Demand for Labor & Wage Determination and Employment

1. (15 pts) The table below shows the number of cakes that could be baked daily at a local bakery, depending on the number of bakers.

a. Calculate the marginal product of labor. b. Do you observe the law of diminishing marginal returns? Explain. c. Suppose each cake sells for $10. Calculate the marginal revenue product of labor. d. Draw the marginal revenue product of labor curve, which is the demand curve for bakers. e. If each baker is paid $80 per day, how many bakers will the bakery owner hire, given that the

goal is to maximize profits? How many cakes will be baked and sold each day?

2. (15 pts) The demand curve for gardeners is GD = 19 − W, where G = the number of gardeners and W = the hourly wage. The supply curve is GS = 4 + 2W. a. Graph the demand curve and the supply curve. What is the equilibrium wage and equilibrium

number of gardeners hired? b. Suppose the town government imposes a $2 per hour tax in all gardeners. Indicate the effect of

the tax on the market for gardeners. What is the effect on the equilibrium wage and the equilibrium number of gardeners hired? How much does the gardener receive? How much does the customer pay? How much does the government receive as tax revenue?

3. (13 pts) Union A wants to represent workers in a firm that would hire 20,000 workers if the wage rate is $12 and would hire 10,000 workers if the wage rate is $15. Union B wants to represent workers in a firm that would hire 30,000 workers if the wage is $20 and would hire 33,000 workers if the wage is $15. Which union is more likely to organize?

Number of Bakers Number of Cakes

0 0

1 10

2 18

3 23

4 27

4. (15 pts) Empirical studies in labor economics have shown that the elasticity of employment (quantity of labor demanded) with respect to a change in the minimum wage is about -0.2 . a. Is the demand for labor elastic or inelastic? Why? b. Estimate how many workers will be displaced if the Federal minimum wage is increased from

$7.25 per hour to $10.10 per hour as President Obama recommended. c. Will the total wage bill paid to minimum wage workers increase or decrease? Why?

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