Topic 10: Labour Supply & Demand

Question 1

Show the profic maximising conditions for firms.

Answer 1

W = P_YMPL = VMPL

R = P_YMPK = VMPL

or

w = MPL

r = MPK

Question 2

Give the Cobb-Douglass marginal products

Answer 2

MP_L = (1-α)A(K / L)^α = (1-α) Y / L

MP_K= (α)A(L / K)^1-α = α Y / K

Question 3

What do the exponents in the Cobb-Douglas PF show us?

Answer 3

The contribution of labour & capital to production, specifically the share of the cost of one factor in the total cost.

In most industrialized economies, α _~= .3

Question 4

Show the labour demand curve, with shifters labelled.

Answer 4

Question 5

In the Rod’s undergraduate macro model (UMM), what is presumed about labour supply?

Answer 5

That it is perfectly inelastic.

Question 6

If consumption & leisure are perfect complements, show the effects on the labour supply curve

Answer 6

As the wage increases, Leisure time increases, so the labour supply curve is backward bending.

Question 7

Derive Marshallian demand curves for Consumption and Leisure, when utility is cobb-douglass.

Answer 7

Maximising C^α T_L^(1-α) subject to C + wT_L = wT

You get:

C = αwT

T_L=(1-α)T

ie, T_L and then hence T_W is indepenent of w

Question 8

What does the literature say on labour supply curves?

Answer 8

The issue is not settled, some indicate perfectly inelastic, some indicate slight backward or forward bending. The assumption of perfect elasticity then is not outrageous.

Question 9

What are the primary determinates of labour market equilibrium?

How are these affects by macroeconomic policy in this unit?

Answer 9

• Capital stock
• Technology
• Consumption-lesiure preferences

Not at all. These factors might cause shocks, but monetary & fiscal policy don’t affect them in the time frame we consider.

Question 10

What is Okuns law?

Answer 10

That output is determined by the labour market - an increase in labour usage nececcarily means an increase in GDP. In Au the ratio is 1:2.8, 1:2 for the US.