Question

Section 11. Short Answer. Write a concise answer in the space provided. Dollars TC max dm Discrimination Coefficient 1. The graph above has profit in dollars on the y-axis and the discrimination coefficient of firms on the x-axis. It is a depiction of preference-based discrimination. a. Why is profit decreasing (as d increases) in the first part of the graph? b. Why is there a discontinuous drop in profit at dm?

Answer 1

It shall be noted that discrimination by the firm means firm taking into factors such as caste, creed, race, gender when making economic exchanges.

If the firm does not discriminate, the firm will hire black workers as the wage for black workers < wage for white workers and hire black workers up to the point where the black wage = Value of marginal product of black workers.

a) The profit is decreasing (as d increases) in the first part of the graph because of the following reasons:

Firms that discriminate hire fewer workers than firms that do not discriminate.

By hiring the wrong color workers and/or the wrong number of workers, a prejudiced employer pays a wage above the competitive wage and does not hire enough workers, resulting in lower output and profits than without discrimination.

Thus, the first part of the graph shows that discrimination carried out by black firm resulting in hiring of less workers at higher wages that resulted in lowering of profits.

b) There is discontinuous drop in the profit at dm because of the following reasons:

The discontinuous drop in the profit at dm indicate that the wage ratio is 1 between the wage of black workers and white workers. The employer discrimination generates a wage gap between equally skilled black and white workers.