Labour Market Economics 8Th Canadian Edition By Dwayne Benjamin - Test Bank

Labour Market Economics 8Th Canadian Edition By Dwayne Benjamin – Test Bank

 

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Sample Questions Are Posted Below

 

Chapter 05

Demand for Labour in Competitive Labour Markets

 

 

Multiple Choice Questions
The figures below give the production schedule and the product demand schedule for a firm, which has to decide how many workers to hire.

Workers hired	Total Physical Product	Price of output
0	0	$10
1	10	$10
2	18	$10
3	25	$10
4	30	$10
5	34	$10
6	37	$10

 

1. If the wage = $40 for the time period in question, then the number of workers hired is:
   A. 2
   B.  3
   C.  4
   D.  5
   E.  6

 

Blooms: Analyze
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-02 Demand for Labour in the Short Run
Topic: 05-03 Wages, the Marginal Productivity of Labour, and Competition in the Product Market

 

2. Assume that at the wage rate of $10 per hour, a firm is hiring 100 hours of labour per week. If the wage elasticity of demand is -1.2, how many hours of labour will the firm shed if the wage increases by $2 per hour?
   A.5 hours per week
   B. 12 hours per week
   C. 20 hours per week
   D. 24 hours per week
   E. 36 hours per week

 

Blooms: Analyze
Difficulty: Medium
Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market?
Topic: 05-10 Elasticity of Demand for Labour

3. Consider the model for the derivation of demand for labour in a long-run context. At equilibrium, which of the following statements is false?
   A.A profit-maximizing firm will choose the cheapest capital-labour combination that yields the optimal output.
   B. At the optimal level of output, labour is cheaper than capital.
   C. If labour is twice as expensive per unit than capital, then the marginal product of labour is twice as large as the marginal product of capital.
   D. If the firm were to alter its input combination by hiring more or less of a factor, its profits would fall.
   E. The slope of the isoquant is equal to the slope of the isocost line.

 

Blooms: Understand
Difficulty: Medium
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-04 Demand for Labour in the Long Run

 

4. The primary reason why workers in the fast-food industry are paid less is that:
   A.The demand for the product that they produce is quite elastic, making the demand for labour wage elastic.
   B. It is easy to substitute capital for labour in the industry, making the demand for labour wage elastic.
   C. Labour costs comprise a large share of the employer’s expenses, making the demand for labour wage inelastic.
   D. These workers collect economic rents.
   E. These workers are seldom unionized.

 

Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market?
Topic: 05-13 Elasticity of Demand for Output

5. If the employer is a monopolist in the output market:
   A.There is monopsony in the input market.
   B. The demand for labour is less elastic than it would be if the firm operated in a competitive output market.
   C. The demand for labour is less elastic than it would be if the firm operated in a competitive input market.
   D. The firm’s demand curve for labour is identical to the case where the firm is a competitor in the output market.
   E. None of the above choices are correct.

 

Blooms: Understand
Difficulty: Medium
Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market?
Topic: 05-10 Elasticity of Demand for Labour

 

6. The empirical evidence that exists concerning the magnitude of the wage elasticity of labour demand indicates that it tends to be:
   A.negative and elastic.
   B. negative and inelastic.
   C. negative and unitary elastic.
   D. positive and inelastic.
   E. None of the above choices are correct.

 

Blooms: Apply
Difficulty: Medium
Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market?
Topic: 05-15 Empirical Evidence

7. What is the behavioural force that underlies the demand curve for labour?
   A.Profit maximizing behaviour on the part of firms
   B. Utility maximizing behaviour on the part of workers
   C. Rate of return maximizing behavior on the part of investors
   D. Revenue maximizing behaviour on the part of firms
   E. Market share maximizing behavior on the part of firms

 

Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-02 Demand for Labour in the Short Run

 

8. Which of the following statements is false?
   A.The quantity demanded for school teachers is equal to the quantity supplied in equilibrium.
   B. The demand for school teachers is downward sloping because it is profitable for schools to hire more teachers when wages fall.
   C. The demand for school teachers is likely to fall when the government decides to cut funding to schools.
   D. The demand for school teachers is likely to be quite wage elastic.
   E. The demand for school teachers is likely to rise when the government decides to cut funding to schools.

