Consider a firm that exists for one period. The value of labour’s (L) marginal product is given by VMPL= P X MPL where P is the price of output, and MPL=10- 0.5L. The wage rate is $10.
a. Assuming that there are no hiring or training costs. If the firm expects the price of the output to be $10, what is the optimal level of employment L0? If the firm hires these workers, but then finds out that the price of output is $5, what will the firm do?
b. Assume now that there are hiring and training costs of $20 per worker. If the firm expects the price of output to be $10, what is the optimal level of employment? How does this compare to your answer in part (a)? If the firm hires these workers, but then finds out that the price of output is $5, what will the frim do? What if the price is $2? Explain.
c. Explain (qualitatively) how your answer to part (b) would change if the hiring and training costs were higher or lower. How can these results be used to predict the patterns of layoffs across occupations and industries during economic downtowns?