solutionwk9 - 1. The following walks you through a famous...

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1. The following walks you through a famous question that served as a “rite of passage” for some economics Ph.D. candidates. A successful answer indicated that the candidate not only mastered the technical skills associated with modern economics (which was tested earlier) but also the intuition. Let us see how you do: The wage earned by barbers has increased over the past 10 years. But the price of a haircut has remained the same; so has the basic haircutting technology. There has been no change in the overall supply of labor during this time period. What might explain this observed rise in the wage for barbers? For simplicity, let us assume that both the market for haircuts and labor are perfectly competitive . So, the barbershop will hire labor until the marginal revenue product of labor equals the market wage. a. Explain why the above description of the economy implies that the rise in wage for barbers must be due to an increase in the overall demand for labor. The market equilibrium wage occurs where labor demanded equals labor supplied. If supply did not shift, then a rise in market wage must be due to shift in labor demand. Wage rises for an increase (shift out) in labor demand. b. Explain why the demand for labor by barbershops has not changed during this time period. Labor demand for a firm is given by the marginal revenue product (MRP = MR x MP).
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This note was uploaded on 04/19/2008 for the course ECON 11 taught by Professor Woglom during the Spring '08 term at UMass (Amherst).

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solutionwk9 - 1. The following walks you through a famous...

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