Econ 360: Assignment 2 - UBC Blogs

Econ 360: Assignment 2November 13th, 2012Due November 22th: At the beginning of classRead each question in its entirely before beginning, then answer the question asclearly and concisely as possible. Make sure to answer all of the questions. You mayfind it helpful to outline the important points first, and then fill in the details. Diagramsmust be carefully labelled. Late assignments will not be accepted. You maywork and turn in assignments in groups. Names of group members and student IDsmust be on the submitted work (I will not allow you to add names after the assignmentis submitted). Groups can be no larger than four (4).Question 1 [5 points]Agree or Disagree. Explain your position with one or two sentences. Use a diagram ifnecessary. No points will be given without an explanation.1. [1 point] In the short-run, a firm facing competitive input and output marketsshould shut down if the market wage is greater than the MRP N . Assume thatlabour is the only variable input.2. [1 point] A firm’s response to a wage change will be greater in the long-run thanin the short-run.3. [1 point] Assume that labour is a normal input and consider a wage rate increase.Scale and substitution effects on labour demand always go in the oppositedirection.4. [1 point] When a firm’s output market is very price-elastic, derived demand forlabor will be very price-inelastic.5. [1 point] Labor’s share in the total costs of a firm have no impact on the elasticityof labour demand.1

5. [4 points] Instead of part (d), suppose that Arc’Teryx is not successful in lobbyingthe government. Show that using the original production function (given by(1)), a reduction in the wage could help offset some of the negative employmentimpact in part (c).Question 3 [20 points]1. [4 points] Consider a firm that sells its output in a perfectly competitive productmarket, and hires labour in a perfectly competitive labour market. The value ofthe marginal product of labour (in dollars) is given byV MP L = 30 − 2L.Assuming that the firm is a profit maximizer and can hire labour at $W per unit,derive its labour demand function.2. [4 points] Given that there are 10 identical firms (like the firm described in part(a)) in the industry, show that the market labour demand is given byL D = 150 − 5W.3. [4 points] The supply function of labour to this market is given byL S = 10W.Solve for the equilibrium wage and the level of employment in this market. Representthe equilibrium graphically and carefully label your diagram.4. [4 points] In an effort to stimulate employment in this industry, the governmentoffers firms a subsidy of $3 per unit of labour hired. Analzye the effects ofthe subsidy on the level of employment and the workers’ wages. Represent thissituation graphically and carefully label your diagram.5. [4 points] The government’s opposition parties accuse the government of cateringto “corporate welfare bums” with the wage subsidy. They suggest that themoney would be better spent by putting the money directly into the hands ofthe workers. They propose that the government should directly give workers anadditional $3 for each unit of labour worked. Compute the equilibrium wage andemployment level that would prevail under this policy. Evaluate the argumentput forward by the opposition parties by comparing workers’ employment andincome to the scheme in part (4). Support you argumentation with a carefullylabelled diagram.3