The elasticity of labor demand facing union B is given by: (33,000 30,000) 33, coo MO. 45 (15 20) 15 Lion B, therefore, is more likely to organize as I-OASIS < 1-21. 2. Consider a firm for Which production depends on two normal inputs, labor and capital, with prices w and r, respectively. Initially the firm faces market prices of w -6 and r -4. These prices then shift tow -4 and r- 2. (a) In which direction will the substitution effect change the firm’s employment and capital stock? Prior to the price shift, the absolute value of the slope ofthe isocost line (vv/r) was 1 After the price shift, the slope is 2.
In other words, labor has become relatively more expensive than capital. As a result, there will be a substitution away from labor and towards capital (the substitution effect). (b) In which direction will the scale effect change the firm’s employment and capital stock? Because both prices fall, the marginal cost of production falls, and the firm will want to expand. The scale effect, therefore, increases the demand for both labor and capital (as both are normal inputs (c) Can we say conclusively vetches the firm will use more or less labor? More or less capital?
The firm will certainly SE more capital as the substitution and scale effects reinforce each other in the direction of using more capital. The change in labor hired, however, will depend on whether the substitution or the scale effect for labor dominates. 3. Suppose a firm purchases labor in a competitive labor market and sells its product in a competitive product market. The firm’s elasticity of demand for labor is [10. 4. Suppose the wage increases by S percent. What Will happen to the number of workers hired by the firm? What will happen to the marginal productivity of the last worker hired by the firm?
Suppose A Firm Purchases Labor In A Competitive Labor Market And Sells Its Product In A Competitive Product Market. The Firm’s Elasticity Of Demand For Labor Is 0.4. Suppose The Wage Increases By 5 Percent. What Will Happen To The Amount Of Labor Hired By The Firm? What Will Happen To The Marginal Productivity Of The Last Worker Hired By The Firm?
Given the estimates of the elasticity of labor demand and the change in the wage, we have that CIA [10. 4 00. 4 . Thus, the firm hires 2 percent fewer workers. Furthermore, because the labor market is competitive, the marginal worker is paid the value of his marginal product. As the product market is competitive, we also know that the output price does not change so that the marginal productivity Of the marginal worker increases by 5 percent. 4. Suppose the hourly wage is $10 and the price of each unit of capital is $25. The price Of output is constant at SO per unit.
The production function is = Eek h, so that the marginal product of labor is MME = h Fifth current capital stock is fixed at 1 ,600 units, how much labor should the firm employ in the short run? How much profit will the firm earn? The fin-en’s labor demand curve is it marginal revenue product of labor curve, VAMP, which equals the marginal productivity to labor, MME, times the marginal revenue of the firm’s product. But as price is fixed at SO, MR. = 50. Thus, we have: 1600 1 ,000 VAMP MRS.њC 50 Now, by setting VAMP = w and solving for E, we find that the optimal number
Of workers for the firm to hire is 10,000 workers. The firm then makes = 4,000 units of output and earns a profit of – 1 – 10,000 ($10) = 560,000. 5. Which one of Marshal’s rules suggests why labor demand should be relatively inelastic for public school teachers and nurses? Explain. Public school teachers and nurses both help produce a good that is price inelastic – in the United States, at least, society will always purchase education and health care. Likewise, education and healthcare do not face strong competition trot substitute goods.
Finally, the production processes tort education and healthcare both require teachers and nurses. And though these talents can be substituted for to some degree by other forms of labor or capital, both are crucial to the production process. Thus, other inputs (computers, doctors, etc. ) cannot readily replace teaching or nursing services, and therefore the supply elasticity of other factors of production is not very elastic for teachers or nurses. For all three of these rules, therefore, the labor demand for public school teachers is likely similar to the labor demand for nurses.