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Find your role and sit at the indicated seat.Don’t disturb the materials.
Name Role Name RoleAbdimajid Abdirahman Firm 1 Carlos Ormachea Firm 9Adriano Gianturco Gulisano Firm 1 Charlotte Rommerskirchen Firm 9Aida Ibricevic Firm 2 Chris Knudsen Firm 10Alejandro Komai Firm 2 Claire Litherland Firm 10Allen Mendenhall Firm 3 Coleman Drake Firm 11Anamaria Boioglu Firm 3 Colin Keesee Firm 11Andrew Seremetis Firm 4 Crane Sorensen Firm 12Ariel Goldring Firm 4 Daniel Piedra Firm 12Arya Morshed Firm 5 Daniel Suddes Firm 13Babatunde Rosanwo Firm 5 Daniel Sockwell Firm 13Benjamin Eisen Firm 6 Denis Clijsters Firm 14Brandon Peterson Firm 6 Dominic Foppoli Firm 14Brian Stacy Firm 7 Dustin Robinson Firm 15Bridgette Richey Firm 7 Eleanor Smith Firm 15Caitlin McLean Firm 8 Emilie Maes Firm 16Candice Malcolm Firm 8 Enrique Angulo Firm 16
Name Role Name RoleEric Sosnoff Red Worker 1 Theodore Dasher Blue Worker 1Jens Moens Red Worker 2 Mark Yager Blue Worker 2Joseph Corey Red Worker 3 David Hendricks Blue Worker 3Ryan Biese Red Worker 4 Michal Kuz Blue Worker 4Joseph Foutch Red Worker 5 Mike Tellier Blue Worker 5Julia Novitskaia Red Worker 6 Milko Markov Blue Worker 6Julio Padilla Red Worker 7 Nicholas Dunn Blue Worker 7Kareem Khalaf Red Worker 8 Oliver Cooper Blue Worker 8Kathryn Isaacson Red Worker 9 Patricio Echagüe Blue Worker 9Lai Xu Red Worker 10 Philippe Caeymaex Blue Worker 10Larisa Burakova Red Worker 11 Rossen Valchev Blue Worker 11Liliya Leontyeva Red Worker 12 Ryan Lynch Blue Worker 12Margaret Gales Red Worker 13 Yashua Bhatti Blue Worker 13
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The Players and the Goals
In this experiment, there are WORKERS and FIRMS.
WORKERS sell labor to the FIRMS.
FIRMS make and sell stuff.
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The Players and the Goals
Two types of worker
• Red workers
• Blue workers
Each worker’s goal: Maximize happiness
One thing makes you happy: Money
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The Players and the Goals
One type of firm
• Firms hire Red Labor and Blue Labor to produce their products.
• Firms automatically sell everything they produce for $2 per unit.
Each firm’s goal: Maximize profit
Profit = Ending $ – Starting $
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The Objects
= 1 hour of Blue labor
= 1 hour of Red labor
= 1 dollar
Labor
$
Labor
= $5 dollars (each)
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Labor Market
Red workers and Blue workers sell as much labor as they can to firms for $.
Labor
$
Labor
$
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Production and Goods Market
Hired labor produces product. Product is automatically sold for $2 each.
Red labor hired
Blu
e labor
hir
ed
Units of output produced
0 1 2 3 4 5 6 7 8 9 100 0 35 43 49 53 57 60 63 65 68 70
1 0 39 48 54 59 63 66 70 72 75 77
2 0 41 51 57 63 67 71 74 77 80 82
3 0 43 53 60 65 70 74 77 80 83 86
4 0 45 55 62 68 72 76 80 83 86 89
5 0 46 56 64 69 74 78 82 85 89 91
6 0 47 58 65 71 76 80 84 87 91 94
7 0 48 59 66 72 77 82 86 89 92 95
8 0 49 60 68 74 79 83 87 91 94 97
9 0 49 61 69 75 80 85 89 92 96 99
10 0 50 62 70 76 81 86 90 94 97 100
Units of Red Labor
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Example: Labor Market
Blue worker 1 Sells 6 to Firm 7 for $5 each.
