1. Explain why the labor demand curve slopes down from left to right. In other w
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Question
1. Explain why the labor demand curve slopes down from left to right. In other words, why does a business firm's labor demand curve have a negative slope? 2. Briefly explain the difference between the income and substitution effects in the labor market. Can you make up your own example of each? 3. Suppose Congress passes and the President signs a bill raising the federal minimum wage by $1.00 per hour from $7.25 to $8.25. As a result of this increase, a local retailer reduces its hiring of minimum wage employees by 10%. Calculate the retailer's elasticity of demand for minimum wage labor. Hint: first calculate the percentage increase in the wage rate. Then use the general formula for elasticity. Indicate whether your numerical result is elastic or inelastic. 4. Refer to the table on page 24-1 and assume that the price of Gadgets produced by Percomp Company rises to $15 each instead of $10 each. If the company can hire any number of employees it chooses at a wage of $120 per day, then how many employees will the firm hire? Hint: First set up another column for Total Revenue (i.e., total revenue product) at the price of $15. Then add a column for marginal revenue product (MRP). Note that the numbers in the new TRP and MRP columns will be higher than the original numbers because the price of the product rose from $10 to $15. Table 24-1 Workers Gadget output MPP Total Revenue(PxQ) Marginal Rev Product 0 0 x $0 X 1 24 24 $240 $240 2 44 20 $440 $200 3 60 16 $600 $160 4 72 12 $720 $120 5 80 8 $800 $80 6 84 4 $840 $40 5. Can you provide your own example of a screening device you have observed in the commercial labor force? Provide a brief explanation.Explanation / Answer
Answer = Demand curve is slope downward because of inverse relationship between price and quantity. The demand curve slopes downwards due to the following reasons (1) Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other substitute commodities. This induces the consumer to substitute the commodity whose price has fallen for other commodities, which have now become relatively expensive. As a result of this substitution effect, the quantity demanded of the commodity, whose price has fallen, rises. (2) Income effect: When the price of a commodity falls, the consumer can buy more quantity of the commodity with his given income, as a result of a fall in the price of the commodity, consumer's real income or purchasing power increases. This increase induces the consumer to buy more of that commodity. This is called income effect. (3) Number of consumers: When price of a commodity is relatively high, only few consumers can afford to buy it, And when its price falls, more numbers of consumers would start buying it because some of those who previously could not afford to buy may now afford to buy it, Thus, when the price of a commodity falls, the number of its consumers increases and this also tends to raise the market demand for the commodity. (4) various uses of a commodity (5) law of diminishing marginal utility It is assumed that if all thinngs remain constant once the price of a good decreases you buy more hence the reason for the negative slope dowards of the demand curve income effect: the change in demand for a good when the income of the purchaser changes. substitution effect: the change in demand for a good when the relative price between a good and its substitute changes. ie: people will buy more coffee if their income increases. they might also buy more coffee if the price of tea (a substitute for coffee) rises.
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