Question

Would a union agreement preventing firms from substituting capital for labor make labor-demand elasticity more or less elastic? Why?

Parting from the profit maximizing rule, why is W = VMP = demand for labor?

What is the fundamental difference between the classical and Keynesian theories with regards to policy?

Why would an employer pay a worker more than she could earn elsewhere?

Answer 1

Answer:

Q) Would a union agreement preventing firms from substituting capital for labor make labor-demand elasticity more or less elastic? Why?

Ans) Yes, the union agreement from preventing firms from substituting capital for labor will make labor-demand elasticity more or less elastic. With making such law, the union governemnt is ensuring more of employment. When such law is passes this will make the labor demand more elastic as a slight increase or decrease in wage rate will influence the labor hired in the firm. If the wage rate will be less, the labor will not be willing to join and if the wage rate will high there will rush in for the job.

Q) Parting from the profit maximizing rule, why is W = VMP = demand for labor?

Ans) VMP stands for value of the marginal product of labor. The marginal product(MP) of labor is each extra production that is produced by hiring an additional labor. When the marginal product (MP) is multipled by price (P) we get VMP. In case of perfectly competitive firm, the price is fixed. Due to diminishing marginal product, as more labor is hired the marginal product declines. Hence the VMP curve is a downward sloping curve which also is demand curve of labor.

In competitive market, the firm will hire workers for which revenues exceeds the cost so that they earn profits. The profit can only be maximised when marginal revenue (MR) is either greater or equal to marginal cost (MC). So for satisfying the situation VMP = W, where W is the wage rate.

Q) What is the fundamental difference between the classical and Keynesian theories with regards to policy?

Ans) The classical theory believes into a lassizie-fairie economy where markets will settle down without any governemnt intervention. They believed that governemnt should only interfere in collecting taxes. The classicist believed that the resources should be allotted individual according to their need. The classical theory was also based for long-run effect. They considered money to be neutral.

The Keyensian theory on other hand compeletly believed in governemnt intevention. They considered the role of money an important parameter for the smooth running of the economy. Keyensian economy considered every policy to have a short life span as everyone dies in long run.

Q) Why would an employer pay a worker more than she could earn elsewhere?

Ans) An employer needs to pay a worker more than she could earn elsewhere to compensate for her opportunity cost. An opportunity cost is loss of one alternative while chossing another. hence to compensate that an employer needs to pay more than her capability.