Case StudiesCase Studies LABOR MARKETS AND LABOR UNIONS Case Study 12.1: Winner-Take-All Labor Markets Each year Forbes magazine lists the multimillion-dollar earnings of top entertainers and professional athletes. Oprah Winfrey has made that list each year for more than two decades. Her annual income adds up. With wealth now in the billions, she ranks among the world’s richest people. Entertainment and pro sports have come to be called winner-take-all labor markets because a few key individuals critical to the overall success of an enterprise are richly rewarded. For example, the credits at the end of a movie list a hundred or more people directly involved in the production. Hundreds, sometimes thousands, more work behind the scenes. Despite a huge cast and crew, the difference between a movie’s fi nancial success and failure depends primarily on the performance of just a few critical people— the screenwriter, the director, and the lead actors. The same happens in sports. In professional golf tournaments, attendance and TV ratings are signifi cantly higher with Tiger Woods in the mix. In professional basketball, LeBron James has been credited with fi lling once-empty seats and boosting the value of his team by $160 million. Thus, top performers generate a high marginal revenue product. But high productivity alone is not enough. To be paid anywhere near their marginal revenue product, there must be an open competition for top performers. This bids up pay, such as the $20 million per movie garnered by top stars—about 2,000 times the average annual acting earnings of Screen Actors Guild members. Simon Cowell reportedly earned $36 million judging American Idol in his fi nal contract year; he was expected to leave that show to develop a new one that could earn him twice as much. In professional sports, before the free-agency rule was introduced (which allows players to seek the highest bidder), top players couldn’t move on their own from team to team. They were stuck with the team that drafted them, earning only a fraction of their marginal revenue product. Relatively high pay in entertainment and sports is not new. What is new is the spread of winner-take-all to other U.S. markets. The “star” treatment now extends to such fi elds as management, law, banking, fi nance, even academia. Consider, for example, corporate pay. In 1980, the chief executive offi cers (CEOs) of the 200 largest U.S. corporations earned about about 42 times more than the average production worker. Now, this multiple tops 200. Comparable multiples are much lower in Germany and Japan. Why the big U.S. jump? First, the U.S. economy has grown sharply in recent decades and is by far the largest in the world—with output equaling that of the next three economies combined. So U.S. businesses serve a wider market, making the CEO potentially more productive and more valuable. Second, breakthroughs in communications, production, and transportat ...

1. Case StudiesCase Studies
LABOR MARKETS AND LABOR UNIONS
Case Study 12.1: Winner-Take-All Labor Markets
Each year Forbes magazine lists the multimillion-dollar
earnings of top entertainers and professional athletes.
Oprah Winfrey has made that list each year for more than two
decades. Her annual income adds up. With wealth
now in the billions, she ranks among the world’s richest people.
Entertainment and pro sports have come to
be called winner-take-all labor markets because a few key
individuals critical to the overall success of an
enterprise are richly rewarded. For example, the credits at the
end of a movie list a hundred or more people directly
involved in the production. Hundreds, sometimes thousands,
more work behind the scenes. Despite a huge cast
and crew, the difference between a movie’s fi nancial success
and failure depends primarily on the performance of just a few
critical people—
the screenwriter, the director, and the lead actors. The same
happens in sports. In professional golf tournaments, attendance
and TV ratings are
signifi cantly higher with Tiger Woods in the mix. In
professional basketball, LeBron James has been credited with fi

2. lling once-empty seats and
boosting the value of his team by $160 million. Thus, top
performers generate a high marginal revenue product.
But high productivity alone is not enough. To be paid anywhere
near their marginal revenue product, there must be an open
competition
for top performers. This bids up pay, such as the $20 million
per movie garnered by top stars—about 2,000 times the average
annual acting
earnings of Screen Actors Guild members. Simon Cowell
reportedly earned $36 million judging American Idol in his fi
nal contract year; he was
expected to leave that show to develop a new one that could
earn him twice as much. In professional sports, before the free-
agency rule was
introduced (which allows players to seek the highest bidder),
top players couldn’t move on their own from team to team. They
were stuck with
the team that drafted them, earning only a fraction of their
marginal revenue product.
Relatively high pay in entertainment and sports is not new.
What is new is the spread of winner-take-all to other U.S.
markets. The “star”
treatment now extends to such fi elds as management, law,
banking, fi nance, even academia. Consider, for example,
corporate pay. In 1980,

