Question 1. Use the marginal productivity theory of labor demand to predict the impact on the firm's employment level of the following events. Explain why the change in employment occurs and show it in a graph.
a) A decrease in the wage rate.
b) An increase in the demand for the firm's product
c) A lower tariff on imported goods
d) The conversion of the firm from a perfectly competitive firm to a monopolistically competitive firm
Question 2. State whether items a - d are true, false, or uncertain, and briefly explain why.
a) Diminishing marginal productivity of labor begins when the total product curve reaches a peak and then declines
b) If the labor demand curve is inelastic, lowering the wage rate will result in a decrease in the firm's wage bill
c) Since skilled workers are paid a higher wage than the less skilled, the firm has an incentive to lay off the skilled workers first during a recession
d) Whether or not a college student had been elected to office in the student government is a useful screening device for employers.