Wk7 - Labor Market & Wage Determination

Question 1

What is VMP

Answer 1

Value of Marginal Product.
VMP = P*MP
The value, at the current market price, of the extra output produced, by an additional unit of input

Question 2

What is the hiring rule for a firm in a perfectly competitive market

Answer 2

VMP = Wage

Must be = for firm to be in equilibrium

Question 3

What inputs vary in the long run

Answer 3

All FoP can vary in the long run

Question 4

Rules for LR Labour Demand

Answer 4

• All inputs may vary
• D for L more elastic when D for product Elastic
• LD more elastic when inputs can be substituted

VIEW DIAGRAM

Question 5

Key points for Labour Demand in Imperfect Competition

Answer 5

Will hire the Q where W=MRP

-MRP decreases as QL^
- Diminishing Marginal product of labour
- Decreasing MR

MRP = MR*MP = W

Question 6

What can you use to model the decision to supply labour

Answer 6

Indifference curve analysis
Assume 7 days of 24hrs available
Assume Labour is homogenous and waged

Question 7

Substitution effect vs Income Effect

Answer 7

Substitution effect:
^W = ^LS (substitute leisure for work) Opportunity cost of labour^

Income Effect:
^W = decrease LS

Question 8

What is 1st degree price discrimination

Answer 8

Charging each customer the maximum price they are willing to pay.

Question 9

What is 2nd degree price discrimination

Answer 9

Pricing based on the quantity purchased or the product version.

Question 10

What is 3rd degree price discrimination

Answer 10

Charging different prices to different consumer groups based on identifiable characteristics