Labor Economics
Labor Economics
7th Edition
ISBN: 9780078021886
Author: George J Borjas
Publisher: McGraw-Hill Education
Question
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Chapter 3, Problem 4P

(a)

To determine

Explain the effect of substitution effect in firm’s employment and capital change.

(b)

To determine

Explain the direction in which the scale effect changes the firm’s employment and capital stock.

(c)

To determine

Explain that preference of firm in the selection of labor and capital.

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Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative externality for those living downstream from the plant. Producing additional electricity imposes a constant per-unit external cost of $490. The following graph shows the demand (private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $490 per unit. PRICE (Dollars per unit of electricity) 1400 1260 1120 980 840 700 560 420 280 140 ° D 1 2 3 D Supply (Private Cost) Demand (Private Value) 5 6 7 QUANTITY (Units of electricity) Social Cost The market equilibrium quantity is units of electricity, but the socially optimal quantity of electricity production is units. To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a unit of electricity. per
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