Labour

Question 1

What is MRP

Answer 1

The additional revenue gained from hiring an extra worker

Question 2

What is the MRP equation

Answer 2

Question 3

If demand a product is elastic what will the firm’s demand for labour be

Answer 3

More elastic too

Question 4

What will the elasticity of a firms’ demand for labout be if it is able to substitutte labour for other inputs easily

Answer 4

Elastic

Question 5

Explain the shape of perfect complements IC

Answer 5

• right angle, can’t increase production without increasing both

Question 6

Why is the short run demand for labour vertical for workers that are perfect complements eg violinists with violins

Answer 6

As capital is fixed in SR thus can’t increase capital to match increase in workers so no. of workers is fixed

Question 7

Explain shape of perfect substitutes IC and how firm changes from SR to LR

Answer 7

• Straight line, when wages are high like W0, the firm uses just machines
• In SR when wages rise to W1 firm produces on Qs with Low LS as capital is fixed
• Inl and can just use L1

Question 8

What is firm demand labour much more in the long run as it can substitute factors that are fixed in SR

Answer 8

Elastic

Question 9

What is the time constraint people face

Answer 9

Labour + Leisure

Question 10

Explain what the graph shows

Answer 10

Optimal choice of leisure and income at point A, highest possible indifference curve tangential to BC

Question 11

What does the BC do when the wage rate increase

Answer 11

Pivots about a given leisure point to a higher income

Question 12

Explain the backward bending supply curve (wage x axis, labour supply y axis)

Answer 12

• At higher wages, workers may actually work less due to the income effect outweighing the substitution effect

Question 13

Why may a labour supply curve for an individual be negatively sloped

Answer 13

• If they simpy have a target level of income, higher wages allow them to hit that target with less work due to income effect

Question 14

Explain the income and substitution effect for a rise in wages

Answer 14

• Higher wages pivot BC upwards and substitution effect means workers will choose to work more as it becomes relatively more attractive- movement along IC tangential to B’
• Income effect means worker works less as they have more money to spend on leisure and so may work less

Question 15

Explain the optimal wage-safety combination diagram

Answer 15

• At lower probabilities of survival the risk taker indifference curve point is at a higher wage rate as they receive this to compensate

Question 16

Why do the lowest paid worker do the most dangerous jobs

Answer 16

• If safety is a normal good, workers with higher productivity will demand more of it hence dangerous jobs are done by lower productivity workers

Question 17

Explain the wage structure when local status matters

Answer 17

• A worker of given ability M0 has to choose between working with high status but lower wage, low status and higher wage or somewhere in the middle

Question 18

Explain monopsony vs competitive labour market

Answer 18

• In competitive, labour market D=S, so wages are W** and employment L**
• Under monopsony, it hires where MFC=MRP thus less labour is hired L* and lower wages paid W*

Question 19

Explain impact of a minimum wage in a monopsony (remember horizontal line until supply then vertical up to MFC)

Answer 19

• Under monopsony, they would hire L* without the minimum wage but they hire Lm when there is (when horizontal line hits the demand curve)
• Increases employment from L* to LM but still excess supply L1>LM