35 - The Marginal Productivity Theory of Labor Demand Lemin...

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Unformatted text preview: The Marginal Productivity Theory of Labor Demand Lemin Wu DEPARTMENT OF ECONOMICS UNIVERSITY OF CALIFORNIA AT BERKELEY February 3, 2011 Warm-up 1. When the wages of bus drivers increase, how do you expect will the size of the buses change in the long run? 2. If the government sets a minimum wage above the market level for bus drivers, will the bus drivers work longer or shorter hours in the long run? 3. If it is the bus driver union’s operation that drives up the wage, will the bus drivers work longer hours? 4. San Francisco increases the minimum wage for restaurant workers, why would the owner of a small restaurant in China town welcome the policy? 5. As more and more people get access to higher education, the skill premium in U.S. labor market increases. Why? (skill premium: the gap of wage between skilled labor vs. unskilled labor) Partial equilibrium vs. General equilibrium I Partial equilibrium: the latest generation of Kindle is $139 and that of IPAD is $550. I decide to buy a Kindle. I General equilibrium: Why are prices of Kindle and IPAD as they are? Money supply. Labor supply. Other product markets... I Partial equilibrium: What if I get a windfall $100 bill? I General equilibrium: It makes little difference if everybody gets a windfall $100 bills. (Because inflation will nullify the effect. Short-run vs. Long-run I Short-run: The invention of a new medicine alleviates pain, saves life and improves the living standard. I Long-run: The invention of a new medicine increases the level of population and thus lowers income per person. I Short-run: China strengthens its bargaining power by suspending supply of rare earth metal. I Long-run: The uncertainty in the supply of rare earth drives the other countries to look for and exploit new mines of rare earth metal. China’s monopoly of rare earth metal is thus broken in the long run. In labor market I Short-run demand for labor is different from long-run demand for labor. I In the short-run, capital is fixed, when the supply of workers goes up, the wage will drop. I In the long-run, capital will increase in response to the increased supply of labor and thus pushes up the marginal product labor. I Gradually, technological development will be directed towards labor-intensive ones and thus further pushes up the marginal product of labor. The firm’s profit maximization max π = P · F ( K , L )- wL- rK F.O.C....
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This note was uploaded on 03/18/2011 for the course ECON 196 taught by Professor Pierre during the Spring '10 term at University of California, Berkeley.

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35 - The Marginal Productivity Theory of Labor Demand Lemin...

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