(a) Assume a competitive labor market. Draw the demand of labor curve for an ind

Question

(a) Assume a competitive labor market. Draw the demand of labor curve for an
individual firm. Assume that the firm faces a labor supply curve that is neither
perfectly inelastic nor perfectly elastic. If the firm has the ability to command more
effort and output from workers once they are hired, then what is occurring to the
labor demand curve? Demonstrate your answer with the help of a graph.

(b) Using the graph in your answer to (a), clearly identify any gains and losses to the
producer and worker surpluses.

(c) Is unemployment a result of this alteration of labor demand (as in efficiency wage
theories)?

Explanation / Answer

In labor economics, the efficiency wage hypothesis argues that wages, at least in some markets, are determined by more than simply supply and demand. Specifically, it points to the incentive for managers to pay their employees more than the market-clearing wage in order to increase their productivity or efficiency. This increased labor productivity pays for the higher wages. Because workers are paid more than the equilibrium wage, there will be unemployment. (a) Find your graph here: http://tinypic.com/view.php?pic=21b3pdw&s=7 If the firm is able to command more effort and output out of each unit of labor, then the demand for labor decreases. That is, the firm demands fewer units of labor than previously because it can now get more effort out of each unit. (b) This red area is the decrease in producer surplus: http://tinypic.com/view.php?pic=24wvp5d&s=7 (c) Yes. You can see that L'*

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