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Unit 3 [MT445] D. Grimes

Unit 3 Assignment: Elasticity and Labor Market Equilibrium Student Name: Deborah Grimes

1. Is the price elasticity of demand for gasoline more elastic over a shorter or a longer period of time? Explain.

The price elasticity of demand for gasoline is more elastic over a longer period. Gas will be purchased by people regardless of what the price is. There is a chance more people will buy eco-friendly cars (like mine) but most still need even small amounts of gas.

2. Is the price elasticity of supply, in general, more elastic over a shorter or a longer period of time? Explain.

In general, the price elasticity of supply is more elastic the longer the period of time for which it is measured. According to Geoff Riley, “In the long run all factor inputs are assumed to be variable and therefore short-term supply constraints can usually be resolved and we expect to see a more elastic supply curve. Producers are better able to respond to a higher level of market demand’.

3. Why is the supply curve for labor usually upward sloping? Explain.

The supply curve for labor tends to slope upwards because the company is increasing its labor, which in turn increases the marginal costs of labor. Once the curve hits the highest point, where the wages are the highest, the curve is certain to twist backward.

4. In the graph below, assume that the market demand curve for labor is initially D 1. The market supply curve for labor is indicated with figure “S.” Wage rate is depicted on the other things held constant vertical axis (dollars per unit), and employment level (quantity of labor) is depicted along the horizontal axis. Answer the following questions.

(Description of graph: In the graph, assume that the market demand curve for labor is initially D1. The market supply curve for labor is indicated with figure “S.” Wage rate is depicted, based on the other things held constant, on the vertical axis (dollars per unit), and employment level (quantity of labor) is depicted along the horizontal axis. The graphs show both scenarios for an increase in demand as well as a decrease in demand in the labor market. If the labor demand increases, the demand curve shifts from D1 to D3. If the labor demand decreases the demand curve shifts from D1 to D2. The change in demand also changes the equilibrium values. Based on this information and scenarios presented under the questions, answer the following questions.)

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Unit 3 [MT445] D. Grimes a. What are the initial equilibrium wage rate and employment level?

The initial equilibrium wage rate and employment level would be B and L. b. Other things held constant, assume that the price of a substitute resource decreases.

What will happen to the demand for labor? Will it increase or decrease?

What are the new equilibrium wage rate and employment level?

If the price of a substitute resource decreased demand for labor would increase. The increase in demand for the cheaper substitute would directly affect the increase in labor. The new equilibrium wage rate and employment level would be C and T. Price would drop and labor would increase. c. Other things held constant, suppose that demand for the final product increases. Using the labor demand curve D1 as your starting point, what happens to the demand for labor? What are the new equilibrium wage rate and employment level?

If the demand for the final product increased, then the demand for labor would increase. The market demand would go up the curve to D³. The new equilibrium wage and employment level would be A and H. d. Assume this industry is dominated by non-union workers. How would the equilibrium wage compare to that earned in a similar industry with similarly skilled union workers?

Explain.

The equilibrium wage would compare to that of a skilled union worker in a similar industry by being lower. Unions have the power to negotiate wages and typically have more workers to save on labor costs.

5. Use the following data to answer the questions below. Assume a perfectly competitive product market.

Units of Labor 0 1 2 3 4 5

Units of Output 0 8 12 17 21 23

a. Calculate the total revenue product and marginal revenue product at each level of labor input if output sells for $4 per unit.

b. If the wage rate is $15 per hour, how many units of labor will be hired? Explain your answer.

If the wage rate is $15/hour then 60 units of labor should be hired. We would take the wage rate of $15 and multiply it by $4 per unit to equal the amount hired in dollars. So 15x4=60.

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Unit 3 [MT445] D. Grimes

References: O'Brien, G.H.A. P. (2018). Economics. [Purdue University Global Bookshelf]. Retrieved from https://purdueuniversityglobal.vitalsource.com/#/books/9780134739281/ Riley, Geoff/ (2012). Unit 1 Micro: Revision on Price Elasticity of Supply, https://www.tutor2u.net/economics/blog/unit-1-micro-revision-on-price-elasticity-ofsupply#:~:text=Supply%20is%20usually%20more%20price,to%20adjust%20its%20production %20levels.&text=Supply%20is%20likely%20to%20be,such%20as%20land%20and%20capital.

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