Red worker 2 Sells 8 to Firm 7 for $5 each.
How much product does Firm 7 produce?
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0 1 2 3 4 5 6 7 8 9 100 0 35 43 49 53 57 60 63 65 68 70
1 0 39 48 54 59 63 66 70 72 75 77
2 0 41 51 57 63 67 71 74 77 80 82
3 0 43 53 60 65 70 74 77 80 83 86
4 0 45 55 62 68 72 76 80 83 86 89
5 0 46 56 64 69 74 78 82 85 89 91
6 0 47 58 65 71 76 80 84 87 91 94
7 0 48 59 66 72 77 82 86 89 92 95
8 0 49 60 68 74 79 83 87 91 94 97
9 0 49 61 69 75 80 85 89 92 96 99
10 0 50 62 70 76 81 86 90 94 97 100
Units of Red Labor
Example: Labor Market
Firm 7 manufactures 92 units of product.The product will be automatically sold for $2 per unit.
87
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Example: Labor Market and Goods Market
Blue Worker 1
Ends the experiment with (6)($5) = $30. Money = $30.
Red Worker 2
Ends the experiment with (8)($5) = $40. Money = $40.
Firm 7
• spent $70 on labor, and
• produced and sold 87 output at a price of $2 each.
Firm 7’s profit is $174 – $70 = $104.
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1. How much am I producing right now?
1 Red and 3 Blue 43 output
2. What happens if I hire 1 more Red worker?
Output increases from 43 to 53 + 10 output
3. What does that do to my revenue?
(10 output)($2) = + $20 revenue
4. What does it do to my costs?
Cost of 1 Red worker = $6 + $6 cost
5. What does it do to my profit?
+ $20 revenue & + $6 cost + $14 profit
Example: Cost/Benefit of Hiring More Labor
Suppose you can hire 1 Red hour for $6 or 1 Blue hour for $7.
So far, you have hired 1 Red hour and 3 Blue hours.
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6. What happens if I hire 1 more Blue worker?
Output increases from 43 to 45 + 2 output
7. What does that do to my revenue?
(2 output)($2) = + $4 revenue
8. What does it do to my costs?
Cost of 1 Blue worker = $7 + $7 cost
9. What does it do to my profit?
+ $4 revenue & + $7 cost – $3 profit
Example: Cost/Benefit of Hiring More Labor
Suppose you can hire 1 Red hour for $6 or 1 Blue hour for $7.
So far, you have hired 1 Red hour and 3 Blue hours.
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Conclusion
Hiring 1 more red hour increases profit by $14.
Hiring 1 more blue hour decreases profit by $3
Hire 1 more red hour.
Example: Cost/Benefit of Hiring More Labor
Suppose you can hire 1 Red hour for $6 or 1 Blue hour for $7.
So far, you have hired 1 Red hour and 3 Blue hours.
