{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

150a_hw2_key

# 150a_hw2_key - Economics 150A Labor Economics Assignment 2...

This preview shows pages 1–3. Sign up to view the full content.

Economics 150A Labor Economics Assignment 2 Spring 2011 1. Graphically show the long-run demand for labor if the price of capital increases. To determine how an increase in the price of capital changes the demand for labor, suppose initially that the firm is producing 200 units of output at point P in figure 2. The increase in the price of capital (assuming capital is a normal input) increases the marginal costs of the firm and will reduce the profit-maximizing level of output to say 100 units see figure 1. The increase in the price of capital also flattens the isocost curve, moving the firm to point R. The move from point P to point Q can be decomposed into a scale effect which reduces the demand for capital, and decreases the demand for labor. The substitution effect (Q to R) reduces the demand for capital and increases the demand for labor. The direction of the shift in the demand curve for labor, therefore, will depend on which effect is stronger: the scale effect or the substitution effect. The effect on labor is ambiguous. The effect on capital is not ambiguous; it decreases. 100 200 MC 0 P MC 1 Dollars Output Figure 1 100 200 R P Q Capital Employment Figure 2 Figure 2 shows employment increases. You should have a 2nd graph showing employment decreases. If this were a test question, you would be expected to show all graphs as the directions ask. 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2. A firm uses 1 capital for every 8 workers to produce 1 output. The price of output is \$75, the wage rate is \$6, and the rental rate for capital is \$2 per unit. Assume capital is not a fixed cost.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern