ptsq5-laborS-D

# ptsq5-laborS-D - Price Theory Study Questions Set#5 LABOR...

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Price Theory Study Questions: Set #5 1. Consider the following two workers. A’s utility function is U = L 0.9 I 0.1 and B’s utility function is U = L 0.1 I 0.9 where L = leisure and I = consumption of all other goods. a. Calculate the MRS for each worker. b. At the bundle L = 10 and I=\$10 which consumer places a relatively higher value on leisure? Draw representative indifference curves through this bundle. 2. Assume the following (unless told otherwise) for this question: U = L 0.8 I 0.2 , w = \$4/hour, N = \$6 and T= 16 hours/day. a. What is “full-income”? Write the equation for the budget line. b. Find the optimal bundle. Show answer on a graph. c. Derive this worker’s leisure demand function and labor supply function. d. At what wage rate would this worker be indifferent between working and not working? (That is, at what wage rate would the optimal L be 16?). Show answer on a graph. e. At level of non-labor income would this worker be indifferent between working and not working? (That is, at what wage rate would the optimal L be 16?). Show answer on a graph. f. Suppose the wage rate fell to \$3 per hour. What would N have to be to leave this worker just as well as before the decrease in the wage rate? Do hours worked change? Why? Show your answer on a graph. g. Suppose the above job required the worker to work at least three hours. Would the worker still work? Show your answer on a graph. LABOR DEMAND 1. Assume Q = K 0.5 L 0.5 with K fixed at 16 units. The output price facing the firm is \$50 and the going wage rate is \$10. a. Find the MRP L function. b. Find the profit-maximizing level of employment (L) and the corresponding output level (Q). c. Find the firm’s inverse short-run demand function and the short-run firm demand function for labor. 2. Firm is a monopoly in the output market but a price taker in the input market. Market demand for the product is P = 27 – 0.5Q. The wage rate is \$10 per unit of labor. The firm’s production function is Q = K 0.5 L 0.5 with K fixed at 16 units. a. Find the MRP L function. b. Find the profit-maximizing level of employment (L) and the corresponding output level (Q). c. Find the firm’s inverse short-run demand function and the short-run firm demand function for labor. d. How does the L and Q found in part (b) compare with the level of employment and output in a competitive output market? 3. Evaluate: “In competitive output and input markets, the industry short-run labor demand curve is derived by simply horizontally summing up all individual firm’s MRP L curves. “ 4. Assume that a firm desires to produce Q 1 using the two inputs labor and capital. Now suppose the price of labor rises. On a clearly drawn graph, show the substitution and scale effects of the change in the price of labor. Directly below this graph sketch in the conditional and unconditional L demand curves. 5.. Suppose a firm has monopsony power and faces two types of labor given by the following inverse labor

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## This note was uploaded on 02/21/2010 for the course ECON 332 taught by Professor Jeong during the Spring '10 term at USC.

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ptsq5-laborS-D - Price Theory Study Questions Set#5 LABOR...

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