Question

Question.

1. Given the data below, reproduce and fill in the table in your answer, graph the results on appropriate graphs. Assume firm has only labor as a resource/input.

L	Wage Bill	Total Resource Cost	MRC	MRP
100	$4000			9000
200	$4000			8000
300	$4000			7000
400	$4000			6000
500	$4000			5000
600	$4000			4000
700	$4000			3000

b)   This labor market is imperfectly competitive. True, False, explain in detail. Why does the Marginal Resource (Labor) Cost curve have the shape it does?

c)   How many workers will this firm hire? Why?

d)   Explain what would happen to the quantity of workers the firm would hire if the demand for the good these workers produce were to fall. What would happen to the wage? Draw (and label as such) a rough new labor demand curve on your graph from answer 1a). (You do not have to use new numbers, just estimate where it would go.)

Answer 1

a)

L	Wage	Total Resource Cost	MRC	MRP
100	4000	400000		9000
200	4000	800000	4000	8000
300	4000	1200000	4000	7000
400	4000	1600000	4000	6000
500	4000	2000000	4000	5000
600	4000	2400000	4000	4000
700	4000	2800000	4000	3000

The total resource cost is

TRC = L x Wage

The marginal resource cost is calculated as

TRC( L = L – TRCL = Lọ) MRC = L1 - LO

Then marginal resource cost for increasing labor employment from L=100 to L=200 is

MRC = 400000 – 800000 - = 4000 200 – 100

10000 9000 8000 7000 MRP,MRC -MRP -MRC 2000 1000 0 100 200 300 500 600 700 800 400 Labor

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b)

The marginal resource cost is equal to the wage bill of $4000. Then the producer takes the price of labor as given. Hence, this is a perfectly competitive labor market.

The labor supply is perfectly elastic at W=4000, and hence it is a horizontal straight line at W=4000

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c)

At equilibrium each firm hire the labor until MRP=W. This occurs at L=600. Then at equilibrium the firm hires 600 labor.

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d)

Given the perfectly elastic supply of labor, the fall in the demand for good will decrease the demand for labor. At the given market wage rate, the firm will hire less labor. The labor employment will fall below 600, while the wage rate remains the same at $4000.