1. A perfectly competitive firm sells wheat in its output market and hires one variable
factor called labor from a competitive labor market. Assume that this firm has the following
marginal value product (MVP):
a. How much labor should the firm hire in this setting if the wage is $10?
b. What happens here if the price of wheat increases? Explain.
2. Assume that labor and capital are variable factors in the long run. Discuss the output effect
we'd expect to observe in the long run if wages are increased in the fast food industry (e.g. due
to steady increases in the minimum wage).
3. A perfectly competitive firm hires variable amounts of labor (capital is fixed) and has the following demand for labor:
and the following marginal expenditure (ME) and supply of labor (SL) curves:
a. Is this a competitive labor market? Explain.
b. Show how much labor this firm should hire (i.e., what is QL*?) and the wage that the firm should pay (i.e., what is w*?)
c. Is there any surplus, deadweight loss, etc? Explain.
d. What's the highest the minimum wage can go before decreasing the quantity of labor hired (relative to your answer in part b)? Explain.