2. Assume that an oil firm (Exxon Mobil Canada) is considering its short- run de
ID: 1162141 • Letter: 2
Question
2. Assume that an oil firm (Exxon Mobil Canada) is considering its short- run demand for labour. The price (S U.S. per barrel (bbl) of Brent) of oil has fallen from $110/bbl to $45/bbl. How specifically might this fall in price affect the fim's demand for labour? (10 marki) Are some Exxon Mobil Canada employees more likely to be laid off than others? Provide an explanation for this phenomenon. (5 marks) a. b. c. How might your analysis change in the long-run (10 marks) d. How would the competiive structure of the oil market impact the firm's labour demand decisions? (5 marks)Explanation / Answer
a. Because of the fall in the price of oil, the profit margin for the firm decreases assuming the cost of labor stays fixed. Hence with a fall in price of oil, the firm might want to cut on its labor cost hence leading to a decrease in the demand for labor.
b. Yes, some Exxon Mobil Canada employees are more likely to be laid off than firms of other industries because since the firm wants to cut on its labor cost, it might want to get rid of employees with less productivity
c. In the long run, the firm might want to strategise and plan more volume to compensate for losses from price cut i.e by increasing its production capacity, the firm might want to hire more efficient labor such that the revenue from extra sales compensates for the lost revenue because of fall in price of oil
d. The competitive structure of the oil market might not allow for independent decisions in the labor market as the prices in the competitive marker are set equal to the marginal cost. Hence if prices are falling, at equilibrium the marginal cost should equal that price
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