Labor Negotiation, Wood Pulp Industry Monopoly and Baseball Team Assesment

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Question

1. In labor negotiations, failure to reach a contract agreement frequently results in a labor strike or work slowdown. In each of the following a situations, identify which side – labor or management – is better positioned to obtain favorable contract terms from the other:
- Demand for the firm’s products is booming, and the firm is earning record profits
- The labor union has over $20,000 per worker in its strike fund.
- A recession in the region has led to increased unemployment.

2. The wood pulp industry is a monopoly in a given location that generates a lot of pollution. The local government has asked you to hire 3 analysts to help examine several government policy alternatives. The demand for wood pulp is given by P=500 -10Q, where Q is measured in thousands of units. The long-run cost of production exhibits constant returns to scale: LAC=LMC=150. Producing a unit of wood pulp generates one unit of pollution. The marginal external cost is estimated to be 100 per extra unit of pollution.
- Analyst A advises no government intervention at all. In this case, what quantity and price will prevail in the (monopolized) industry?
- Analyst B is mainly worried about the monopolization of the industry, and therefore, recommends that you promote competition through a regulation and antitrust policy. What quantity of pulp would a perfectly competitive industry produce?
- Analyst C is worried about the pollution externality and, therefore, recommends a tax of 100 per unit of pulp output (on the currently monopolized industry). What quantity of pulp will the monopolized industry produce under the tax and at what price?
(Which of the analyst's recommendations would you support? Do you have a better policy? Explain. (Hint: Identify the socially efficient level of pulp production to help clarify your answer.)

3. Just prior to a professional baseball spring training session, you are asked to assess the probability that a particular baseball team will win the coming World Series.
- How would you go about making this assessment? In what sense is this assessment subjective?
- If you knew nothing about baseball, what would be the appropriate probability assessment or distribution?
- As an avid fan, how would you adjust this “naive” assessment? How would your assessment change day by day as the season progressed?

Solution Preview

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When the company is doing well and demand for its products is high, the workers are in a better position. The company is obviously able to afford the workers’ demands and so labor is in a better bargaining position than if business was slow. In addition, a work slowdown would cause the company to lose profits since production would slow. Management is in the weaker position.

With ample money in its strike fund, labor can stay out on strike for an extended period in order to force management to accede to its demands. Labor is in the stronger position....

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