Labor Economics

1. Comment (including an economic perspective) on the old epigram/adage from nineteenth century Great Britain:

“Some men wrest a living from nature and with their hands; this is called work. Some men wrest a living from those who wrest a living from nature and with their hands; this is called trade. Some men wrest a living from those who wrest a living from those who wrest a living from nature and with their hands; this is called finance.”

2. A firm chooses capital K and labor L to maximize profit given by p=PQ ( K , L )- rK-wL, where P = price of output, Q = quantity output, r = rental rate of capital, and w = wage rate. Assume that the supplies of capital and labor are perfectly elastic.

(a) True/False/Uncertain The firm should hire workers until the marginal revenue product of labor is equal to the wage rate. (Please explain it)

(b) Explain intuitively (i.e., non-mathematically) why profit maximization requires that the marginal revenue product of labor be equated with the wage rate.

 

Sample Solution

ACED ESSAYS