ProblemSet_3_Solutions - 1 ILRLE 240: Economics of Wages &...

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CONTINUED 1 ILRLE 240: Economics of Wages & Employment Professor Matthew Freedman Fall 2008 Problem Set III Suggested Solutions 1. Offices have become substantially more computerized over the past several decades as faster, more powerful machines have become increasingly affordable. Some observers have attributed declines in the employment of some types of office workers, and in particular low- skilled office staff, to the rise in workplace computerization in the U.S. Is it necessarily the case that cheaper computers will result in fewer office jobs? Explain. A fall in computer prices will have offsetting substitution and scale effects with respect to desired employment of office workers. The total effect of the decline in the price of computers on the employment of office workers, therefore, is theoretically ambiguous; it depends on the relative magnitude of the substitution and scale effects. On the one hand, cheaper computers will create an incentive for firms to substitute capital for office labor. However, on the other hand, cheaper computers will have a scale effect as they lower the total costs of production. Taken alone, this scale effect will work to increase desired office employment. Ultimately, then, the relative magnitudes of the scale and substitution effects will determine whether firms increase or decrease employment of office workers in response to changes in the prices of computers. 2. Suppose that there are 50 retail stores in Ithaca, each of which operates in a perfectly competitive product market and a perfectly competitive labor market. (a) Describe the labor supply curve facing each individual retailer in Ithaca. (b) Suppose that 10 of the 50 retailers in Ithaca are type A firms and that the remaining 40 are type B firms. Owing to differences in the technologies they use, type A firms employ 10 workers at the going wage, while type B firms employ 20. Calculate total employment in the retail industry in Ithaca. (c) If the real wage for workers were to increase, could we say conclusively that employment at a given retailer in Ithaca would fall? Could we say conclusively that employment in the retail industry as a whole in Ithaca would fall? Explain. (d) Suppose now that there is only one gigantic retail store in Ithaca. While a monopolist in the product market, the retailer continues to operate in a perfectly competitive labor market because it must compete with firms in other industries (e.g., restaurants) for workers. For a given product demand curve and real wage, would aggregate employment in Ithaca’s retail industry be greater or less if the industry consisted of a single monopolist relative to if the industry consisted of many small perfectly competitive firms? (a)
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This note was uploaded on 01/24/2009 for the course ILRLE 2400 taught by Professor Smithr during the Fall '07 term at Cornell University (Engineering School).

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ProblemSet_3_Solutions - 1 ILRLE 240: Economics of Wages &...

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