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14www.antolin-davies.com
The Mechanics
Runner
Firms Workers
Manager
0 1 2 3 4 5 6 7 8 9 100 0 30 40 47 52 57 61 65 69 72 75
1 0 33 44 52 58 63 68 72 76 80 84
2 0 35 47 55 62 67 72 77 81 85 89
3 0 37 49 57 64 70 76 80 85 89 93
4 0 38 50 59 66 73 78 83 88 92 96
5 0 39 52 61 68 75 80 85 90 95 99
6 0 40 53 62 70 76 82 87 92 97 101
7 0 41 54 64 71 78 84 89 94 99 103
8 0 42 55 65 73 79 85 91 96 100 105
9 0 42 56 66 74 81 87 92 97 102 106
10 0 43 57 67 75 82 88 94 99 104 108
11 0 44 57 68 76 83 89 95 100 105 109
12 0 44 58 68 77 84 90 96 101 106 111
Units of H Purchased
$5.00
$5.00
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The Mechanics
Runner
Firms Workers
Manager
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The Mechanics
Runner
Firms Workers
Manager
0 1 2 3 4 5 6 7 8 9 100 0 30 40 47 52 57 61 65 69 72 75
1 0 33 44 52 58 63 68 72 76 80 84
2 0 35 47 55 62 67 72 77 81 85 89
3 0 37 49 57 64 70 76 80 85 89 93
4 0 38 50 59 66 73 78 83 88 92 96
5 0 39 52 61 68 75 80 85 90 95 99
6 0 40 53 62 70 76 82 87 92 97 101
7 0 41 54 64 71 78 84 89 94 99 103
8 0 42 55 65 73 79 85 91 96 100 105
9 0 42 56 66 74 81 87 92 97 102 106
10 0 43 57 67 75 82 88 94 99 104 108
11 0 44 57 68 76 83 89 95 100 105 109
12 0 44 58 68 77 84 90 96 101 106 111
Units of H Purchased
$5.50
$4.50
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Ready to begin…
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Labor Market
Red workers sell your labor to firms for $.
Blue workers sell your labor to firms for $.
Firms: Every unit of output you produce is automatically sold for $2.
= 1 hour of Blue labor
= 1 hour of Red labor
= 1 dollar
Labor
$
Labor
= $5 dollars (each)
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Report
1. Red workers report unsold labor and ending money.
2. Blue workers report unsold labor and ending money.
3. Firms report labor hired and ending money.
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New Rules
The wage rate that some workers receive is too low. In the interest of assuring a minimum standard of living, we now impose a minimum wage.
LAW:Henceforth, no firm may pay less than per hour.
$6
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Ready to begin…
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Labor Market
Red workers sell your labor to firms for $.
Blue workers sell your labor to firms for $.
Firms: Every unit of output you produce is automatically sold for $2.
FIRMS MUST PAY NO LESS THAN PER HOUR.
$6
= 1 hour of Blue labor
= 1 hour of Red labor
= 1 dollar
Labor
$
Labor
= $5 dollars (each)
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Report
1. Red workers report unsold labor and ending money.
2. Blue workers report unsold labor and ending money.
3. Firms report labor hired and ending money.
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Results…
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Wage Rate
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
Free Market Minimum Wage
Blue Labor Red Labor
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Unemployment Rate
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Free Market Minimum Wage
Blue Labor Red Labor
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Units of Output Produced (all firms combined)
1,150
1,200
1,250
1,300
1,350
1,400
1,450
Free Market Minimum Wage
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Total Profits (all firms combined)
$0
$500
$1,000
$1,500
$2,000
$2,500
Free Market Minimum Wage
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Red Worker Wage Income
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
Red
1
Red
2
Red
3
Red
4
Red
5
Red
6
Red
7
Red
8
Red
9
Red
10
Red
11
Red
12
Red
13
Free Market Minimum Wage
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Blue Worker Wage Income
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00B
lue
1
Blu
e 2
Blu
e 3
Blu
e 4
Blu
e 5
Blu
e 6
Blu
e 7
Blu
e 8
Blu
e 9
Blu
e 10
Blu
e 11
Blu
e 12
Blu
e 13
Free Market Minimum Wage
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Firm Profits
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
$180.00
Firm
1
Firm
2
Firm
3
Firm
4
Firm
5
Firm
6
Firm
7
Firm
8
Firm
9
Firm
10
Firm
11
Firm
12
Firm
13
Firm
14
Firm
15
Firm
16
Free Market Minimum Wage
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Price Controls
The intent of price controls is to provide relief to buyers (e.g., college tuition caps, interest rate caps) or support to sellers (e.g., minimum wage, retail milk prices).
How do you cure a fever?
Prices are not levers that set value, they are metrics that respond to value.
