Question

1-4. Need help. Thanks

Be thorough and concise. If possible, include a graphical explanation as well as verbal. True/False/Uncertain. You must provide a proof for your answer. (20 points) 1. The supply curve of labor may be upward sloping, downward sloping or both- it depends on the relative size of substitution and income effects. The demand curve for labor is derived from the marginal product of labor curve- the portion that is subject to increasing returns to labor, due to specialization and division of labor 2. 3. If the cross-wage elasticity of demand is negative, the two inputs are said to be gross complements. The long run labor demand curve is more elastic than the short run demand curve because of the scale effect. 4.

Answer 1

1)Uncertain .The demand for leisure increases as income increases .So supply of labour may be less as the higher income may be spend on leisure. This is the income effect as people substitute leisure for work when income increases.The supply curve here will be backward bending because income effect is large. Again if substitution effect is stronger than income effect than supply curve will slope upwards.The supply curve will slope downwards in a decreasing cost industry as with increase in output , more firms will enter the market and production cost will fall. So the supply curve will slope downwards not because of income or substitution effect.

2) False.As the amount of labor employed increases , the marginal product of labor falls The downward sloping portion of the marginal revenue product curve is the demand curve of labor as it shows how much labor the firm will employ.The demand curve is downward sloping due to the law of diminishing returns.

3)True. Cross wage elasticity of demand refers to the responsiveness of employing one input to a change in the wage rate of another input.Thus when cross wage elasticity is positive ,they are gross substitutes and when cross wage elasticity is negative ,they are gross complements.

4)True. The long run labor demand curve is more elastic than the short run labor demand curve. The scale effect is the effect that a wage cut generates.In the long run,the workers get more time to adjust to the change and so their response will be more.Thus the elasticity of demand for workers will be more in the long run.