Mt_445_Managerial_Economics,_Unit_6_Project

Ury Salinas Unit 1 Project MT445 Managerial Economics Chapter 11 Question 9 (opportunity Cost and Economic Rent) Define economic rent. Economic rent can be defined as the payment which goes beyond that of the minimum wage which is paid towards labor in order to sustain the labor supply. A. What are the equilibrium wage rate and employment level' What is the economic rent' Equilibrium wage rate is point b on the graph and employment level is point f on the graph. Economic rent is the area which is bordered by points b, l and v. B. Next assume that the price of a substitute resource increases, other things constant. What happens to demand for labor' What are the new equilibrium wage rate and employment level' What happens to economic rent' If the price of substitute resources increases, then the demand for labor increases and the demnd curve will go upward to D3. The new equilibrium wage rate is at point h, and the employment level is represented by point g. The economic rent would increase to the area bordered by points by points a, h and v. C. Suppose instead that demand for the final product drops, other things constant. Using labor demand curve D1 as your setting point, what happens to the demand for labor' What are the new equilibrium wage rate and employment level' Does the amount of economic rent change' If the demand for final product should drop, the demand for labor would go down as well. The market demand curve would shift down to D2. The new equilibrium wage rate would be at point c and the employment level at point e. Economic rent will decrease to the area bordered by point c, t and v. Question 10 (Firm’s Demand for a Resource) Use the following data (p.269) to answer the questions below. Assume a perfectly competitive labor market. A. Calculate the marginal revenue product for each additional unit of labor if output sells for $3 per unit. L MMP MRP 1 7 21 2 6 18 3 5 15 4 4 12 5 3 9 B. Draw the demand curve for labor based on the above data and the $3-per-unit product price. I don’t know how to draw the demand curve on this assignment, but I know you are supposed to plot the points the MRP above as the y-axis and the labor as the x-axis. The line that passes through the points will be downward sloping from left to right. C. If the wage rate is $15 per hour, how much labor will be hired' If I draw a horizontal line at the $15 wage rate on the y-axis, and I look to where the line crosses the MRP (y-axis), the value of labor units (x-axis) will be the amount of labor hired. In this case it is 3 units. D. Using your answer to part C., compare the firm’s total revenue to the total amount paid for labor. Who gets the difference' Total revenue = 18 x $3 = $54 Total amount paid for labor = 3 x $15 = $45 The difference is $9, the firm will get it. E. What would happen to your answers to parts B. and C. if the price of output increased to $5 per unit, other things constant' For part B., the following amounts would be input in the x and y axis. L MRP 1 35 2 30 3 25 4 20 5 15 For part C., the labor hired would be 5 units. Chapter 12 Question 4 ( Substitution and income effects) Suppose that the substitution effect of an increase in the wage rate exactly offsets the income effect as the hourly wage increases from $12 to $13. What would the supply of labor curve look like over this range of wages' Why' The supply of labor curve would look vertical over this range of wages. This is due to the fact that the quantity of labor supply would not change since the substitution effect exactly offsets the income effect. Question 12 (Craft Unions) Both industrial unions and craft unions attempt to raise their members' wages, but each goes about it differently. Explain the difference in approaches and describe the impact these differences have on excess quantity of labor supplied. Industrial unions attempt to raise their member’s wages by negotiation. They want to negotiate wage that is higher than market level for each class of labor throughout an industry. Conversely, craft unions attempt to raise their member’s wages by reducing the supply of labor through limitation of membership, and by forcing employers to hire only union members. Both attempts may lead to lower employment levels, and a decrease in excess quantity of labor supplied. The approach of the Industrial unions may lead to a higher excess quantity of labor supplied as compared to that of the craft union. This is because a higher minimum wage means an increase in market labor supply. Craft unions may also cause an increase in employment and mitigate excess labor if it increases its own demand for union labor.