Price controls fail on two counts: (1) legislating price does not legislate value, (2) legislating price prevents price from signaling value.
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Prices Ration Goods
All things are scarce. Scarce resources will be rationed. The question is, by what mechanism?
In a free market, scarce resources are rationed by prices.
With price controls, scarce resources are rationed by non-price factors.
Capping interest rates rations credit away from risky borrowers.
Capping tuition rations college away from less advantaged students.
A minimum wage rations jobs away from less productive workers.
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Minimum Wage
When we force an employer to pay a worker more than the job is worth, the job disappears.
40 years ago: Telephone operators
30 years ago: Gas station attendants
10 years ago: Fast food servers
Last year: Pizza deliverersWhat happens to workers whose jobs are eliminated?
Those whose labor is worth more than minimum wage find new jobs.
Those whose labor is worth less than minimum wage remain unemployed.
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Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
College Education (1984-2004)
y = 0.003x + 0.02
R2 = 0.0002p = 0.95
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44
Min Wage as Fraction of Avg Hourly Wage
Un
emp
loym
ent
Rat
e
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Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
HS Education (1984-2004)
y = 0.23x - 0.03
R2 = 0.18p = 0.05
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44
Min Wage as Fraction of Avg Hourly Wage
Un
emp
loym
ent
Rat
e
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Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
Less than HS Education (1984-2004)
y = 0.46x - 0.07
R2 = 0.26p = 0.02
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44
Min Wage as Fraction of Avg Hourly Wage
Un
emp
loym
ent
Rat
e
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Source: Bureau of Labor Statistics
Unemployment for Teenagers Relative to Adults (1964-2004)
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46 0.48Minimum Wage as Percentage of Average Hourly Earnings
Un
emp
loym
ent
Po
pu
lati
on
Rat
io f
or
16-1
9 Y
ear
Old
s as
Per
cen
tag
e o
f 20
-64
Yea
r O
lds
Minimum Wage as Percentage of Average Hourly Wage
Unem
plo
ym
ent
Popu
lati
on
Rati
o f
or
16-1
9
Year
Old
s as
a P
erc
enta
ge o
f R
ati
o f
or
20
-64
Year
Old
s
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Source: Bureau of Labor Statistics
Minority vs. Non-Minority Household Income (1970-2001)
y = -0.33x + 0.73
R2 = 0.15
55%
57%
59%
61%
63%
65%
67%
69%
32% 34% 36% 38% 40% 42% 44% 46% 48%
Minimum Wage as Fraction of Average Hourly Earnings
Rat
io o
f M
edia
n H
ou
seh
old
In
com
es
(Bla
ck/W
hit
e)
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How to Pay for a Minimum Wage
There are three ways in which a firm can find additional money to pay workers.
1. Layoff some workers and shift their wages to the remaining workers.
2. Keep all the workers and pay for the additional wages out of profits.
3. Keep all the workers and pay for the additional wages by raising prices.
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Source: Bureau of Labor Statistics, California Department of Finance
Comparison of Minimum Wage to CA Inflation (1970-2004)
y = 0.44x - 0.14
R2 = 0.28p = 0.001
0%
2%
4%
6%
8%
10%
12%
14%
16%
35% 37% 39% 41% 43% 45% 47% 49% 51% 53%
Real CA Min Wage as % of Real US Avg Hourly Wage
CA
In
flat
ion
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But, we have to do something about the distribution of income.
The rich are getting richer while the poor get poorer!
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0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
< $
15,0
00
$15,0
00 -
$25,0
00
$25,0
00 -
$35,0
00
$35,0
00 -
$50,0
00
$50,0
00 -
$75,0
00
$75,0
00 -
$100,0
00
> $
100,0
00
% o
f H
ou
seh
old
s
1980
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.
