Assignment

1. LABOR DEMAND, PART 1

Presuming a 40-hour work week, consider the following information.

Units of Units of A. If the firm can sell its output at a price of $5 per unit, then how much labor will be hired at a weekly wage rate of $500? Show why this quantity of labor is best for the firm.

Labor            Output
0                     0
1                   500
2                   750
3                   900
4                   1,000
5                   1,050
6                   1,075
7                   1,085
8                   1,085

B. Suppose a minimum hourly wage of $15 is imposed. Now how much labor will be hired? Show why this quantity of labor is best for the firm. In this case is labor demand elastic or inelastic? Demonstrate and explain. (8 points)

C. The American Federation of Bricklayers union (AFB) faces a situation in which a wage of $16 per hour results in a demand for 20,000 worker-hours, while a wage of $20 per hour results in a demand for 10,000 worker-hours. Elsewhere the International Brotherhood of Bricklayers union (IBB) faces a situation in which an $18 hourly wage results in a demand for 30,000 worker-hours, whereas a $15 hourly wage results in a demand for 33,000 worker-hours.

1. Which union faces the more inelastic labor demand, the AFB or IBB? Demonstrate and explain.

2. Which union will be more successful in increasing the aggregate income of its membership, the IBB or AFB? Demonstrate and explain.

2. LABOR FRICTIONS, PART 1.

The Tasty Baking Company is famous for its Butterscotch Krimpets and KoffeeKakes. In order to expand its workforce, suppose Tasty Baking must entice labor by offering a higher wage. Specifically, consider the following information.

Units of Offered Value of A. To maximize profits, what wage will Taste Baking pay? How much labor will be hired? Demonstrate and explain.

Labor      Wage ($)      MPL
5               6
6               8               50
7               10             38
8               12             26
9               14             14
10             16             2
11             18             1

B. How would the Tasty Baking Company react - if at all - if a minimum wage of $14 were imposed? Demonstrate and explain.

3. LABOR DEMAND, PART II

A. What exactly is the interpretation of the term w/MPL? Explain.

B. What exactly is the interpretation of the term r/MPK? Explain.

C. In choosing its optimal combination of labor and capital, explain why a company must satisfy the condition w/MPL = r/MPK.

D. Suppose "progress" makes capital less expensive. Is it necessarily the case that a profit-seeking company will now use more capital? Demonstrate and explain.

E. Given your analysis in Part D above, is it necessarily the case that this profit-seeking company will now use less labor? Demonstrate and explain.

F. Now explain why the following statement is true/false/uncertain. "If capital and labor are substitutes in production, then capital and labor must be gross substitutes."

4. LABOR FRICTIONS, PART II.

According to research published in 2000 in the International Labour Review (by P. Auer and S. Cazes, pp. 379-408), "Job stability as measured by employment tenure seems to be generally stable..." But that was 16 years ago.

According to the BLS data, in January 2004 nearly 51% of all working persons aged 55-59 had worked at their firm for at least ten years. In January 2014, more than 53% of all working persons in the age group had worked at their firm for at least ten years. For this age group job tenure has not become less stable.

Under what condition(s) would a particular employer want to develop a long-term relationship with a particular employee? What keeps that long-term association intact? In your answer you must use a suitable economic model, including the presentation and interpretation of an appropriate graph.