David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

Review questions
In a graph with the wage on the vertical axis and labour on the horizontal axis, show the labour
market equilibrium. Suppose that the labour demand comes from many identical perfectly
competitive firms. If the price of the output produced by those firms is reduced by half because of
a recession, explain what happens to the labour demand. How will the equilibrium of the labour
market be affected?
7 A firm is producing chocolate bars using only labour. The production function is Q = 20L - 0.5L 2 ,
where L denotes labour. The firm is selling its chocolate bars in a competitive market and the price
of a chocolate bar is £1. The firm hires workers in a competitive market. The wage paid to a worker
is w. Write down the profit of the firm and find the labour demand function (L as a function of w)
of the firm.
8 Suppose that the labour supply of workers is L 5 = w - 5. Use the labour demand you found in
Question 7 to derive the labour market equilibrium.
9 Suppose that the firm in Question 7 is now a monopsony in the labour market and faces the labour
supply outlined in Question 8. This means that the wage that the monopsony must pay is w = L + 5.
Find the labour demand that maximizes the profits of the monopsony. What about the wage?
Compare your results with the ones you found in Question 8.
10 In the Appendix to this chapter the concept of isoquant is introduced. Suppose that the long-run
production function of a firm is Q = KL, where K denotes capital. In a graph with Kon the vertical
axis and L on the horizontal axis, plot the isoquants associated with Q = 10 and Q = 20. What is the
slope of a given isoquant?
11 'A minimum wage set sufficiently high will always reduce jobs, but whether a modest level of
minimum wage reduces or increases employment depends entirely on the degree of competition in
the labour market: Explain.
1 2 Could a university degree increase your subsequent job prospects even if the subject that you
studied at university had no relevance whatsoever for your subsequent career?
1 3 Essay question In the past 50 years, there has been a dramatic increase in female participation in
the labour force. Three possible explanations are: (a) a change in social attitudes to women working,
(b) technological advances that make it easier to accomplish household chores (shopping, cleaning,
etc.) without women themselves having to remain at home full time, and (c) the possibility that
material goods are a luxury and that people wish to buy disproportionately more of them as living
standards rise. What evidence would you gather in order to test these different hypotheses?
For solutions to these questions contact your lecturer.
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