EC 350 Assignment 4

EC 350 Assignment 4

1. At a particular level of capital, a fast food restaurant has the following production

function for value meals per hour (expressed as a table):

Labor Total Product

0 0

1 6

2 16

3 24

4 30

5 34

6 36

7 36

8 34

(a) Calculate the Marginal Product for each level of labor.

(b) Assuming the rm is perfectly competitive and faces a price of $5 per meal,

calculate Total Revenue and Marginal Revenue Product at each level of output.

Graph the Labor Demand curve.

(c) Now, assume the rm is imperfectly competitive and faces a downward-sloping

demand curve:

Price = 7

Total Product

10

Calculate the unit price, Total Revenue, Marginal Revenue Product, and the

Value of Marginal Product at each labor input level. Graph the Labor Demand

curve. How does this compare with your previous graph?

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2. Job Training:

A clothing retail store is considering putting its workers through a training program.

Untrained workers currently contribute $100 per day, trained workers contribute $150

per day, and workers in training contribute -$20 per day (training them costs the rm

money). Training takes one week (ve working days per week), and expects workers

to stay for an average of 6 weeks after being trained. Employers choose to train their

employees if the total benets to the company over time are equal or greater than the

total costs over time (ignore discounting).

(a) First, assume this is general training: working point of sale systems, interacting

with customers, etc. Also, assume there is a competitive labor market. How much

would employees be paid/pay in each period? (Pre-training, during training, and

after training).

(b) Now assume that there is a minimum wage of $50 per day. Again assuming a

perfectly competitive market, would the store choose to train its workers?

(c) Next, assume the labor market is not perfectly competitive, and that rms can

pay their employees $10 less per day than they bring in while retaining their

employees. Now, given the same minimum wage and training program, do they

choose to train their employees?

(d) Finally, what if the training is specic training - learning about the specic clothes

the store sells and all the specic procedures of that store? What wages would

the employees make in each period? Would the store choose to train them?

3. In problem 1, you should have calculated the following labor demand schedule given a

perfectly competitive market:

Units of Labor Wage

2 50

3 40

4 30

5 20

6 10

7 0

(a) Calculate the total wage bill at all points.

(b) Calculate the elasticity of labor demand using the midpoint formula" between 2

and 3 units of labor, and 5 and 6 units of labor. Do your results align with the

total wage bill rule of thumb?

4. Long-run Labor Demand

(a) What is the dierence between the short-run and long-run in terms of labor de-

mand? Is long-run labor demand more or less elastic than short-run labor de-

mand?

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(b) In problem 1, you saw the output eect of labor demand - lower wages led to more

production, and thus more quantity of labor demanded. Discuss what actions this

fast food restaurant might take in response to lower wages, thinking about the

substitution eect.

(c) State whether elasticity of long-run labor demand would increase or decrease (in

absolute value) from the following changes, and why:

i. The restaurant spends a larger portion of its costs on capital.

ii. The restaurant faces a downward-sloping demand curve (like in problem 1,

part c).

iii. Someone invents a computer that can replace cashiers

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