3. Labour Demand

Question 1

How is the initial production function a very restricted view?

Answer 1

It doesn’t include:
•many factors
•many outputs 
•different types of workers 
•different wages
•different quality of product

Question 2

Profit max equation

Answer 2

Pi= pq- wE- rK

Question 3

Short run definition

Answer 3

A period during which the firm can’t change K and there are a fixed number of firms

Question 4

MPE

Answer 4

Marginal product of labour

Question 5

VMPE

Answer 5

Value marginal product of labour (in monetary terms)

Question 6

VAPE

Answer 6

Value average product of labour

Question 7

Where does the firm employ labour?

Answer 7

Up to the point where VMPE=W and where VMPE is declining

Question 8

Short run elasticity of demand equation

Answer 8

dSR= (change in E)/(change in W) x W/E

Question 9

When is short run elasticity of labour demand inelastic and elastic?

Answer 9

• inelastic if |dSR|<1

* elastic if |dSR|>1

Question 10

Long run

Answer 10

Where firms can vary capital and employment. It is also possible that other firms can enter the market

Question 11

Isoquant properties

Answer 11

1. Downward sloping
2. Don’t intersect
3. Higher isoquants have higher q
4. Convex to the origin

Question 12

What is the slope of an isoquant?

Answer 12

(Change in K)/(Change in E) = -MPE/MPK

Question 13

What is the absolute value of an isoquant slope called?

Answer 13

The marginal technical rate of substitution

Question 14

Describe the MRS between E and K

Answer 14

They are diminishing since they are convex

Question 15

Equation of an isocost

Answer 15

K= c/r- WE/r

Question 16

What is true with an interior solution for cost minimisation?

Answer 16

Slope of isoquant (MPE/MPK)= slope of isocost (W/r)

Question 17

Does cost minimisation imply profit maximisation?

Answer 17

No, profit max requires W= p x MPE and r= p x MPK

Question 18

What is the impact of wage reduction?

Answer 18

• the scale effect causes the firm to use more labour and capital
• the substitution effect causes the firm to use more labour

Question 19

What is the impact of increasing wages?

Answer 19

• reduces labour

* can increase or decrease capital depending on the scale and substitution effect

Question 20

Why is the elasticity of demand hard to estimate?

Answer 20

•we can’t just look at the relationship between wages and employment because they themselves are outcomes of supply and demand- there are many other unobserved variables

Question 21

What does the magnitude of the substitution depend on?

Answer 21

The curvature of the isoquant

Question 22

Equation for elasticity of substitution

Answer 22

Elasticity = ((%change in k)/L) /((%change in W)/r)

Question 23

When is the elasticity of substitution positive?

Answer 23

Always because if w/r increase then K/L can’t fall

Question 24

Values of elasticity of substitution for perfect substitutes and perfect compliments

Answer 24

• perfect substitutes ó= infinity

* perfect compliments ó=0

Question 25

Labour demand is more elastic the greater…

Answer 25

• the elasticity of substitution
• the elasticity of demand for output
• labours share in total costs
• the supply elasticity of other factors of production

Question 26

Predictions about unions

Answer 26

• they may resist new technology which allows greater substitution of capital and labour
• may resist competition in product markets
• unions that organise small groups of particular occupation may be more successful
• unions may attempt to increase the price of other inputs

Question 27

How much of each input will a profit maximising firm use?

Answer 27

They will use each input up to the point where VMPi is equal to the price of that input

Question 28

Equation for cross elasticity of demand

Answer 28

% change in xi/ % change in wj

Question 29

Capital skill complementary hypothesis

Answer 29

• unskilled Labour and capital are substitutes

* skilled labour and capital are compliments

Question 30

Relationship between technology and labour

Answer 30

• long term evidence is that technology doesn’t reduce employment
• technology substitutes and compliments labour
• there are short term effects with winners and losers