## Answered: - Question 1:Consider a firm that exists for one period. The value

Question 1:Consider a firm that exists for one period. The value of labour?s marginal product is given byVMPN ? MRPN ? P ? MPN , where P is the price of output, and MPN ? 10 ? 0.5N . The wage rateis \$10.(a) Assume that there are no hiring or training costs. If the firm expects that the price ofoutput to be \$10, what is the optimal level of employment N0 ? If the firm hires theseworkers, but then finds out that the price of output is \$5, what will the firm do?(b) Assume now that there are hiring and training costs of \$20 per worker. If the firm expectsthe price of output to be \$10, what is the optimal level of employment? How does thiscompare to your answer in part (a)? If the firm hires these workers, but then find out thatthe price of output is \$5, what will the firm do? What if the price is \$2? Explain.

Econ: 41-350 Labour Theory,

Assignment 3

Due: March 31, 2016

Question 1:

Consider a firm that exists for one period. The value of labour?s marginal product is given by

VMPN MRPN P MPN , where P is the price of output, and MPN 10 0.5 N . The wage rate

is \$10.

(a) Assume that there are no hiring or training costs. If the firm expects that the price of

output to be \$10, what is the optimal level of employment N 0 ? If the firm hires these

workers, but then finds out that the price of output is \$5, what will the firm do?

(b) Assume now that there are hiring and training costs of \$20 per worker. If the firm expects

the price of output to be \$10, what is the optimal level of employment? How does this

compare to your answer in part (a)? If the firm hires these workers, but then find out that

the price of output is \$5, what will the firm do? What if the price is \$2? Explain.

Question 2:

(a) Consider a firm that sells its output in a perfectly competitive product market, and hires

labor in a perfectly competitive labor market. The value of marginal product of labor (in

dollars) is given by VMPN MRPN 30 2 N . Assuming that the firm is a profit

maximizer and can hire labour at \$W per unit, derive its labor demand function.

(b) Given that there are ten identical firms (like the firm described in part (a)) in the industry,

the market labor demand is given by N D 150 5W . The supply function of labor to this

market is given by N S 10W . Solve for the equilibrium wage and level of employment

in this market.

(c)

In an effort to stimulate employment in this industry, the government offers firms a

subsidy of \$3 per unit of labor hired. Analyse the effect of the subsidy on the level of

employment and the workers? wages.

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