Problem Set 4 - equilibrium approach analyze the effect of...

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Dept of Economics Fall 2010 University of Iowa Professor Sarah Frank 06E:001:SCB Principles of Microeconomics Problem Set 4 Due Tuesday, November 16 in class 1) How would each of the following developments affect the amount of labor the typical profit- maximizing toy manufacturer hires? You should assume the markets for toys and labor are both perfectly competitive and that our typical toy manufacturer must pay the going wage rate for labor. Use graphs to explain your answer. a. A recession hits during the holiday shopping season. People decide to make their own gifts to save money. b. Toy manufacturers also use capital to make toys, and capital and labor are complementary inputs. Suppose the price of capital equipment falls. c. The price of capital does not change, as in (b), but a new machine is developed that allows one worker to make many more toys per hour than before. 2) During the 1970s and 1980s, more women entered the labor market. (In 1970, 39% of married women ages 25-34 were in the labor force compared with 70% today.) Using a general
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Unformatted text preview: equilibrium approach, analyze the effect of more women entering the labor market on the market price of legal services. (HINT: The output is legal services. One input to legal services is labor. To do this analysis, you will need 3 graphs, one for the input market and two for the output market - one for the market for legal services and one for the typical law firm.) 3) True, False or Uncertain. For each of the following, decide if the statement is true, false or uncertain and explain why. Your analysis determines your grade. a. The market outcome in a perfectly competitive economy leads to an efficient mix of output. b. Diminishing marginal returns explains why the marginal revenue product of labor eventually declines. c. Giving food stamps to poor families will lead to a more efficient distribution of outputs than giving cash assistance. d. A firm will continue investing up to the point where the marginal revenue product of capital is equal to the total investment....
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