Assignment #5 - Questions

Question 1 - 35%

The Apple Pie Factory produces apple pies. The firm sells its product and hires its workers in competitive markets. The market price (p) for a pie is $4 and the wage rate (w) is $10 per hour. The table below shows the total hourly production (Q) for varying amounts of workers (L). (Remember that for a price-taking firm, p = MR.)

L

Q

w

p

MP

MRP

4

40

5

48

6

55

7

61

8

66

9

70

10

73

11

75

12

76

a.Fill in the p and w columns. (12 marks total - 6marks each column)

b.Calculate the MP and the MRP for each amount of labour employed. (12 marks total - 6marks each column)

c.What is the logic of the firm's profit-maximizing condition for hiring labour? (3 marks)

d.How many workers should this profit-maximizing firm hire? Why? (8 marks)

Question 2 - 35%

Refer back to the production schedule for the Apple Pie Factory in Question 1.

a.On a diagram, with MRP on the vertical axis and the number of workers on the horizontal axis, plot the MRP curve. (Make sure that the MRP is shown at the mid-points of the number of workers to show that it is associated with the change in the factor input.). (23 marks)

b.If the wage is $10 per hour, how many workers will be hired? Why? (4 marks)

c.If the wage is $5 per hour, how many workers will be hired? Why? (4 marks)

d.If the wage is $20 per hour, how many workers will be hired? Why? (4 marks)

Question 3 - 30%

Economists argue that temporary factor-price differentials tend to be eroded by factor mobility. Consider the two markets for sheet-iron workers and steel-pipe workers in the same region. Suppose both markets are competitive. We begin in a situation in which both sheet-iron workers and steel-pipe workers earn $20 per hour. Assume that workers can switch easily between the two jobs.

a.Draw 2 separate diagrams showing the supply and demand for labour in each of the two markets - sheet-iron market and steep-pipe market. (8 marks total - 4 marks each)

b.Now suppose there is a sharp increase in the demand for steel pipes. Explain in words and also illustrate on your graph in part (a) what happens in the market for steel-pipe workers. (8 marks)

c.If the employment of steel-pipe workers increased in part (b), explain where the extra workers came from. (4 marks)

d.What effect does the event in part (b) have on the market for sheet-iron workers? Explain your answer in words and illustrate on your graph drawn in part (a).(8 marks)

e.What is the long-run effect of the shock on the relative wages in the two types of jobs? (2 marks)