Topic 4: Labour Demand Flashcards
What is the firms profit function?
What are the resulting first order conditions?
π = pY - wL - rK
First Order Conditions:
p*MPL = w
p*MPK = r
Graph the value of the average product with the value of the marginal product.
What does the short run demand for labour look like? Why?
What effects it?
It is downward sloping, which reflects the decreasing returns to hiring more workers.
A change in the wage rate is a movement along the curve.
Other changes, such as an exogenous change in the capital stock or in the price of the product would shift the curve.
What are some criticisms of marginal product theory?
Doesn’t actually reflect the decision making process of firms in reality.
Assumptions are not necessarily very realistic.
In the long run demand model, graph the results of a wage decrease.
Show the income and substitution effect from a change in wages, in the long run model.
What is the elasticity of substitution?
Percentage chang in the capital labour ratio from a change to the wage rent ratio.
If perfect compliments than = 0.
If perfect substituted than infinity.
How does the long run labour demand curve compare to the short run
It has a flatter slope, reflecting that extra investment in capital can minimize changes to MPL that result from extra workers.
Show how the implementation of an affirmative action policy would affect the hiring decisions of a racist firm.
When is labour demand more elastic?
When:
- Elasticity of substitution is greater.
- Elasticity of demand for firm output is greater.
- Labours share in total production costs is greater.
- Supply elasticity for other factors of production is greater.
What are the implications of a minimum wage in one labour sector (covered) for an uncovered sector?
As there is arbitrage over wages, workers will leave the uncovered sector until the wages are equal.