Income Distribution for 1980 (in 2003$)
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44www.antolin-davies.com
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
< $
15,0
00
$15,0
00 -
$25,0
00
$25,0
00 -
$35,0
00
$35,0
00 -
$50,0
00
$50,0
00 -
$75,0
00
$75,0
00 -
$100,0
00
> $
100,0
00
% o
f H
ou
seh
old
s
1980 2003
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.
Income Distribution for 2003 (in 2003$)
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45www.antolin-davies.com
wtf?
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% of the Popuation
% o
f T
ota
l In
com
e
1980 2003
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2008, Table 675.
In 1980, the lower 80% of households earned 56% of all income.
By 2003, the lower 80% of households earned only 50% of all income.
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In which world would each person rather live?
(prices are the same in the two worlds)
Household Income in World #1 Household Income in World #2Person 1 $32,000 $40,000Person 2 $33,500 $41,875Person 3 $35,000 $43,750Person 4 $36,500 $45,625Person 5 $38,000 $47,500Person 6 $39,500 $49,375Person 7 $41,000 $51,250Person 8 $42,500 $53,125Person 9 $44,000 $77,000
Person 10 $45,500 $79,625
In world #1, Person 10 earns 11% of all income.
In world #2, Person 10 earns 15% of all income.
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% of the Popuation
% o
f T
ota
l In
com
e
World #1 World #2
In World #1, the lower 80% of households earned 80% of all income.In World #2, the lower 80% of households earned only 70% of all income.
Yet each person would rather live in World #2!
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In which world would each person rather live?
(prices are the same in the two worlds)
World #3’s income distribution is the same as World #1’s.
Household Income in World #1 Household Income in World #2 Household Income in World #3Person 1 $32,000 $40,000 $6,400Person 2 $33,500 $41,875 $6,700Person 3 $35,000 $43,750 $7,000Person 4 $36,500 $45,625 $7,300Person 5 $38,000 $47,500 $7,600Person 6 $39,500 $49,375 $7,900Person 7 $41,000 $51,250 $8,200Person 8 $42,500 $53,125 $8,500Person 9 $44,000 $77,000 $8,800
Person 10 $45,500 $79,625 $9,100
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Conclusions
1. Everything is scarce and will be rationed.
2. Prices signal information about value.
3. Price controls both prevent prices from conveying value information and cause rationing to be based on some other (usually unanticipated) factor.
4. Despite no (real) increase in the minimum wage from 1980 to 2003, the poor got richer (in real terms).** Because the rich got richer by more than the poor got richer,
the Gini-coefficient shows a growth in the disparity of income.
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number of firms
number of blue workers
number of red workers
labor endowment per blue worker
labor endowment per red worker
output of a single firm
units of blue labor hired by a single fir
B
R
B
F
B
R
E
E
Q
L
ln ln ln
1
ln ln
m
units of red labor hired by a single firm
price of output
1
Profit maximizing hiring levels
e
e
R B R
B R
R
B R
P P PW W W
R
P PW W
B
L
P
Q L L
L
L
ln
1 1B
PW
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number of firms
number of blue workers
number of red workers
labor endowment per blue worker
labor endowment per red worker
output of a single firm
units of blue labor hired by a single fir
B
R
B
F
B
R
E
E
Q
L
3 1711 11
m
units of red labor hired by a single firm
price of output
35, 0.15, 0.30, 2, 10, 12, 21
10.5 21Quantity demanded of
10.5Quantity demanded of
R
R B
RB R
BB
L
P
P E E R B N
L NW W
L NW
14 611 1121
1
Quantity supplied of
Quantity supplied of
Equilibrium $8.25
Equilibrium $3.51
R
R R
B B
R
B
W
L E R
L E B
W
W
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Experiment Scenario
$2.00
$8.25
$3.51
Competitive Scenario
$2.34
$9.64
$4.10
Minimum Wage Competitive Scenario
$2.40
$9.30
$6.00
R
B
R
B
R
B
P
W
W
P
W
W
P
W
W