Elasticity and labor market equilibrium


Assignment: Elasticity and Labor Market Equilibrium

In this Assignment, you will elaborate price elasticity of demand and supply in the short run and long run. You will evaluate factors that change equilibrium wage rate and employment level. Moreover, you will calculate total revenue product and marginal revenue product, and compare them with total cost and marginal cost in order to figure out optimal quantity of labor that should be hired to maximize profit.

Instructions: Answer all of the following questions. You are required to follow proper APA format. Read the Criteria section below for more information before you begin this Assignment.

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

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

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

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.

819_Demand curve.png

a. What are the initial equilibrium wage rate and employment level?

b. 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?

c. 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?

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

5. Use the following data to answer the questions below. Assume a perfectly competitive product market.

       Units of Labor                      Units of Output

                   0                                     0

                   1                                     8

                   2                                     12

                   3                                     17

                   4                                     21

                   5                                     23

a. Calculate the total revenue product and marginal revenue product at each level of labor input if output sells for $4 per unit.

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

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Microeconomics: Elasticity and labor market equilibrium
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