Economics Exam Questions..

economicshelp

Got an economics exam in the morning and am discovering how difficult it is to cram a subject like economics!! :rolleyes:

Read relevent bits of textbook + lecture slides for these Q's but still not sure how to go about answering them or even whats being looked for..



1. Graphically, decompose the total price effect into the substitution effect and the output (scale) effect for the following production functions:

i)Cobb-Douglas
ii)Perfect substitutes
iii) Perfect complements

2. Explain how the concepts of income and substitution effects may be used to analyse the labour supply response of an individual to an increase in the tax rate on labour income.

3. Explain "Derived demand for labour"
Discuss the relationship between the firm's demand curve for labour in the short run and the long run.


If anyone could help, it would be great, thanks!

andrew

Micro isn't my strong suit, but I'll give it a shot.

economicshelp wrote: »

1. Graphically, decompose the total price effect into the substitution effect and the output (scale) effect for the following production functions:

i)Cobb-Douglas
ii)Perfect substitutes
iii) Perfect complements

First, draw each production function; what each one looks like should be in the slides. Lets say the price of one input (Labour) goes down (the one on the x-axis). This has two effects. Firstly, the firm will consume more of it, because it is now relatively cheaper than capital. This is the substitution effect. Secondly, the reduction in the price of labour can be seen as an increase in output (or income, if we were talking about a household here). It's hard to explain how to draw it, without being able to draw it. The situation is analogous to a household in which one good has just become cheaper; I'd say the book covers that situation pretty well.

2. Explain how the concepts of income and substitution effects may be used to analyse the labour supply response of an individual to an increase in the tax rate on labour income.

An increase in the tax rate is the same as a reduction in the wage rate. The labour supply response will operate in two ways. Firstly, there'll be the substitution effect. People will substitute toward the good which has just gotten cheaper, in this case leisure. I'm not sure exactly about the income effect. I think it's that now, people have to work more to have the same income as they did before, in which case they'll increase their labour supply. But I'm not completely sure.

3. Explain "Derived demand for labour"
Discuss the relationship between the firm's demand curve for labour in the short run and the long run.

If he's using the same lecture notes as last year, then the answer to the derived demand bit is in Lecture 11. The firm has a cost constraint. You want to know what the maximim output which can be produced is, given that cost constraint. Using lagrange multipliers, you can find an expression which determines how much labour the firm will demand. This is the derived demand for labour.

Regarding long and short run demand curve, I'm not sure. I guess it'd have something to do with the fact that only labour is variable in the short run, and so as labour increases, output would go up less in the short run; the short run demand curve would be flatter, where as the long run demand curve would be steeper, since capital can be varied in the long run.

Good luck anyway, I empathise, I'm having my own problems with micro this year