 

Blooms: Apply
Difficulty: Medium
Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market?
Topic: 05-10 Elasticity of Demand for Labour

9. For labour demand choices, the long run is defined as:
   A.the time period over which all costs are fixed.
   B. the period of time over which all inputs can vary.
   C. the period of time over which fixed factors cannot vary.
   D. the period of time over which variable factors can vary.
   E. the period of time over which variable factors cannot vary.

 

Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-04 Demand for Labour in the Long Run

 

10. For a firm that is a competitor in the output market, the demand for labour does not depend on:
    A.the price of capital.
    B. the market demand for the final product.
    C. the structure of the labour market.
    D. the marginal product of labour.
    E. the price of the output.

 

Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-04 Demand for Labour in the Long Run

11. All of the following statements regarding the marginal product of labour are true except:
    A.It initially increases with the quantity of labour employed because of specialization.
    B. It diminishes after the inflection point on the total product curve.
    C. It is zero at the maximum value of total product.
    D. It eventually diminishes because the capital stock is fixed.
    E. It is the increment to revenue obtained by hiring one more unit of a variable factor.

 

Blooms: Analyze
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-03 Wages, the Marginal Productivity of Labour, and Competition in the Product Market

 

12. In the area of diminishing returns in production:
    A.Total output declines with each additional unit of labour input.
    B. The marginal product of labour increases at a decreasing rate.
    C. The marginal product of labour decreases eventually.
    D. The marginal product of labour first increases, then reaches a maximum level, and then decreases.
    E. The marginal product of labour first decreases, then reaches a minimum level, and then increases.

 

Blooms: Analyze
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-02 Demand for Labour in the Short Run

13. In the short run, the demand for labour for a competitive firm is:
    A.the marginal product of labour curve.
    B. the value of the marginal product curve.
    C. the downward sloping portion of the value of the marginal product curve.
    D. perfectly elastic at the market wage.
    E. perfectly inelastic at the market wage.

 

Blooms: Analyze
Difficulty: Easy
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-02 Demand for Labour in the Short Run

 

14. Consider a firm that seeks to minimize the cost of producing a given level of output. Which of the following statements is true?
    A.In equilibrium, it will produce on the inelastic portion of its long-run labour demand curve.
    B. In equilibrium, the ratio of input prices equals the marginal rate of technical substitution.
    C. In equilibrium, the wage rate equals the slope of the isoquant.
    D. In equilibrium, the rate of return on capital equals the slope of the isoquant.
    E. In equilibrium, the rate of return on capital equals the wage rate.

 

Blooms: Analyze
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-05 Isoquants, Isocosts, and Cost Minimization

15. In the long run, which of the following statements is false?
    A.MPL/MPK = w/r.
    B. W = VMPL and r = VMPK.
    C. VMPL/VMPK = w/r.
    D. MPL = MPK.
    E. Profits are maximized.

 

Blooms: Analyze
Difficulty: Medium
Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion.
Topic: 05-08 The Relationship Between Short- and Long-Run Labour Demand

16. The scale effect of a wage change implies that:
    A.Firms substitute toward the input that has become relatively cheaper.
    B. Along with the substitution effect, the demand for labour is downward sloping.
    C. The demand for labour may be upward sloping if labour is an inferior input.
    D. The firm reduces its output in response to the wage increase.
    E. In order to increase output, a firm will use more labour even if the wage increases.

