# 0 0 \$10.00 \$10.00 1 15 10.00 9.50 2

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```					Economics 4340                                                Labor Economics
Isaac McFarlin                                                University of Texas at Dallas

Problem Set #3:

1. The following table pertains to data for a given firm.
Labor       Output    Price (D1)    Price (D2)
0           0       \$10.00         \$10.00
1          15        10.00           9.50
2          29        10.00           9.00
3          42        10.00           8.50
4          54        10.00           7.50
5          65        10.00           6.50
6          75        10.00           5.50

a. Assuming the firm faces a perfectly competitive market, construct and
graph this firm’s short run labor demand curve. Which price column
would you use to calculate this? Why?

b. Assuming the firm faces an imperfectly competitive market, construct and
graph this firm’s short run labor demand curve. Which price column
would you use to calculate this? Why?

2. Explain how marginal revenue product is derived. Why is the MRP curve the
firm’s short-run labor demand curve? Explain how and why the labor demand
curves for the perfectly competitive seller and the imperfectly competitive seller
differ.

3.    Given the data in Table A, complete the labor demand schedule shown in Table
B. Contrast this schedule to the value of marginal product schedule that would
exist given these data. Explain why the labor demand and VMP schedules differ.

Table A                              Table B
Labor Demand Schedule

Inputs      Total      Product                      Quantity
of Labor    Product    Price         Wage Rate      Demanded
0           0   \$ 1.10        \$   18.00
1          17   \$ 1.00        \$   14.00
2          32   \$ 0.90        \$   11.00
3          45   \$ 0.80        \$    6.00
4          55   \$ 0.70        \$    2.00
5          62   \$ 0.65        \$    1.00
6          68   \$ 0.60
4. Employers urge labor unions to accept wage concessions as a means to increase
jobs. For a union to do so, however, usually requires approval by a majority of the
membership. Given this situation, if a layoff caused 30% of the membership to
lose their jobs, would the union vote for a wage concession? How large would the
layoff have to be before the union would accept a concession? What influence
does the elasticity of demand have on the size of the wage concession that the
union would have to agree to in order to preserve the jobs of its members? If
demand were highly elastic, how would this affect the union’s attitude toward a
concession?

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