Name last 4 PSU ID Section 001 MWF 1 25 pm 2 15 pm 112 Kern Building Section 002 MWF 8 00 8 50 am 104 Keller Building Fall 2012 Chuderewicz YOU MUST USE THIS AS A TEMPLATE THAT IS MAKE SPACE FOR YOUR ANSWERS BY HITTING ENTER you certainly don t need to type this assignment LEAVE THE QUESTIONS AS THEY ARE AND PLEASE STAPLE NOTEBOOK PAPER OR ANY PAPER STAPLED TO THE BACK IS NOT ACCEPTABLE ALSO PLEASE PUT THE FIRST TWO LETTERS OF YOUR LAST NAME IN THE TOP RIGHT HAND CORNER OF THIS PAGE SO THAT WE CAN ALPHABETIZE THESE EASILY THANKS IN ADVANCE Economics 304 Homework 2 The market for labor Chapter 3 Due Wednesday 9 19 at the beginning of class no late papers accepted Instructions Please show all work or points will be taken off Good luck 1 50 points total 5 points for each of 8 parts plus 10 for diagram The production technology of a firm is given in the table below Number of workers 0 1 2 3 4 5 6 7 Units of output 0 48 84 108 128 143 155 165 MPN a Define the marginal product of labor explain how it relates to the production function with N on horizontal axis and Y on vertical axis and find the marginal product of labor MPN for each level of employment fill in the third column of table b Assume that the price of a unit of output is 10 Calculate the number of workers that will be hired if the nominal wage rate 190 Calculate the number of workers the firm will hire if the nominal wage is 140 Calculate the number of workers that the firm will hire if the nominal wage is 110 Draw a production function and real labor demand curve vertically with the PF on top like we do in class labeling point A as the wage price combo of 190 10 point B as the 140 10 combo and point C as the 110 10 wage price combo A correct and completely labeled diagram is worth 10 points c What could cause wages to fall like this name and support 2 reasons d Why exactly does the firm s behavior change when the nominal wage fall like it did all else constant In particular explain exactly why the firm changes their labor input when nominal wages fall from 190 to 140 all else constant point A to B Make sure you refer to the profit maximizing condition when answering this question e Let s return back to the initial conditions in the beginning of part b with prices at 10 and nominal wages at 190 point A Now we let prices change and fall from 10 to 9 What could cause such a change name at least 2 reasons f Locate this new point W 190 P 9 as point D on your two diagrams Similar to part d why exactly does the firm s behavior change when prices fall from 10 to 9 all else constant Make sure you refer to the profit maximizing condition when answering this question just as you did in part d above g Let s return to point A the initial conditions where the nominal wage rate 190 and the price of a unit of output 10 Assume that a new technology increases the number of units of output that each worker can produce by 50 Calculate the number of workers that the firm will hire and the number of units of output that will be produced fill in the table below Number of workers 0 1 2 3 4 5 6 7 Units of output 0 MPN Now locate this point as point E on both diagrams h Comment on the macroeconomic implications of this technology shock as in assume many firms in the economy experience similar technology shocks on prices inflation employment the unemployment rate economic growth real wages assume workers can bargain for higher nominal wages the stock market via the profit implications and the budgetary implications for the Government make sure you refer to each economic variable 2 2 50 points total 5 for each of 8 parts and 10 for diagram For the new Real World State College season MTV is looking for Penn State students Students are asked to produce drama as a part of their contract The marginal productivity of labor curve is given by MPN 135 2N The supply of Penn State students is given by Ns 30 2 w where w is the real wage per hour 2a Compute equilibrium values for the real wage and employment Illustrate this equilibrium on a labor market diagram in real wage space Please be sure you label the diagram completely and label this initial equilibrium point as point A A correct and completely labeled diagram is worth 10 points 2b Now the Penn State student union successfully forces MTV to pay each student a minimum happy valley living real wage equal to 25 00 per hour That is 25 00 per hour is the effective real minimum wage What is the level of employment now 2c Compare the number of people willing to work vs the number of people MTV is willing to hire under this living wage program What do we call the difference in these values when the quantity of labor supplied exceeds the quantity of labor demanded Add these two points to your diagram and label these points as point s B Make sure you identify the unemployed in your diagram 2d The intuition part 1 Why exactly did we move along the labor demand curve In particular why does the profit maximizing level of labor input change with the living wage program make sure you write out the profit maximizing condition and explain why it has changed i e why does MTV rationally change their quantity demanded of labor the way they did 2e The intuition part 2 We also experience a movement along the labor supply curve Explain the intuition here as in why are more people are willing to work using and explaining the substitution and income effects associated with labor supply Which effect dominates and what has happened to the price of leisure given the living wage program 2f Suppose now that a new course offered by the Drama Department increases the productivity of each student via an increase in human capital so that the NEW marginal product of labor equals MPN 185 2N Find the equilibrium market clearing wage and level of employment Please show all work below Please depict this new development on your original diagram labeling this new equilibrium point as point C Be sure to label diagram completely 3 2g Compare the welfare of the workers under the two scenarios 1 the living wage program vs 2 no living wage program but the productivity shock as in part f In other words are workers better off in part b or are they better off in part f Be sure to explain 2h Compare the welfare of the firm the producer Is the firm better off in terms of profits in …