Labor Market

Question 1

Demand curve = firm POV

Answer 1

How much labor firms are willing to buy at each wage

Question 2

Marginal Revenue Product

Answer 2

Revenue increase through purchase of additional unit of labor

• the firm maximises profit by purchasing labor until MRP is equal to market wage

Question 3

Supply curve = worker POV

Answer 3

how much labor workers or households are willing to provide at each wage

Question 4

Backwards bending labor supply curve due to

Answer 4

Substitution effect: as wage rises, households more likely to choose labor market,

then eventually as wage rises, households less likely to spend more time in labor market

Question 5

Equilibrium and inefficiencies in labor market

Answer 5

Income tax: workers pay tax on income and affects amount of time they are willing to work

Minimum wage lower than mkt eq. => no impact
Minimum wage higher than mkt. eq => labor supplied will be higher than labor demanded -> unemployment

Discrimination in work place

Unions: by bargaining for higher wages, unions decrease demand for labor