Economists have advanced a number of theories to explain the nature and effect of discrimination in labor markets. in the most basic theory, white men and black men are assumed to be perfect substitutes that are equally productive in producing a good.
a) Depict an isoquant map depicting a typical firm's use of two inputs - white and black labor. Label its slope.
b) Assume that discrimination exists in a society such that the wage paid to black workers is $12 but the wage paid to white workers is $13, as determined by the market. For the three profit maximizing firms described.
FIRM A: not prejudice in any way and does not discriminate between black and white workers.
FIRM B: prejudice against black workers and willing to pay a 2 dollar wage premium for white workers, even though all workers are equally productive.
FIRM C: prejudice against white workers and willing to pay a 2 dollar wage premium for black workers, even though all workers are equally productive.
c) What would be the effect of an increase the price of black labor from $12 to $13 and a decrease in the price of white labor from $13 to $12 on each of the three firms?
The solution answers the question(s) below.