Labour Demand

Question 1

Y = zF(K,N)

What is z?

Answer 1

Level of technology or TFP

Question 2

What is a static production function model?

Answer 2

Single period economy –> K is constant

Question 3

Name the assumption about production function

F(0, N) = F(K, 0) = 0

Answer 3

Inputs are necessary

Question 4

Name the assumption about production function

F(pi K, pi N) = pi F(K, N), where pi >= 0

Answer 4

Constant returns to scale

• Constant returns to scale means that a large firm replicates how a small firm produces many times over.
• With CRS, an economy with a large firm is equivalent to an economy with many small firms in production.
• This is a necessary condition to aggregate all firms in an economy to a representative firm.

Question 5

Name the assumption about production function

F_KN > 0
F_NK > 0

Answer 5

Marginal productivity of each input increases in the other

Marginal productivities are diminishing in their respective input. This means as K increases, MPK decreases, holding N constant. This results in N becoming a limiting factor. Now N is allowed to change. As N increases, MPK increases, i.e., the output from increasing K by another unit increases.

Question 6

Assumptions about the production function

Inputs are necessary. Numerically, ______

Answer 6

F(K, 0) = F(0, N) = 0

Question 7

Assumptions about the production function

Constant returns to scale. Numerically, ______

Answer 7

F(pi K, pi N) = pi F(K, N) where pi >= 0

Question 8

Assumptions about the production function

Marginal productivities are positive. Numerically, ______

Answer 8

MPK > 0

MPN > 0

Question 9

Assumptions about the production function

Marginal productivities are decreasing. Numerically, ______

Answer 9

F_KK < 0

F_NN < 0

Question 10

Assumptions about the production function

Marginal productivity of each input is increasing in the other. Numerically, ______

Answer 10

F_KN > 0

F_NK > 0

Question 11

What happens to Y vs N^d graph when z increases?

Answer 11

Becomes steeper

Question 12

What happens to MPN vs N^d graph when TFP increases?

Answer 12

Shifts to the right

Question 13

What happens to Y vs N^d graph when z decreases?

Answer 13

Becomes flatter

Question 14

What happens to MPN vs N^d graph when TFP decreases?

Answer 14

Shifts to the left

Question 15

_______ firm rents capital at rate r and hires labour at wage w

Answer 15

competitive

Question 16

pi = ___________

Answer 16

zF(K, N) - (r + delta)K - wN

Question 17

FOC

Answer 17

zF_K(K, N) = r

zF_N(K, N) = w

Question 18

The w vs N^d graph of a profit-maximizing firm is _____-sloping

Answer 18

downward

w = MPN. Therefore, w vs N^d graph = MPN vs N^d graph which we know to be diminishing and so downward-sloping
Labour demand curve = MPN curve

Question 19

______ satisfies all the assumptions about production function

Answer 19

Cobb-Douglas function

Question 20

Labour demand function can be derived by rearranging the _______

Answer 20

FOC

zF_N(K, N) = w