Question

a) Consider a firm that sells its output in a perfectly competitive product market, and hires labour in a perfectly competitive labour market. The value of the marginal product of labour (in dollars) is given by:
                                                                VMP_L = 30-2L
Assuming that the firm is a profit maximizer and can hire labour at $W per unit, derive its labour demand function.

b) Given that there are 10 identical firms (like the firm described is part (a)) in the industry, show that the market labour demand is given by:
                                                                L^D = 150 – 5W

The supply function of labour to this market is given by:
                                                                L^S = 10W

Solve for the equilibrium wage and level of employment in this market.

c) In an effort to stimulate employment in this industry, the government offers firms a subsidy of $3 per unit of labour hired. Analyze the effects of the subsidy on the level of employment and the workers’ wages.

d) The government’s opposition parties accuse the government of catering to “corporate welfare bums” with the wage subsidy/handout. They suggest that the money would be better spent by putting the money directly into the hands of the workers. They propose that the government should directly give workers an additional $3 for each unit of labour worked. Evaluate the argument put forward by the opposition parties by comparing workers’ employment and incomes (wages plus government bonus) to the scheme in part (c).

Answer 1

ANS a)

A profit maximizing firm hires valuable input till that point at which MC of input equals the VMP . Here the MC of input means price of the input. since we consider labour as the variable input, its MC is nothing but the wage rate. If labour market is characterized by perfect competition , then wages will remain same.

VMPL = 30 - 2L

we say that if the labour rate is flexible then

VMPL = price - MPL *labour cost , let L = 10 , VMPL= 30-2*10 , VMPL = 10

MPL = 30-N , where n is the number of workers employed , suppose that price of a coomodity is 2 unit the we write the value of the marginal product as

VMPL = 60-2N

since VMPL equation of the firm demand curve is labour..As VMPL is given . let us take an example.

If the demand of the car increases in the market then the price of the autos goes up and hence the demand for the labour increases.

Of the worker finds the job opportunity more attractive than factory work then the supply of the labour will decrease.

b) In this part we have given the labour demand and labour supply function as follows

LD = 150 - 5W and LS = 10W

HERE

equilibrium founds where LD = LS

150-5W = 10W

150 = 10W + 5W

150 = 15 W

150/ 15 = W

W= 10

The employment level is increases as the demand for the lbour work is increses.

c) If the government offers firm a subsidy of $3 per unit of labour hired then the workers income level is increases by $3 . If the demand for the labour is increases then the employment level increases and the wage rate is also decreases .If the government gives the additional subsidy to the labour then it attract the labour to work more and the demand for the labour will decline .

d) IF the government opposition party gives the money in hand to the workers then the worker joins the opposition firms more quickly than the govenment firm. The opposition party will gives the bonus plus wage directly to the labour hand then that is increses the money value at the time of money needed to the workers.