problem1. Agree or Disagree. describe your position with one or two sentences. Use a diagram if necessary.

(a): In the short-run, a firm facing competitive input and output markets should shut down if the market wage is greater than the MRPN. Assume that labour is the only variable input.

(b): A firm’s response to a wage change will be greater in the long-run than in the short-run.

(c): Inelastic demand curves are steeper than elastic ones.

(d): Scale and substitution effects always go in the opposite direction.

(e): When a firm’s output market is very price-elastic, derived demand for labour will be very price-inelastic.

(f): Labour’s share in the total costs of a ?rm has no impact on the elasticity of demand.

(g): Canada will not gain from trade because Canada is already on its PPF.

problem2. Suppose there are a large number of identical Canadian firms producing hockey pucks according to the production function: Q = 3. L ^2/3 where Q is the number of pucks produced and L is the number of hours of labour.
Therefore, the marginal product of labour is given by

MPN = 2. 1/L^1/3 

The price of hockey pucks is p.

(a) Solve for the demand function assuming p = 10

(b) find out the labour demand, output, and profits for wages equal to the following (fill in table) and still assuming p = 10. How do profits vary along the demand curve?1

Table 1: Table for problem 2, part b

Wage ($) Labour   Output   profits
1
2
5
10

(c) Suppose the wage of Canadian puck workers is w = 5. But now a Swedish firm can make pucks for less by having consumers assemble them at home. The Swedish firm competes with the Canadian firms in a world market for pucks. Suppose that now the world price falls from p₀ = 10 to p₁ = 8. If nothing else changes, what happens to the amount of labour Canadian firms wish to use?

(d) Don Cherry, still bitter about Swedish gold at the 2006 Olympic Games, does not want to be outdone by the Swedes again. He lobbies the Canadian government to subsidize the research and development of puck manufacturing. The production process is now:

Q = 6   L^2/3

And the marginal product of labour is

MPN = 4.  1/L1^1/3

Ignore the shutdown decision. Show that, at any given p, Canadian firms producing with (3) instead of (1) will now demand more labour when w = 5.