 

Blooms: Understand
Difficulty: Medium
Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion.
Topic: 05-07 Separating Scale and Substitution Effects of a Wage Change

 

17. The determinants of the wage elasticity of demand for labour include all of the following except:
    A.the availability of substitute inputs.
    B. the elasticity of supply of substitute inputs.
    C. the elasticity of demand for output.
    D. the ratio of labour cost to total cost.
    E. All of the choices are determinants of the wage elasticity of demand

 

Blooms: Remember
Difficulty: Medium
Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market?
Topic: 05-10 Elasticity of Demand for Labour

18. Consider a firm that seeks to minimize the cost of producing a given level of output. How will it respond to an increase in the wage rate?
    A.It will increase production
    B. It will hire more workers
    C. It will substitute capital for labour
    D. It will not react at all
    E. It will decide based on whether labour is an inferior factor of production or a normal one

 

Blooms: Apply
Difficulty: Medium
Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion.
Topic: 05-09 Labour Demand Under Cost Minimization

19. The slope of an isoquant reflects:
    A.the marginal cost of labour.
    B. the wage elasticity of the demand for labour.
    C. the marginal rate of technical substitution between inputs.
    D. the marginal productivity of capital.
    E. the marginal productivity of labour.

 

Blooms: Remember
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-05 Isoquants, Isocosts, and Cost Minimization

 

20. Along an isocost curve, which of the following remains constant?
    A.The market prices of inputs
    B. The quantity of labour
    C. The quantity of capital
    D. The level of production
    E. The wage elasticity of demand for labour

 

Blooms: Remember
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-05 Isoquants, Isocosts, and Cost Minimization

21. A perfectly competitive labour market would be characterized by:
    A.the presence of labour unions.
    B. wage-setting firms.
    C. wage-taking firms.
    D. the presence of monopsony power.
    E. infinitely elastic labour demand curves.

 

Blooms: Remember
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-03 Wages, the Marginal Productivity of Labour, and Competition in the Product Market

 

22. Which of the following statements regarding a firm’s production function is true?
    A.The marginal product of labour curve intersects the average product of labour curve at its lowest point.
    B. The average product of labour curve intersects the marginal product of labour curve at its highest point.
    C. The average product of labour curve intersects the marginal product of labour curve at its lowest point.
    D. The marginal product of labour curve must not intersect the average product of labour curve.
    E. The marginal product of labour curve intersects the average product of labour curve at its highest point.

 

Blooms: Analyze
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-03 Wages, the Marginal Productivity of Labour, and Competition in the Product Market

23. In the context of outsourcing, consider the case where domestic labour and foreign labour are almost perfect complements. If there is an increase in the wage paid to domestic labour, then which of the following statements is true?
    A.There will be a small substitution effect and a larger scale effect away from domestic labour.
    B. There will be a large substitution effect and a smaller scale effect away from domestic labour.
    C. There will be a small substitution effect away from domestic labour, but the scale effect will work toward domestic labour.
    D. There will be a small substitution effect toward domestic labour, but the scale effect will work in favour of domestic labour.
    E. There will be no substitution effect but only scale effect.

 

Blooms: Apply
Difficulty: Hard
Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion.
Topic: 05-07 Separating Scale and Substitution Effects of a Wage Change

 

24. In order to obtain the substitution effect of a wage change:
    A.One traces the change of the quantity demanded of labour through a parallel shift in the isocost line.
    B. One moves either up or down the labour demand curve.
    C. One traces the change in the quantity demanded of labour by moving along an isoquant curve as the prices change.
    D. One needs to first know the wage elasticity of demand for labour.
    E. One traces the change in output as firms respond to it.

 

Blooms: Analyze
Difficulty: Hard
Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion.
Topic: 05-07 Separating Scale and Substitution Effects of a Wage Change

25. In order to obtain the scale effect of a wage change:
    A.One traces the change of the quantity demanded of labour through a parallel shift in the isocost line.
    B. One moves either up or down the labour demand curve.
    C. One traces the change in the quantity demanded of labour by moving along an isoquant curve as the prices change.
    D. One needs to first know the wage elasticity of demand for labour.
    E. One traces the change in output as firms respond to it.

