Problems Chapter 2

6. The following table gives the demand and supply for cashiers in retail stores.

Wage Rate
$ 3.00
4.00
5.00
6.00
7.00
8.00
9.00

Number of cashiers demanded

200
180
170
150
130
110
80

Number of cashiers supplied

70
100
120
150
160
175
190

a. Plot the demand and supply curves.

b. What are the equilibrium wage and employment level in this market?
c. Suppose the number of cashiers demanded increases by 30 at every wage
rate. Plot the new demand curve. What are the equilibrium wage and
employment level now?
Answer: a.

b. From either the table or the graph, the equilibrium wage is $6.00 per hour
and the equilibrium quantity is 150 cashiers.

c.

From either the table or the graph, the new equilibrium wage is $7.00 per hour and
the equilibrium quantity is 160 cashiers.

Problems Chapter 3

2. The marginal revenue product of labor in the local saw mill is MRP L = 20 0.5L,
where L = the number of workers. If the wage of saw mill workers is $10 per
hour, then how many workers will the mill hire?
Answer: The mill will hire workers until MRPL = W.20 0.5L = 10 when L = 20 workers.
4. The output of workers at a factory depends on the number of supervisors hired
(see below). The factory sells its output for $0.50 each, it hires 50 production
workers at a wage of $100 per day, and needs to decide how many supervisors
to hire. The daily wage of supervisors is $500 but output rises as more
supervisors are hired, as shown below. How many supervisors should it hire?
Supervisors

Output (units per day)

11.000

14.800

18.000

19.500

20.200

20.600

Answer: The firm needs to compare the marginal cost to the marginal revenue of
hiring an additional supervisor. The marginal cost is always $500 for each extra
supervisor. The marginal revenue is the number of additional units produced times
the price of output.
Number of Supervisors
1
2
3

MC
$500
$500
$500

$500

$500

MR
$0.50 3800 = $1900
$0.50 3200 = $1600
$0.50 1500 = $750
=
$0.50 700
$350
=
$0.50 400 $200

The firm will hire three supervisors since the marginal revenue generated from
hiring the
third supervisor exceeds $500 but the marginal revenue generated from hiring the
fourth

supervisor is less than $500.

Number of Bakers Number of Cakes 0
0 1 10 2 18 3 23 4 27
Number of Hours Wage 2 $10 3 8 4 6
5462
6.
The table below shows the number of
Number of Hours Wage Elasticity 2
cakes that could be baked daily at a local
$10 3 8 [(3 2)/2]/[(8
10)/10] = [1/2]/[2/10] = 2.5 4 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?
Answer: a.

Number of
Bakers
0
1
2
3
4

Number of
Cakes
0
10
18
23
27

MPL

MRPL

10
8
5
4

100
80
50
40

The marginal product of labor (MPL) is calculated in the third column, using the
following formula:
MPL =(Number of cakes)/L
b. Yes, the marginal product of labor declines as more bakers are hired.
c. The marginal revenue product of labor (MRP L) is calculated in the fourth
column, using the following formula:
MRPL MPL P
d. The demand for labor is the MRPL curve:

e. If each baker is paid $80 per day, 2 bakers would be hired and 18 cakes
would be baked and sold daily.

Problems Chapter 4
4. The following table gives the demand for labor at Homers Hideaway, a motel in
a small town.
Wage
$10
$8
$6
$4
$2

Number of
Hours
2
3
4
5
6

a. Draw the demand for labor curve.

b. Calculate the wage elasticity of demand along the demand curve. Indicate
whether the elasticity is elastic, inelastic, or unitary elastic.
c. As you slide down along the demand curve, does the demand curve become
more or less elastic?
Answer: a. Simple plot of tabular data.

b.
Number of
Hours
2

Wage
$10

Elasticity

[(3 2)/2]/[(8 10)/10] = [1/2]/[2/10]

=2
[(4 3)/3]/[(6 8)/8]
= [1/3]/[2/8] =
1.32
[(5 4)/4]/[(4 6)/6]
= [1/4]/[2/6] =
0.76
[(6 5)/5]/[(2 4)/4]
= [1/5]/[2/4] =
0.40

The demand curve is elastic at its upper end and inelastic at its lower
end.
c.
The demand curve becomes less elastic (or more inelastic) as you
slide down along the curve.

Problems Chapter 5
2. Assume that the labor supply curve to a firm is the one given in Problem 1
above. If the firms marginal revenue product of labor (MRP L) 240 2E, what
is the profit-maximizing level of employment (E*) and what is the wage level
(W*) the firm would have to pay to obtain E* workers?
Answer: Total labor costs to the firm (C) equal WE, which, expressed in terms of
E, are as follows:
C E E/5 0.2E2
To maximize profit, the firms marginal revenue product of labor, 240 2E,
must equal the
marginal expense of labor: dC/dE 0.4E
Thus, for profit-maximization the following must hold: 240 2E 0.4E
Solving the above equation for E yields E* 100. Plugging E 100 into the
labor supply
equation (E 5W) and solving for W yields W* $20.

Problems Chapter 6
2. Nina is able to select her weekly work hours. When a new bridge opens up, it
cuts one hour off Ninas commute to work. If both leisure and income are
normal goods, what is the effect of the shorter commute on Ninas work time?
Answer: When the new bridge opened, Ninas budget constraint shifted to the right
in a parallel
fashion as the amount of available time for either work or leisure (as
opposed to
commuting) was increased. This shift in her constraint created an income
effect (she can
now work more an1 consume more leisure). Because both income and
leisure are normal
goods, both would increase. The only way income can increase in this case
is for her to
work more, so we must conclude that her extra hour per day from the
shorter commute is
divided in some way between more work and more leisure. Therefore, she
works more.

4. The federal minimum wage was increased on July 24, 2007 to $5.85 from
$5.15. If 16 hours per day are available for work and leisure, draw the daily
budget constraint for a worker who was earning the minimum wage rate of
$5.15 and the new budget constraint after the increase.
Answer:

6. Stella can work up to 16 hours per day at her job. Her wage rate is $8.00 per
hour for the first 8 hours. If she works more than 8 hours, her employer pays
time and a half. Draw Stellas daily budget constraint.
Answer:

Stellas earnings are equal to the following:

[Number of hours (within first 8 hours) $8] [Number of hours (among next 8
hours) $12].
The budget constraint for the first 8 hours of work is the segment to the right of the
dotted vertical line at 8 hours. The budget constraint for subsequent hours of work
is the segment to the left of the dotted vertical line at 8 hours.