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##### Economics 304 Homework #2

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Question;Instructions: Please show;all work or points will be taken off. Good luck!;1. (55 points total;? 5 points for each of 7 parts - a. through g., 10 points for part h. and the;diagram plus 10 for diagram)The production;technology of a firm is given in the table below.;Number;of workers;Units of output;MPN;0;0;1;48;2;88;3;118;4;144;5;166;6;184;7;196;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 = $290. Calculate the number of workers the firm will hire if;the nominal wage is $250. Calculate the number of workers that the firm will;hire if the nominal wage is $200.;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 $290 / $10;point B as the $250 / $10 combo, and point C as the $200 / $10 wage / price;combo. Be sure to label your diagram completely.;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 changes, all else constant? Make sure you refer to;the profit maximizing condition when;answering this question. Please discuss in real terms, not nominal terms.;e. Let?s return back to the initial;conditions in the beginning of part b, with prices at $10 and nominal wages at;$290 (point A). Now we let prices change;and fall from $10 to $8, holding nominal wages constant at $290. What could cause such a price change (name at;least 2 reasons)? Hint, think of economics 102.;f. Locate this ?new? point 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 $8, all else constant? Again, make sure you;refer to the profit maximizing condition;when answering this question. Please discuss in real terms, not nominal terms.;g. Let?s return to point A, the initial;conditions where the nominal wage rate = $290 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 10 units of output (i.e., each worker's MPN;rises by 10). 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;Units of output;MPN;0;0;1;2;3;4;5;6;7;Now locate this point as point E on both;diagrams. Again, make sure you label;diagram completely or points will be taken off.;h. (10 points) 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 and the;unemployment rate, economic growth, pressure on real wages, the stock market;via the profit implications, and the budgetary implications for the Federal Government;(make sure you refer to each economic;variable).;2.;(50 points total ? 5 for each of 8 parts and 10 for diagram);This current event is no longer current but;it still works!;January 28, 2014, 10:47 AM ET;Obama to Raise Minimum Wage for Federal Contractors;Asserting Executive Power;President Barack Obama plans;to act unilaterally to raise the minimum wage for employees of federal;contractors, a move that asserts his executive powers before his State of the;Union address in which he will press Congress to approve a broader increase;this year, write Carol E. Lee and Eric Morath. Read;the full WSJ story here.;The executive order would raise the minimum wage for;workers on new federal contracts to $10.10 an hour, according to a fact sheet;from a White House official. It said Mr. Obama would announce the new policy in;his speech Tuesday, which is scheduled to begin at 9 p.m. Eastern Time.;The federal minimum wage is $7.25 per hour, and hasn?t been;raised since July 2009. About 22,000 federal employees were paid at or below;minimum wage in 2012, according to the Labor Department. The agency doesn?t;specify how many employees were government contractors.;Suppose the marginal productivity of labor;for a federal employee is given by;MPN = 51 - 2N.;The labor supply curve for federal;employees is estimated to be;NS = 15 + w;N is;denominated in thousands of workers;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 (with all the shift variable included) and label this initial equilibrium point as point A.;A correct and completely labeled diagram is;worth 10 points;2b) Now the executive order from President;Obama - he is forcing (mandating) the real wage to be 10 (actually it is the;nominal wage at $10.10 but let's pretend it is the real wage at 10). What is the level of employment now?;2c);Compare the number of people willing to work vs. the number of people;that are hired. 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;minimum wage program (make sure you write out the profit maximizing condition;and explain why it has changed i.e., why do employers rationally change their;quantity demanded of labor the way they did)? Be very specific with numbers;(i.e., use numbers in your explanation).;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 for those that are still working, given the executive order?;2f);Suppose now that instead of raising the minimum wage, the federal;government offers a training program to these same federal employees so that;their human capital rises. As a result, the new marginal product of;labor is now;MPN =;60 ? 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.;2g);Compare the welfare of the workers under the two scenarios: 1) the;minimum wage program vs. 2) no minimum wage program but with the training;program. 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 employer. Is the firm better off in terms of profits in;part b) or in part f)? Be sure to explain (feel free to refer to the plastering;example and/or the new economy).;3.;(55 points total ? 5 for each of eight parts and 15 points for diagram);An economy?s aggregate production function;is given by Y = A?K?N ? N2. The marginal product of labor for this;production function is MPN = A?K ? 2N.;(a) Assume that A = 10 and K = 10. Suppose;that the labor supply function for this economy is given by NS = 10;+ 2w. Find the equilibrium real wage rate, the full employment level of;employment, and the full-employment level of output for this economy.;Draw a production function and labor market;diagram vertically as we did in class (many times) and label this initial;equilibrium point as point A.;A correct and completely labeled diagram is;worth 15 points (remember to put shift variables in parentheses next to the;relevant functions).;(b);Suppose that a new innovation leads to an increase in total factor productivity;so that A increases to 12. Everything else remains as in part (a). Find the;equilibrium real wage rate, the full employment level of employment, and the;full-employment level of output for this economy and label on your diagrams as;point B.;(c) Explain exactly why the profit;maximizing level of labor has changed given the increase in total factor;productivity. Again be very specific;with your answer as in using numbers.;Begin your answer with: At the;same level of labor input N* = (what it was at point A), the firm is no longer.............;(d) Let?s go back to our initial conditions;(point A). Instead of a new innovation impacting the economy, assume that;severe weather destroys a portion of the capital stock, so that K = 8. Everything else is as it was in part (a).;(In particular, A = 10.) Find the new levels of the equilibrium real wage rate;the full employment level of employment, and the full-employment level of;output for this economy and label (on both diagrams) as point C.;(e) (c) Explain exactly why the profit;maximizing level of labor has changed given the adverse shock to the capital;stock (K). Again be very specific with;your answer as in using numbers. Begin;your answer with: At the same level of;labor input N* = (what it was at point A), the firm is no longer.............;(f) Instead of a new innovation or bad;weather impacting the economy (we are back to point A), suppose that there is a;change in the supply of labor so that NS = 5 + 2w (All else remains;as in part (a)). (In particular, A = 10 and K = 10.) Find the new levels of the;equilibrium real wage rate, the full employment level of employment, and the;full-employment level of output for this economy and label on your diagrams as;point D.;(g) Explain exactly why the profit;maximizing level of labor has changed given the change in labor supply. Again be very specific with your answer as in;using numbers. Begin your answer with: At the same level of labor input N* = (what;it was at point A), the firm is no longer.............;h);Give two well supported answers as to why Ns might have;changed as it did in part (d) above.

Paper#56463 | Written in 18-Jul-2015

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