Labor Economics
7th Edition
ISBN: 9780078021886
Author: George J Borjas
Publisher: McGraw-Hill Education
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Question
Chapter 3, Problem 11P
To determine
Explain how the state policies distort the firms profit maximization decisions.
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What are the concepts of microeconomic theory with respect to the supply and demand of the inputs required to produce the good/s and the good/s itself. Consider relating to elasticity/inelasticity; substitutes and complements; derived demand; marginal costing; rival / non-rival goods; price formation.
Profit is the incentive that drives our market economy. Firms make production, pricing, and hiring decisions based on their quest for profit. But what happens when a firm discovers that it can make dramatically higher profits by stopping production altogether? In December 2000, due to wild swings in the market for electricity, Kaiser Aluminium faced just such a decision. Kaiser Aluminium had contracted with Bonneville power for all of its electricity needs and found itself in the unique position of being an electricity consumer and, potentially, an electricity reseller. By December 2000, Kaiser faced a difficult decision of continuing its current aluminium production and profit levels, or closing the plant to dramatically increase its profit by simply reselling its electricity. When making production decisions, firms must consider both their costs and revenues. One important concern for many firms is utility costs. In 1996, Kaiser Aluminium Corporation in Spokane, Washington, entered…
Question Two
A coal-mining company is the only employer in town, and faces this supply curve for labor:
W = 48 + ( 72/2000 )L
where w is the daily wage, in dollars, and L is the number of workers employed. The company faces this demand curve for coal:
P = 60 − ( 9/ 4000 )Q
where p is the price of coal, per ton, and Q is the number of tons sold per day. Coalminers produce 8 tons of coal each, per day, regardless of the number hired. The mining company maximizes profit.
a) How many workers will be hired, and how much profit will be made?
b) Suppose a union is formed, which sets a wage of $120 per day. At this wage, according to the supply curve given above, 2000 miners are willing to work, and the company is free to hire as many of these as it wants. How many will be hired, and how much profit will be made?
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