 

Blooms: Analyze
Difficulty: Hard
Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion.
Topic: 05-07 Separating Scale and Substitution Effects of a Wage Change

 

26. It is not necessarily the case that Canadian workers are doomed to hold “bad” jobs as all of the “good” jobs are outsourced to countries with cheap labour. Which of the following related statements is false?
    A.Canadian employers always have an incentive to seek out the lowest-cost labour and send the work there.
    B. It is not clear that Canadian and foreign labour are substitutes in production.
    C. One has to consider the unit labour costs in the two countries.
    D. While Canadian labour is often expensive compared to foreign labour, it is often much more productive.
    E. Outsourcing typically lowers the costs of production, which can lower the prices that Canadian consumers pay for certain goods, thereby permitting an increase in spending on other goods.

 

Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Understand the impact of free trade, and of international competition more generally, on the Canadian labour market.
Topic: 05-17 The Impact of Trade on a Single Labour Market

27. Regarding an increase in wage, which of the following is INCORRECT?
    A.In a perfectly competitive industry, the wage increases shift up the firm’s marginal and average cost curves.
    B. In a perfectly competitive industry, the wage increases will reduce output, which raises the market price of the product.
    C. In a monopoly, the wage increases will raise the product price and reduce output.
    D. The wage increases will reduce output, therefore total costs will be reduced as well.
    E. In the case of wage increases, the scale effect and the substitution effect work in the same direction to reduce labour demand.

 

Blooms: Analyze
Difficulty: Hard
Learning Objective: 05-03 Understand why labour demand functions are downward sloping (i.e., decreasing functions of the market wage), and learn that this law of demand holds regardless of the time horizon used by the firm in its decisions or the structure of product market completion.
Topic: 05-07 Separating Scale and Substitution Effects of a Wage Change

 

28. Which of the following is correct regarding the elasticity of labour demand?
    A.If capital and labour are easily substitutable, the derived demand for labour will be inelastic.
    B. If the supply of substitute inputs is inelastic, the derived demand for labour will be inelastic.
    C. If the product demand is elastic, the derived demand for labour will be inelastic.
    D. If the share of the labour costs in total costs is large, the derived demand for labour will be inelastic.
    E. None of the choices are correct.

 

Blooms: Analyze
Difficulty: Hard
Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market?
Topic: 05-10 Elasticity of Demand for Labour
Topic: 05-11 Availability of Substitute Inputs
Topic: 05-12 Elasticity of Supply of Substitute Inputs
Topic: 05-13 Elasticity of Demand for Output
Topic: 05-14 Share of Labour Costs in Total Costs

29. Which of the following is correct regarding the impact of globalization on the Canadian market?
    A.Due to global competition, due to the change of product price, productivity of Canadian labour will decrease.
    B. The labour demand in the Canadian market will decrease.
    C. If Canadian labour and foreign labour are close substitutes, cheaper foreign labour will lead to scale effects, which may increase the demand for Canadian labour and foreign labour.
    D. If Canadian labour and foreign labour are complements, cheaper foreign labour will lead to scale effects, which may increase the demand for Canadian labour and foreign labour.
    E. The labour demand in the Canadian market will increase.

 

Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Understand the impact of free trade, and of international competition more generally, on the Canadian labour market.
Topic: 05-16 Changing Demand Conditions, Globalization, and Offshoring
Topic: 05-17 The Impact of Trade on a Single Labour Market

 

30. Which of the following facts are correct regarding international comparison of labour costs and productivity?
    A.Canada’s compensation costs are relatively high compared to other European countries.
    B. Canada has relatively low productivity growth since 1990s compared to many other European countries.
    C. Canada’s unit labour costs are much lower since 1990s due to the increase of productivity.
    D. Canada’s unit labour costs are lower than that of the United States.
    E. Canada has relatively higher productivity growth since 1990s compared to many other European countries.

 

Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Understand the impact of free trade, and of international competition more generally, on the Canadian labour market.
Topic: 05-17 The Impact of Trade on a Single Labour Market

 

Essay Questions
 

31. · Outline step by step the derivation of the short run labour demand curve. Do not confuse this with the model for long run labour demand involving isoquants and the isocost curves. You do not have to give a graph. The first step is a description of the behavioural assumption. Restrict your analysis to an intuitive but methodical discussion. Include in your analysis an explanation of why it is called the derived demand for labour.

