particular labor market.