3. the chief executive offi cers (CEOs) of the 200 largest U.S.
corporations earned about about 42 times more than the average
production worker.
Now, this multiple tops 200. Comparable multiples are much
lower in Germany and Japan. Why the big U.S. jump?
First, the U.S. economy has grown sharply in recent decades
and is by far the largest in the world—with output equaling that
of the next
three economies combined. So U.S. businesses serve a wider
market, making the CEO potentially more productive and more
valuable. Second,
breakthroughs in communications, production, and
transportation mean that a well-run U.S. company can now
usually sell a valued product
around the world. Third, wider competition for the top people
has increased their pay. For example, in the 1970s, U.S.
businesses usually hired
CEOs from company ranks, promoting mainly from within (a
practice still common today in Germany and Japan). Because
other fi rms were not
trying to bid away the most talented executives, companies were
able to retain them for just a fraction of the
pay that now prevails in a more competitive market. Today top
executives are often drawn from outside the
fi rm—even outside the industry and the country. Fourth,
although CEO pay has increased more than sixfold

4. on average since 1980, so has the stock market value of the
corporations they run. Fifth, a study of 732
fi rms in the United States, France, Germany, and the United
Kingdom found that U.S. fi rms on average are
more effi cient than those in the other countries. One fi nal
reason why top CEO pay has increased in America
is that high salaries are more socially acceptable here than they
once were. High pay is still frowned on in
some countries, such as Japan and Germany.
Some top executives are no doubt paid more than they are
worth, but nobody claims the market for
resources works perfectly. The claim is that an open
competition for resources will tend to offer the most to
those resources contributing the most. And in those cases where
marginal productivity is huge, so is the pay.
SOURCES: Nicholas Bloom and John Van Reenan, “Measuring
and Explaining Management Practices Across Firms and
Countries,” Quarterly Journal of Economics, 122 (November
2007): 1351–1408. Bill Livingston, “LeBron,” Cleveland Plain
Dealer, 6 May 2007; “Paula Abdul Stays Focussed on Her
Craft,” The Los Angeles Times, 5 May 2009. Urs Fischbacher
and Christian Thoni, “Winner Take All Markets Are Ineffi
cient,” Journal of Economic Behavior and Organization,” 67
(July 2008): 150–163; Xavier Gabaix and Augustin Landier,
“Why
Has CEO Pay Increased So Much,” Quarterly Journal of
Economics, 123 (February 2008): 49–100. Economic Report of
the President, February 2010, at http://www.gpoaccess.

5. gov/eop/.
QUESTION
1. What characterizes a winner-take-all labor market? Offer
some reasons why corporate heads now earn much more than
they did in the
1970s.
winner-take-all
labor markets
markets in which a few
key employees critical
to the overall success
of an enterprise are
richly rewarded
12
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Case Study 12.2: Federal Bailout of GM, Chrysler, and the
UAW
In the 1970s, the United Auto Workers (UAW) negotiated what
have been called “gold-plated benefi ts” for their workers and
retirees. General
Motors, Ford, and Chrysler, the so-called Big Three, believed
that because they dominated the U.S. auto market and because
they all faced the
same labor costs, any higher costs could simply be passed along

6. to car buyers. What could go wrong? Well, what went wrong
was an onslaught
of fi erce competition from foreign automakers who would
develop a reputation for high quality at competitive prices.
These foreign automakers
also began building plants in the United States operated by
mostly nonunion workers. Pay and benefi ts for these nonunion
workers, while still
attractive, amounted to about three quarters of what UAW
workers were getting (and UAW pay was double what average
Americans earned).
Not only were UAW wages higher, but union work rules—some
5,000 pages detailing what each worker could and could not be
asked to
do—imposed expensive ineffi ciencies on production. If work
rules were violated, a union representative could shut down the
assembly line.
General Motors, Ford, and Chrysler, were making costly
vehicles that not enough people wanted to buy, and the
companies were losing money
by the truckload. GM, for example, lost over $60 billion
between 2005 and 2008. Hard hit by fallout from the global fi
nancial crisis of 2008 and
facing bankruptcy, the Big Three turned to the federal
government for help. After some UAW pressure and political
wrangling, federal offi cials
agreed on a bailout of about $85 billion, with most of that going

