Unit 3 Assignment: Elasticity and Labor Market Equilibrium

Unit 3 Assignment: Elasticity and Labor Market Equilibrium
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In this Assignment, you will elaborate price elasticity of demand and supply in the short run and long run. You will evaluate factors that change equilibrium wage rate and employment level. Moreover, you will calculate total revenue product and marginal revenue product, and compare them with total cost and marginal cost in order to figure out optimal quantity of labor that should be hired to maximize profit.
Instructions: Answer all of the following questions. You are required to follow proper APA format. Read the Criteria section below for more information before you begin this Assignment.
1 Is the price elasticity of demand for gasoline more elastic over a shorter or a longer period of time? Explain.
Over a long period. If the price of gas increases, people will still buy gas to meet the consumption demand in the short-run. However, with persistent high prices for a long time, people will look for alternatives like consuming less oil products and switching to efficient products that use less oil products. Thus, in the long run, the demand for gasoline declines with the persistent high prices.
2 . Is the price elasticity of supply, in general, more elastic over a shorter or a longer period of time? Explain.
Over a longer time. In the short-run, producers are limited with time to react to any price change hence produces almost the same quantity. In the long run, the producers adjust their production yielding a significant change in quantity supplied. Hence, the price elasticity of supply becomes more elastic in the long-run CITATION Tho16 \l 1033 (Sowell, 2016).
3 Why is the supply curve for labor usually upward sloping? Explain.
Income of a person rises as one does more work. A worker trades his leisure time for more work to earn more income. A high wage induces the worker to supply more labor substituting with his/her leisure time. Therefore, a rise in the wage offers a positive substitution effect on the supply of labor resulting in the upward slopping of the labor supply curve. However, with high wages translating to high income, the demand for leisure time goes up causing a reduction in labor supply CITATION Tho16 \l 1033 (Sowell, 2016). Thus, the supply curve slightly bends backwards at some point due to the negative income substitution effect.
4 . In the graph below, assume that the market demand curve for labor is initially D1. The market supply curve for labor is indicated with figure “S.” Wage rate is depicted on the other t...