1. 1. Is the price elasticity of demand for gasoline more elastic over a shorter or a longer period of time? Explain.

The gasoline prices are more elastic over a longer period of time. People will respond more to the change in prices of gasoline over a longer time horizon. Gasoline has a more inelastic demand because it is a necessity (Hyclak, Johnes & Thornton, 2013). In the short-run, if the prices of gasoline increase, people will still use gasoline. However, in the long-run, people will switch to alternative energy sources or use public transport.

2. Is the price elasticity of supply, in general, more elastic over a shorter or a longer period of time? Explain.

The price elasticity of supply becomes more elastic over a longer period of time. Price elasticity of supply depends on its determinants and over time, firms will have time to allocate resources and adjust their production to suit the market trend (Hyclak, Johnes & Thornton, 2013). Similarly, new technology will adapt to the changes in price and this will create more efficiency.

3. 3. Why is the supply curve for labor usually upward sloping? Explain.

The supply curve of labor is upward sloping because an increase in wage rate will cause the quantity supplied of labor to increase. Besides, as wages rises, workers will enter into the industry because they are attracted by the higher rewards offered.

4. In the graph below, assume that the market demand curve for labor is initially D1. The market supply curve for labor is indicated with figure “S”. Wage rate is depicted on the other things held constant vertical axis (dollars per unit) ad employment level (quantity of labor) is depicted along the horizontal axis. Answer the following questions.

What are the initial equilibrium wage rate and employment level?

The initial equilibrium wage rate is point b and the employment level is point f. This is because the initial demand curve and supply curve for labor intersect at an equilibrium point l.

Other things held constant, assume that the price of a substitute resource decreases. What will happen to demand for labor? Will it increase or decrease?

What are the new equilibrium wage rate and employment level?

If the prices for substitutes decreases, the demand for labor will decrease, the market demand curve will shift down to D2. The new equilibrium wage rate is point c and employment level is point e.

Other things held constant, suppose that demand for the final product increases. Using labor demand curve D₁ as your starting point, what happens to the demand for labor? What are the new equilibrium wage rate and employment level?

If the demand for the final product increases, the demand for labor would increase and the market demand curve will shift upwards to D3. The new equilibrium wage rate is point a and the employment level is point g.

Assume non-union workers dominate this industry. How would the equilibrium wage compare to that earned in a similar industry with similarly skilled union workers? 

The equilibrium wage rate for non-unionized workers would be lower than those who are unionized. The skilled union workers will earn higher wages than the amount the non-union workers will earn. According to Cahuc, Carcillo, Zylberberg and McCuaig (2014), some of the things that unions negotiate for their workers include wages and benefits.

5. 5. Use the following data to answer the questions below. Assume a perfectly competitive product market.
6. Calculate the total revenue product and marginal revenue product at each level of labor input if output sells for $4 per unit.

1. If the wage rate is $15 per hour, how many units of labor will be hired?

The firm will obtain a maximum profit by hiring workers whose marginal revenue product exceeds the wage rate. If the firm’s wage rate is $15 per hour, it will need to hire four workers.

References

Cahuc, P., Carcillo, S., Zylberberg, A., & McCuaig, W. (2014). Labor economics. MIT press.

Hyclak, T., Johnes, G., & Thornton, R. J. (2013). Fundamentals of labor economics. Mason, Ohio: South-Western Cengage Learning.

 
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