Question 3. Consider the market for labor. Explain what happens to the equilibrium wage and the...

Question 3.

Consider the market for labor. Explain what happens to the equilibrium wage and the equilibrium labor employed in each of the following events.

a. Firms decrease the use of machines that labor work with.

b. Population decreases.

c. Demand for the firm’s product decreases.

d. Price of the firm’s product increases.

Solutions

Expert Solution

Labour demand curve is value of marginal product curve, VMPL = Price of the product * Marginal Product of Labour

a) If firm reduces the use of machines that labor work with then marginal product of labour falls as each additional labour units does not have enough capital on which he/she can work on. Thus, value of marginal product of labour decreases at each wage rate leading to decrease in demand for labour which at given supply of labour will decrease the wage rate.

b) Decrease in population decreases the labour supply which at given labour demand will lead to increase in wage rate.

c) Decrease in firm's product leads to a decrease in price of the good leading to decrease in value of marginal product of labour at each wage rate which decreases the demand for labour and causes wages to fall as well at given supply of labour.

d) Decrease in price of the firm's product will lead to decrease in value of marginal product of labour at each wage rate which decreases the demand for labour and causes wages to fall as well at given supply of labour.

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Rahul Sunny answered 1 year ago

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