(Substitution and Income Effects) Suppose that the substitution effect of an increase in the wage rate exactly offsets the income effect as the hourly wage increases from $12 to $13. What would the supply of labor curve look like over this range of wages? Why?
(Firm's Demand for a Resource) Use the following
data to answer the questions below. Assume a perfectly
competitive product market.
(Craft Unions) Both industrial unions and craft unions attempt to raise their members' wages, but each goes about it differently. Explain the difference in approaches and describe the impact these differences have on excess quantity of labor supplied.
Units of Labor Units of Output
0 0
1 7
2 13
3 18
4 22
5 25
a. Calculate the marginal revenue product for each additional unit of labor if output sells for $3 per unit.
b. Draw the demand curve for labor based on the above data and the $3-per-unit product price.
c. If the wage rate is $15 per hour, how much labor will be hired?
d. Using your answer to part (c), compare the firm's total revenue to the total amount paid for labor. Who gets the difference?
e. What would happen to your answers to parts (b) and (c) if the price of output increased to $5 per unit, other things constant?