Labor Demand

• Describes the technology that the firm uses to produce goods and services?

  Production Function
• Equation that specifies how much output is produced by any combination of labor and capital?

  $q =$$f(E,K)$
• Change in output from hiring an additional worker, holding constant the quantities of all other inputs?

  Marginal product of labor
• Change in output resulting from a one-unit increase in the capital stock, holding constant the other inputs?

  Marginal product of capital
• Gives the relationship between output and number of workers hired by the firm, holding constant the other factors?

  Total product of labor
• Assumption that the marginal product of labor eventually diminishes. The fixed level of capital will eventually constrain the production?

  Law of Diminishing Marginal Returns
• Amount of output produced by a typical worker APE = q/E?

  Average product of labor
• Equation for profit maximization?

  profit = pq - wE - rk
• In the short-run, the firm cannot increase or reduce the size of its plant or purchase or sell physical equipment. Hence, the firms capital stock is fixed at some level of K_o?

  True
• A profit maximizing firm hires workers up to the point where the wage rate equals the value of the marginal product of labor?

  True
• What is the profit maximization condition aside from VMPE is declining?

  w = p x MPE
• Firms hire workers up to the point where the value of marginal product of labor equals the wage?

  Marginal productivity condition
• Produce up to the point where the cost of producing an additional unit of output equals the revenue obtained from selling the output MC = p?

  Profit maximizing behavior
• If q < q*?

  Expand production to increase profits
• If q > q*?

  Shrink production to increase profits
• A short run demand curve for labor tells what happens to the firms employment as the wage changes, holding K constant?

  True
• Properties of short run demand curve?

  downward sloping
• A drop in the wage increase the?

  Firm's employment
• An increase in the price of the output shifts the value of the marginal product curve upward and increases employment?

  True
• Accounts for the fact that the price of the output adjusts if all firms expand?

  True Industry Labor Demand Curve
• Measures the responsiveness of the employment in the industry to changes in the wage rate?

  Elasticity
• If |δsr| < 1?

  Inelastic demand
• If |δsr| > 1?

  Elastic demand
• The firm's capital stock is not fixed. Thus, the firm maximizes profit by choosing both how many workers to hire and how much plant and equipment to invest in?

  Employment Decision in the Long Run
• Describes the possible combination of labor and capital that produce the same level of output?

  Isoquant
• All capital-labor combinations that lie along a single isoquant produce the same level of output?

  True
• What are the properties of Isoquant?

  downward sloping

  do not intersect

  higher isoquant are associated with higher level of output

  convex to the origin
• What is the slope of the isoquant?

  $MRTS =$$∆k/∆L =$$- MP_E/MP_K$
• Firm's cost of production C = wE + rK?

  Isocost
• Only hired labor (y-intercept)?

  Co/r
• Only hired labor (x-intercept)?

  Co/w
• Line connecting all the various combinations of labor and capital the frim could hire with a given cost outlay $K =$$c/r - w/r E$


  Isocost Line
• Choose the combination of labor and capital where the isocost is tangent to the isoquant?

  Cost Minimization Condition
• In the long run profit maximization condition labor and capital be hired up to point where?

  w = p x MPE ; r = p x MPK
• In the long run, a profit-maximizing firm, will not generally want to hold the cost outlay constant when the wage changes?

  True
• The firm will always hire more worker when the wage falls?

  True
• 2 stage impact of wage cut?

  scale effect

  substitution effect
• Indicates what happens to the demand for the firm's inputs as the firm expands production?

  Scale effect
• The wage cut reduces the price of labor relative to that of capital. Frim takes advantage of the wage change by rearranging its mix of inputs?

  Substitution effect
• percentage change in short-run employment resulting from a 1% change in the wage?

  Short-run elasticity of labor demand