7. to GM (Ford ultimately decided not to accept federal aid).
The agreement called for GM and Chrysler to fi le for
bankruptcy. By doing so, both companies were able to walk
away from huge debt
burdens built up from years of making costly products that
didn’t sell well enough. Those who had owned the companies,
the stockholders, got
wiped out in the bankruptcy—they got nothing. Bondholders
and other creditors also took a beating—they would get back
less than a third
of what they had lent the automakers. Some suppliers were also
left hanging and many dealerships were shut down. The group
that benefi ted
most from the bailout was UAW workers. They ended up
owning 10 percent of the
new GM and a majority of the new Chrysler. In years leading up
to the bailout, many
workers had taken buyouts, meaning that the company paid
them a chunk of money
to leave their jobs. The union also made some concessions, but
mostly on the pay
and benefi ts of workers hired in the future. Existing workers
gave up little in the
bailout agreement—certainly little compared to the drubbing
suffered by company

8. stockholders, creditors, suppliers, and car dealers.
The new GM emerged from bankruptcy with the federal
government owning 61
percent in return for its $43 billion “investment.” Much of the
federal bailout money
would be used to buy out existing workers and shore up the
health care fund for
union retirees. The Big Three are hoping to hire new workers at
lower wages, but
recently-laid-off workers still have fi rst claim on any job
openings, and they must be
rehired at their previous high wages, not the lower wages to be
paid new workers.
The Congressional Budget Offi ce estimated that the
government bailout would ultimately cost taxpayers $34 billion.
That translates into
$300 per U.S. household to support the pay and benefi ts of
those making twice what average American workers earn. We
can’t necessarily
blame the UAW for the demise of the American auto industry.
Demanding higher pay, better benefi ts, and more restrictive
work rules sounds
like the job description of union representatives. But we can
blame the managements for going along with these demands.
Top auto executives

9. lost their jobs in the bankruptcy. UAW workers gave up little in
the bankruptcy.
In today’s competitive marketplace, only an effi cient, fl exible
work force will thrive. Technology advances too rapidly to drag
along wages
that exceed the market rate and featherbedding work rules that
slow down production.
SOURCES: David Leonhardt, “$73 an Hour: Adding It Up,”
New York Times, 10 December 2008; Jonathan Welsh, “General
Motors Says It Repaid Bailout. Not True, Says Watchdog
Group,” Wall Street Journal, 4 May 2010; Nick Bunkley,
“Progress for Automakers After Losses,” New York Times, 21
April 2010; and Bill Koenig, “Unions Resist Yielding More as
GM, Ford, Chrysler Seek Aid,” Bloomberg, 12 November 2009.
QUESTION
1. How would the UAW benefi t for increased demand for GM
and Chrysler vehicles?
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1. If work provides disutility, why do people ever engage in
either market work or nonmarket work?
2. What does it mean to say that the demand for a resource is a
derived demand? Why does the supply curve of a resource slope
upward?
3. Why does the division of resource earnings into economic
rent and opportunity costs depend on the resource owner's
elasticity of supply?
4. What is the price of an hour of leisure? An hour of nonmarket

10. work? What does it mean to say that leisure is a normal good?
Why doesn’t the market supply curve for labor bend backward?
5. Distinguish between mediation and arbitration. Explain how
industrial unions tend to raise wages and why unemployed
workers do not offer to work for less money.
6. Addition question. Does not have to be a certain amount of
words. Just answered:
Many individuals feel that they have little influence over the
wage rate they receive, and that employers decide unilaterally
what wage they will pay. How do you square this fact with the
model of wage determination presented in this chapter?
Optional: What are the pros and cons of sending jobs overseas?
What, and who, makes this such a "hot" topic in the news
media?
Instructions: I need each question (5 questions) answered in 75
words or greater. The additional question (6) doesn’t have a
word limit and it does not need to be long. There are also 2 case
study questions attached as a PDF file to the homework (not in
this word document) that need to be answered that also need to
be at least 75 words. There are a total of 8 questions being
asked. I need the book that is being used to be referenced in
APA format. The book being used is ECON MICRO 3 by
William A. McEachern. I need these back Saturday (3/23) by
9:00pm so that I have time to read over and submit them. 9:00
EST.
Case StudiesCase Studies
AGGREGATE EXPENDITURE
Case Study 9.1: The Life-Cycle Hypothesis

