Unformatted text preview: eisure dominates the income eﬀect. In this case, leisure increases and
dominates the income effect. In this case, leisure increases rise, hours worked fall. same.
fall. Although consumption must fall, hours worked may and fall, or remain the Although consumption must fall, hours worked may rise, fall, or remain the same.
E D B I1
G I2 H l Figure 4.3
Figure 2: 3. 1. The firm chooses its Canadian Nd so as toChapter 4, Problem 11. Suppose that the
1 Williamson, Third labor input Edition, maximize profits. When there is no
government subsidizes employment. That is, the government pays the ﬁrm s units of consubsidy, profits for the firm are given by
sumption goods for each unit of labor that the ﬁrm hires. Determine the eﬀect of the subsidy
on the ﬁrm’s demand for labor.
. π = zF ( K , N ) − wN d The ﬁrm chooses its labor input N so as to maximize proﬁts. top panel in
That is, profits are the difference between revenue and costs. In theWhen there is no subsidy,
proﬁts for the ﬁrm are given by:
Figure 4.7 the revenue function is zF ( K , N d ) and the cost function is the straight line,
wNd. The firm maximizes profits byπ = zF (K, N dquantity of labor where the slope of the
choosing the ) − wN d
revenue function equals the slope of the cost function:
That is, proﬁts are the diﬀerence between revenue and costs. In the top panel in Figure 3
MPN = is
the revenue functionw .zF (K, N d ) and the cost function is the straight line, wN d . The ﬁrm The firm’s demand for labor curve is the marginal product of labor schedule in the
bottom panel of Figure 4.7.
With an employment subsidy, the firm’s profits are given by: amount of the subsidy, s. In the top panel of Figure 4.7, the subsidy acts to shift down
the cost function for the firm by reducing its slope. As before, the firm will maximize
profits by choosing the quantity of labor input where the slope of the revenue function is
equal to the slope of the cost function, (t-s), so the firm chooses the quantity of...
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- Spring '14