Question

Micro-Econ Problem 1

PROBLEM 1: TRUE OR FALSE (20 POINTS) Determine whether the following statements are True or False. Explain your answer. (1) (5 points) In a competitive labor market, the market labor supply curve is always upward sloping. (2) (5 points) In the short run (capital is fixed), if the product produced by a perfectly competitive firm becomes more valuable (i.e. its price increases), then the firm will respond by increasing its labor demand. (3) (5 points) Raising the minimum wage may improve the welfare of workers, but will always lead to an increase in the deadweight loss. (4) (5 points) An increase in the interest rate has an ambiguous effect on the savings of a utility maximizing household.

Answer 1

1. True.

In a competitive labor market, the supply curve is always upward sloping because it reflects the higher price needed to cover the higher marginal cost of production. The higher marginal cost arises because of diminishing marginal returns to the variable factors.

2. True.

In the short run where capital is fixed, if the product produced by a perfectly competitive firm becomes more valuable i.e. price increases then the firm will increase the labor demand in order to produce more and benefit from the increase in price.

3. True.

Increasing the minimum wage will result in cutting down on some existing labor and transfer of their part of income to others. As a result, leading to unemployment of willing workers. This will increase the deadweight loss.

4. False. Increase in interest rate will lead to only one possible outcome that is holding more money than investing so that a sure amount of sum will be earned without any risk.