4:41 PM bbhosted.cuny.edu AT&T; LTE * 57% Labor Demand Questions: 1. The wage fo

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4:41 PM bbhosted.cuny.edu AT&T; LTE * 57% Labor Demand Questions: 1. The wage for workers in a competitive market is initially S10 and rent, the cost of capital (also rented in a competitive market), is initially S5. Now suppose that wages decrease to $8 and rent decreases to $2 a) Describe how the scale effect changes a firm's use of labor and capital. b) Describe how the the substitution effect changes a firm's use of labor and capital c) Overall will a firm hire more or fewer workers? Will a firm rent more or less capital? d) Will a firm change its production technology given the changes in w and r? 2. The public utilities commission in a state lifts price controls on the sale of natural gas to manufacturing plants and allows utilities to charge market prices (which are 30% higher). What conditions would minimize the extent of a manufacturing job loss associated with this price increase? 3. We have dealt extensively with monopsonistic firms that have paid a single wage tots workers. Now consider a monopsonistic firm that can pay each worker his or her individual reservations wage without affecting the wages other employees receive a) Draw a diagram showing equilibrium employment, employer surplus, and employee surplus. b) Is this monopsonistic firm hiring in a way that is efficient? Explain your answer c) Make a new diagram showing what will happen when a minimum wage is set slightly below or at the intersection of labor supply and MRPL curves. Label equilibrium employment, employer surplus, employee surplus, and any DWL. d)Make another diagram showing what will happen when a minimum wage is set slightly above the intersection of labor supply and MRPL curves. Label equilibrium employment, employer surplus, employee surplus, and any DWL Labor Supply Questions: 4. Consider how a decrease in wage will change a workers labor

Explanation / Answer

1. a. Because of the increase in costs, the amount of capital and labor used in production decreases.  Because of the increase in costs, the amount of capital and labor used in production decreases.  

1.b. Because of the increase in the relative price of capital, more labor, and less capital are used in the production process.

1. c. Overall, the firm will definitely use less capital because the scale and substitution effects move in the same direction. We can’t say whether the firm will use more or less labor because the scale and substitution effects move in opposite directions.

1.d. The frim can change its production technology as the firm needs less capital now.

2. In this question there is a clear case of the cross elasticity of demand. A higher price of natural gas will have a substituion effect that could favor incraesed employment & a scale effect that tend to reduce employment. Factors minimizing the extent of job loss are made for a robust substitution effect & small scale effect. A larfe substitution effect will tend to occur if labor is easily substituted for a natural gas in the process of production & if labor supply is relatively elastic. A small scale effect is created if natural gas is a small part of the overall cost of production & if the demand for the products made using natural gas is relatively inelastic.

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