-1\"..- . Problem Two Suppose that a firm's production function is Q = v'K * N where K is capital and N is units of labour in thousands. Currently, K = 1 and r = $5 per unit. The market labour supply is given by W = 4N5. Assume that the output is sold in a perfectly competitive market at a per-unit price of $2. (Round up your answers to two decimals.) Assume that the rm's wage is determined in a perfectly competitive labour market. a) Write down the marginal product of labour and derive the short run labour demand. b) Calculate the equilibrium wage and employment levels. c) Suppose that the wage rate decreases. Without any calculation, briey explain the role of substitution and scale effects in the rm's adjustment of labour. Now suppose that the rm is a monopsonist. Firm's marginal cost of labour is MC = 8N. d) Derive the equation for the value of the marginal product of labour. Calculate the resulting wage and employment levels. e) Calculate the size of the vacancy gap. f) Briey compare possible effects of a minimum wage on employment in labour markets characterized by both perfect competition and monoposony. Using a relevant graph, cleanly and clearly illustrate that a minimum wage may have opposite outcomes in these two labour markets. 1 The contents of this file are only available to the students of this class and can be neither shared with other students nor posted on any website. Problem Three Suppose the earnings structure for citizens and immigrants are respectively, E,- = as + lick} and 55 = [If + MK 1' where E is earnings andX is productivity level. Subscripts c and i refer to citizens and immigrants, respectively. Assume that the citizen's earnings structure is the base. (Note, it is common to assume that the dominant group is the base group so unless you are told otherwise, it is best to keep the dominant group as the base. Dominant group is the one that it is believed there is no discrimination against them.) i. Calculate the average earnings difference between the two groups. ii. Use the Oaxaca decomposition and determine what portion of the average earnings difference is due to productivity differences and what portion is due to possible discrimination