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# h4f10 - Increases profit by \$4100 next year and \$7,000 the...

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ECO 304K INTRO MICRO Fall 2010 Hickenbottom HOMEWORK #4 (Due November 3 rd at 12pm) 1. a) Draw a picture of a labor market at equilibrium at a wage of \$25 per hour where the market is hiring 500,000 hours and 1 firm that is hiring 80 hours of this labor at the market wage. (1 point) b) Explain how an increase in the price of the firm’s output will change the picture for the firm. Draw a picture showing the effect on the firm if the wage stays constant. Explain what determines whether or not the wage changes and if it changes, would it increase or decrease? (2 points) c) Explain how a decrease the supply of labor will affect the market for labor in the short run. Redraw the labor market showing this affect. In the long run, explain the forces which will determine whether the firm hires more or less capital. (2 points) 2. Consider the following two projects Project A: Costs \$10,000 today.
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Unformatted text preview: Increases profit by \$4100 next year and \$7,000 the year after that Project B: Costs \$6000 today. Increases profit in two years by \$7,100 A firm faces a rate to borrow money of 8% and has the option of investing money with almost no risk at 6%. a) If the firm has \$20,000 on hand, with only these two project to choose from, will they invest in A, B, neither or both? Show the calculations that lead to your conclusions. Explain whether you answers would be different for either project if the firm had no money on hand to invest. (2 points) b) Set up (but do not solve) and equation that would find the rate of interest where the firm is indifferent between investing in project B, and not investing in project B. (1 point) c) Explain, based on your calculations in (a), why the rate of return on project A must be somewhere between 6% and 8% (1 points)...
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