11. Do people with high incomes save a larger fraction of their
incomes than those with low income? Both theory and
evidence suggest they do. The easier it is to make ends meet,
the more income is left over for saving. Does it
follow from this that richer economies save more than poorer
ones—that economies save a larger fraction of total
disposable income as they grow? In his famous book, The
General Theory of Employment, Interest, and Money,
published in 1936, John Maynard Keynes drew
that conclusion. But as later economists studied
the data—such as that presented in the exhibit below—it
became clear that
Keynes was wrong. The fraction of disposable income saved in
an economy
seems to stay constant as the economy grows.
So how can it be that richer people save more than poorer
people, yet
richer countries do not necessarily save more than poorer ones?
Several
answers have been proposed. One of the most important is the
life-cycle
model of consumption and saving. According to this model,
young people
tend to borrow to fi nance education and home purchases. In

12. middle age,
people pay off debts and save more. In old age, they draw down
their savings,
or dissave. Some still have substantial wealth at death, because
they are not
sure when death will occur and because some parents want to
bequeath
wealth to their children. And some people die in debt. But on
average net
savings over a person’s lifetime tend to be small. The life-cycle
hypothesis
suggests that the saving rate for an economy as a whole depends
on, among
other things, the relative number of savers and dissavers in the
population.
A problem with the life-cycle hypothesis is that the elderly do
not seem to draw down their
assets as much as the theory predicts. One reason, already
mentioned, is that some want to leave
bequests to children. Another reason is that the elderly seem
particularly concerned about covering
unpredictable expenses such as from divorce, health problems,
or living much longer than the
average life span. Because of such uncertainty, many elderly

13. spend less and save more than the
life-cycle theory predicts. Researchers have found that those
elderly who have not experienced a
divorce or health problems build their net wealth well into old
age.
Still, the life-cycle hypothesis offers a useful theory of
consumption patterns over a lifetime.
SOURCES: Martin Browning and Thomas Crossley, “The Life-
Cycle Model of Consumption and Saving,” Journal of Economic
Perspective 15 (Summer 2001): 3–22; OECD Economic Outlook
87 (May 2010); and James Poterba, Steven Venti, and David
Wise, “Family Status Transitions, Latent Health, and the Post
Retirement Evolution of Assets,” NBER Working Paper 15789,
(February 2010).
QUESTION
1. According to the life-cycle hypothesis, what is the typical
pattern of saving for an individual over his or her lifetime?
What impact does
this behavior have on an individual’s lifetime consumption
pattern? What impact does the behavior have on the saving rate
in the overall
economy?
9
life-cycle model of
consumption and
saving
young people borrow,

14. middle-agers pay off
debts and save, and
older people draw down
their savings; on average,
net savings over a lifetime
is usually little or nothing
U.S. Consumption Depends on Disposable Income
C
o
n
s
u
m
e
r
s
p
e
n
d
in
g
(t
ri
ll
io

15. n
s
o
f
2
0
0
5
d
o
ll
a
rs
)
0.0 1.0 2.0 3.0 4.0
5.1
4.5
Disposable income
(trillions of 2005 dollars)
5.0 6.0 7.0 8.0 9.0 10.0 11.0
9.0
8.0
7.0
6.0

16. 5.0
4.0
3.0
2.0
1.0
0.0
1995
1985
1975
2005
2010
10.0
11.0
SOURCE: Based on estimates from the Bureau of Economic
Analysis, U.S.
Department of Commerce. For the latest data, go to
http://bea.gov/.
26692_CS_01-42.indd 1826692_CS_01-42.indd 18 11/11/11
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17. Case Study 9.2: Investment Varies Much More than
Consumption
Consumption averaged 70 percent of GDP during the most
recent decade, and investment varied from year to year and
averaged 16 percent
of GDP during the most recent decade. Now let’s compare the
year-to-year variability of consumption and investment. The
exhibit below shows
the annual percentage changes in GDP, consumption, and
investment, all measured in real terms. Two points are obvious.
First, investment
fl uctuates much more than either consumption or GDP. For
example, in the recession year of 1982, GDP declined 1.9
percent but investment
dropped 14.0 percent; consumption actually increased 1.4
percent. In 1984, GDP rose 7.2 percent, consumption increased
5.3 percent, but
investment soared 29.5 percent. Second, fl uctuations in
consumption and in GDP appear to be entwined, although
consumption varies a bit
less than GDP. Consumption varies less than GDP because
consumption depends on disposable income, which varies less
than GDP.
During the six years of falling GDP over the last half century,
the average decline in GDP was only 0.9 percent, but
investment dropped

