Explain why each of the following statements is True, False, or Uncertain accord

Question

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It i s the explanation that is important.   

A3-5. Suppose a firm faces a wage of 100/unit of labour and at its current hiring level, marginal product (MP) is equal to 10. If a technological advance increases MP to 20, the marginal cost of output produced by this level of labour will decline from 10 to 5. [Hint: MC across multiple units of output is the change in total costs divided by the change in output]

A3-6. Suppose a firm is currently operating where it would experience long-run diseconomies of scale if it increased output. This firm will have average costs that increase by less in the short-run than it would in the long-run.

A3-7. An increase in the minimum wage will have no effect on either firm-level or industry level supply curves for competitive industries that hire minimum wage labour, so prices will be unaffected in these markets in both the short and long run. [Hint: Assume the industry is composed of identical firms.]

A3-8. A cartel composed of small firms who would otherwise be operating in a competitive market is stable because the firms have no incentive to increase output beyond their agreed-upon output quota.

Explanation / Answer

A3-5 True With the doubling of marginal product the employment of labour will fall by half. Thus the statement is true. Less labour is required to produce the same level of output and will cost less.

A3-6 False. With diseconomies of scale we have that the cost increases more than increase in output. The diseconomies are more aggressive in short run than in long run. Thus the increase in cost is more in short run than in long run. One reason that can be attributed to the fixed inputs in short run

A3-7. False. The affect will be from the demand side and there will be surplus of labour supplied. The prices of the product will rise proportionately.

A3-8. True. Because such firm are little in capacity and cannot meet the entire market demand even if they cheat. Since they are not the dominant suppliers in the market the price will fall if more output than agreed upon output is produced

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