Ec100 Week 8

Question 1 If eight workers can manufacture 22 shirts per day and nine workers can manufacture 27 per day, and if shirts can be sold for £5 each, the marginal product of the ninth worker is: The marginal product of labour (or capital) = the extra output produced by one more worker (or unit of capital) Here, extra output is 5 shirts £25 is the marginal value product of labour (extra revenue from selling the output of the marginal worker)

Question 2 The value of marginal product of capital is the increase in: Notice the word “value” So it is the extra revenue (value to the firm) of employing one more unit of capital The correct answer is: revenue that results from employing one more unit of capital

Question 3 If the wages of pilots rises, would you expect the demand for pilots to? The correct answer is: Go down a little Pilots & planes = (perfect) complements

Question 4 **Will do questions 9 & 10 first. Suppose clothes are made by people alone but can be made by workers in the UK or workers in Bangladesh.  What are the factors of production in this case? Workers in the UK and Workers in Bangladesh

Question 5 If clothes can be produced by workers in the UK and workers in Bangladesh, what do you think the isoquants for producing clothes look like? Factor of production: here we have two types of labour – workers in Bangladesh and workers in UK. Clearly: UK and BD labour are easily substituted… so straight line isoquants.

Question 6 If clothes can be produced by workers in the UK and workers in Bangladesh, what will happen if wages in the UK rise by a lot? LBD LUK

Question 6 If clothes can be produced by workers in the UK and workers in Bangladesh, what will happen if wages in the UK rise by a lot? LBD LUK

Question 6 So: b. Employment in the UK will fall a lot and employment in Bangladesh will rise a lot. LBD LUK

Question 7 If the wage of a worker is £5 per hour, how many workers will a profit maximizing employer demand? Hire an extra worker if it increases profits: Change in revenue>change in cost By definition, this is the same as: MVPL>wage With diminishing MPL, optimal amount of labour is where: MPVL=wage which is the same as MPL=real wage

Question 8 Concerning the market for making widgets, assume that the wage rate is €10 per hour in the Germany and €5 per hour in Poland. If the marginal product of a Polish worker is 5 widgets per hour, a German worker will be less costly to employ than a Polish worker if the marginal product of the German worker is at least: Output per $ in Poland = 1 Could a firm get the same return from investing in Germany? Only if MPL>=10

Question 9 Suppose output is produced from labour and capital alone.  What would be the effect of a rise in the interest rate on the demand for labour if output is fixed? See diagram. It would increase. This is the same as the substitution effect in consumer choice.

Question 10 Suppose output is produced from labour and capital alone.  What would be the effect of a rise in the interest rate on the demand for labour if output is variable and chosen by the firm to maximize profits? Remember: Firm’s optimal output is where P=MC (As long as P>=AC) (& MC is upward sloping) P=MC means firm reduces output when MC increases See diagram This reduces amount of labour and capital

Question 10 But: Increase in cost of capital has made labour relatively cheaper (substitution effect) See question 9 Overall effect on demand for labour ambiguous (We know that demand for capital will fall) See lecture slides “when the wage rises”

Discussion Question There is a country whose people live only on cheese sandwiches made of two slices of cheese placed between two slices of bread. Local taboos mean that no-one has any interest in eating anything that is not a complete sandwich formed in this way. So cheese and bread are perfect complements…

Isoquants Plotting Isoquants Bread Slices 2 slices Isoquant for 1 sandwich Cheese slices 2 slices

Discussion Question 3. How many cheese sandwiches per person will be produced a day if all workers are employed? See board.

Discussion Question 4. Now suppose that a technological innovation causes a cheese-maker to be able to produce 20 slices of cheese a day. Explain why the number of cheese sandwiches produced in the economy will be the same as before. Amount of bread is the same. And cheese & bread are perfect complements

Discussion Question 5. What will happen to the employment of cheese makers? Only need half as many cheese makers to produce the required amount of cheese. So expect a fall in employment of cheese makers. But not told about relative price of machine and labour

Discussion Question 6. What will happen to wages? Nothing happens to bread maker wages. Cheese makers lose some bargaining power Expect their wages to go down Important assumption: workers cannot change occupation…

Discussion Question 7. Now suppose that individuals can freely move between occupations so that everyone can choose to be a cheese maker or a bread maker. 8. What will be the effect of the innovation on the number of cheese makers & bread makers? People now want to be bread makers as they have a higher wage. The number of cheese makers falls and number of bread makers increases. This increases the bargaining power of cheese makers, and reduces bargaining power of bread makers…

Discussion Question 10. What will happen to the wages of cheese makers & bread makers? Eventually… Wage of cheese maker = wage of bread maker This is the equilibrium outcome. If people can move freely, they go wherever the wage is highest. But as more people go there, the wage falls and rises in other sectors. Eventually, the wages are equal.

Discussion Question 9. What will be the effect on the total number of cheese sandwiches? Will increase. Intuition: We have a technology that enables mass production of cheese. So we want to have mass production of bread too (as they are perfect complements). When labour was immobile, the potential mass production of cheese was basically wasted because only a limited amount of bread could be made. There was unemployment in the cheese sector – these people could have been making bread!