2. a. \"The firm\'s demand schedule for labour is a negative function of the wag

Question

2. a. "The firm's demand schedule for labour is a negative function of the wage because, as the firm uses more labour, it has to utilize poorer-quality labour, and hence pays a lower wage." True or false? Explain. (10 marks) b. "Assume that a construction firm uses both capital and carpenters when building a house. If the wage rate of carpenters should fall when the costs of capital remain unchanged then the demand for capital services will also fall. Is this statement true or false? llustrate your answer and explain. (15 marks)

Explanation / Answer

a) false

Demand for labour is a negative function of wage but the reaoning is wrong. As wage increases cost of hiring a labor increases which reduces the demand for labor.

b) False

The firm uses both carpenters and capital to produce the good. When wage rate falls, there are two effects that play key roles. Substitution effect says demand for capital should fall. Oxime effect says demand for capital should rise. The net effect depends on which effect outweighs.

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