Question

1. Suppose you are researching a firm that dominates the labor market in a small town.

a. What is the significance of studying this firm's resource pricing (for local people, for the firm itself, etc.)?

b. In the context of derived demand, why might it be important for workers at the firm that the firm's product has strong market performance?

c. Now assume the firm decides to increase employment by 1,000 workers. What does this decision reveal about the firm's marginal revenue product (MRP) and marginal resource cost (MRC)?

d. Next, assume the price for capital goods that the firm buys decreases. If capital goods and labor are substitute resources, what might this do to the firm's demand for workers?

e. If the firm's MRPL= $40, PL = $10, MRPC = $200; PC = $200, is it maximizing its profits? If not, state which resource(s) should be used in larger amounts and which resource(s) should be used in smaller amounts.

f. Finally, suppose there is mass migration into the small town where the firm operates. Due to the resulting increase in labor supply, what will happen to the firm's quantity of workers demanded? In this case, will the substitution effect and output effect move in the same direction or in opposite directions? Why?

Answer 1