Question

Notes: Draw separate diagrams for answers to each part of different questions (a, b, & c). Do not combine all your answers on one graph. All of your answers should be based on your graphical analyses. Your written explanations should complement what you draw on your graphs.

1-[Firms Behavior in Labor Market-20 points]
a- We are interested in the causal relationship between units of labor demanded by firm (??) and price of firm’s output (???????). What factors do we need to hold fixed to be able to correctly hypothesize about the causal relationship between the two variables? Name all of them. Holding those factors constant, do you expect ?? to increase or decrease as a result of an increase in ???????? Explain and draw your answer on a diagram where the horizontal axis refers to ?? and the vertical axis refers to ???????. (10 p)
b- Assume that a labor-augmenting technological innovation happens in this market. How the graph you drew in part (a) will be affected as a result? (5 p)
c- Assume that the raw materials that are used in the production of the firm’s output become more expensive. How the graph you drew in part (a) will be affected as a result? (5 p)

Thank you!

Answer 1

Answer (A)- Following factors need to be fixed , other things remaining constant

Land will be fixed , other fixed constant like rent, electricity fixed charges and other monthly fixed amount will be fixed

The ouptut will increase when labour increase but till a certain point, becuase we need to maximize the labour as per marginal product.

Rest diagram in attached pic

(B) the output will increase

(C) the raw material cost will increase then total production will decrease due to rising cost