18. an average of 13.6 percent. Consumption actually increased by
an average of 0.3 percent. So while consumption is the largest
spending
component, investment varies much more than consumption and
accounts for nearly all the year-to-year variability in real GDP.
Note that GDP
does not always fall during years in which a recession occurs.
That’s because the economy is not necessarily in recession for
the entire year.
For example, because the recession of 2001 lasted only eight
months, GDP managed a small gain for the year of 1.1 percent
and consumption
grew 2.7 percent. It was the 7.0 percent fall in investment that
caused the recession. That’s why economic forecasters pay
special attention to
business expectations and investment plans.
SOURCES: Economic Report of the President, February 2010,
Survey of Current Business 90, various months for 2010; and
OECD Economic Outlook 87 (May 2010). For data and
articles about economic aggregates, go to the Bureau of
Economic Analysis site at http://bea.gov/.
QUESTION
1. Why do economic forecasters pay special attention to
investment plans? Take a look at the Conference Board’s index
of leading economic
indictors at http://www.conference-board.org/. Which of those
indicators might affect investment?

19. Annual Percentage Change in U.S. Real GDP, Consumption, and
Investment
A
n
n
u
a
l
p
e
rc
e
n
ta
g
e
c
h
a
n
g
e
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999
Investment

20. 2003 2007 2011
30.0
GDP
Consumption
25.0
20.0
15.0
10.0
5.0
0.0
–5.0
–10.0
–15.0
–20.0
–25.0
SOURCE: Bureau of Economic Analysis, U.S. Department of
Commerce. Figures for 2011 are projections based on
annualized rates from the fi rst half of the year. For the latest
data, go to http://bea.gov/.

21. 26692_CS_01-42.indd 1926692_CS_01-42.indd 19 11/11/11
6:07 PM11/11/11 6:07 PM
1. For each of the following, explain whether it shifts the short-
run aggregate supply curve, the long-run aggregate supply
curve, or the aggregate demand curve (or more than one of
these).
a. Households decide to save a smaller share of their disposable
income.
b. There is an 8-week strike in the steel industry.
c. A drought in the Midwest causes poor wheat harvest.
d. The labor force participation rate increases.
2. Suppose MPC is 0.8 initially. Households then change their
behavior so that the MPC falls to 0.75. What happens to
aggregate expenditures? Why?
3. Explain what would cause the government purchases function
to increase. Will a change in social security spending affect
government purchases?
4. What is a consumption function? Describe the graph of a
consumption function and explain its shape. If total spending is
consumption plus investment spending, how does an increase in
the interest rate affect total spending?
5. How is an aggregate demand curve derived? What would
cause the aggregate demand curve to shift to the right?
6. Addition question. Does not have to be a certain amount of
words. Just answered:
The AS curve does not describe the same kind of relationship
between price and quantity as a microeconomic supply curve,
why?
Optional: It has been said that U.S. citizens do not have much
propensity to save, and the low interest on savings accounts
may be a reason. What would happen to the economy if, all else
remaining the same, savings interest increased enough that we

22. would have greater propensity to save? What aspects of the
economy would be affected?
Instructions: I need each question (5 questions) answered in 75
words or greater. The additional question (6) doesn’t have a
word limit but it does not need to be long. There are also 2 case
study questions attached as a PDF file to the homework (not in
this word document) that need to be answered that also need to
be at least 75 words. There are a total of 8 questions being
asked. I need the book that is being used to be referenced in
APA format. The book being used is ECON MACRO 3 by
William A. McEachern. I need these back Saturday (3/23) by
9:00pm so that I have time to read over and submit them. 9:00
EST.