    · Explain the different implications for labour demand between the case in which the output market is monopolized and the case in which it is perfectly competitive.
    · Hicks’ laws refer to the factors which affect the elasticity of labour demand. Explain the role of each of the following variables, and provide an explanation:

    a) the availability of substitute inputs
    b) the elasticity of demand for output
    c) the ratio of labour cost to total cost.

 

Labour demand curve explains the relationship between market wage rate and the demand of labour by profit-maximizing firms. It is a derived demand because the demand of labour depends on the demand of the product that the firm produces. In the short run, firms cannot adjust all of the factors of production used and labour may be the only variable factor. In the short run, the firm will choose how many workers to hire in order to produce the profit maximizing amount of product. In this case, if the market wage rate is given, the higher the wage, the higher the cost of production, a firm will choose to hire fewer workers in order to maximizing its profits. Therefore market wage rate and labour demand is negatively related.
Generally speaking, the profit maximizing firm chooses to produce where marginal revenue equals to marginal cost of the product. Therefore, the demand schedule of a profit-maximizing firm that is a wage-taker in the labour market is where the marginal revenue product of labour equals the wage rate. Marginal revenue product can be decomposed into marginal revenue of the product (additional revenue which a firm can gain by selling additional unit of the product) and marginal product of labour (additional products which a firm can produce by hiring one more unit of labour). If the product market is perfectly competitive, a firm is a price taker. In this case, product demand is given by price equalizes marginal revenue of the product; therefore the labour demand is given by price times the marginal product of labour, which gives the market value of the marginal product of labour.
If a firm is a monopoly in the product market, then the firm is a price-setter on the product market. In this case, the firm faces a downward slopping product demand curve, in order to sell additional unit of output, the monopolist has to lower the price for its product. Assuming that it cannot differentiate its homogeneous product to consumers, the monopolist will also have to lower the price on all units of its output. As a result, its marginal revenue will fall faster than its price, reflecting the fact that the price decline applies to intramarginal units of output. The marginal revenue curve for the monopolist will lie below and to the left of the demand curve. By equating marginal revenue with marginal cost so as to maximizing profits, the monopolist will produce less output and charge a higher price. Therefore in the labour market, the monopolist will also hire less workers given the market wage rate. Its marginal revenue product is the product of marginal revenue and the marginal product of labour and in this case, marginal revenue is not equal to the price of the product.
The elasticity of labour demand explains the responsiveness of labour demand to the change of market wage rate. It can be measured by the percentage change of labour demand over the percentage change of market wage rate. Because labour demand is a derived demand, the factors that affect output demand elasticity will affect labour demand elasticity as well. For example, if the demand for output is more elastic, the demand for labour is also more elastic. if labour and other input factors are easily substitutable, as wage rate increases, firms can easily replace labour with other input (such as workers vs. automation), therefore labour demand is subject to higher elasticity. Lastly, the ratio of labour cost to total cost may also affect labour demand elasticity. If labour cost is a large proportion of the total cost, such as house painting services, the change of the wage rate will not affect the demand of labour as much. Therefore given all things are equal, higher the labour cost, lower the elasticity of the labour demand.

 

 

Blooms: Create
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Learning Objective: 05-04 Learn about the factors that affect the elasticity of demand for labour. For example, does it matter whether a firm operates as a monopolist or a perfect competitor in the product market?
Topic: 05-01 Categorizing the Structure of Product and Labour Markets
Topic: 05-02 Demand for Labour in the Short Run
Topic: 05-03 Wages, the Marginal Productivity of Labour, and Competition in the Product Market
Topic: 05-10 Elasticity of Demand for Labour
Topic: 05-11 Availability of Substitute Inputs
Topic: 05-12 Elasticity of Supply of Substitute Inputs
Topic: 05-13 Elasticity of Demand for Output