Question

This problem asks you to consider a company refining crude oil into gasoline. The company hires

workers to process an input (crude oil) into an output (gasoline). You should assume both the (output)

market for gasoline and the labor market for workers are perfectly competitive, and that the firm must

pay the equilibrium wage set in the labor market and charge the equilibrium price for gas set in the

market for gas. You may additionally assume the relevant labor market is “factory workers in the United

States” and that oil refineries hire a negligible percent of all factory workers.

For a-c, answer for the short run, assuming capital levels are fixed. For each of the following

developments, discuss the impact on the quantity of labor that a typical profit-maximizing oil refinery

will hire. Use graphs to explain your answer and summarize your answer in a sentence or two. (HINT:

draw three graphs – for the output market, labor market and firm - and write the equation for MRPL.)

a. More people choose to go “green” and buy hybrid and electric vehicles.

b. Remember the oil refineries are hiring workers from a labor market that includes all factory

workers in the US. Suppose many factories (but not the oil refineries) hiring from that labor

market move overseas.

c. Suppose a few bad accidents at oil refineries lead to strict safety regulations that effectively

decrease the productivity of workers.

For d-e, consider the labor and capital decisions our oil refinery makes in the long run. Suppose the

company is initially using the profit-maximizing combination of labor and capital.

d. Continue part (c) for the long run. If labor productivity decreases, what impact will there be

on labor hired in the long run? What impact will there be on capital in the long run?

e. Continue part (b) for the long run. If wages fall, what will happen to the quantity of labor

demanded?

f. Oil refineries also use machinery (capital) to refine crude oil. Suppose the price of capital

equipment decreases. What will happen to labor demand in the long run? What will happen

to demand for capital in the long run?

Answer 1

Answer a) Equikbuom is allam ea eshen demow.ct of aes4 İs auk cowpelition and equilibriom le isn, demana qua.ility ill he, Q*, Nhen heeNe. Chode to nder bsiol and eliilical vehic asoiene decreate. Decrease in loucanol asoti ne rice Pt ち by etene uantity dem After cleurease in i den and of Pascline, demand 咔labor used uv'ue proces, of as a kesult rease l.e IAJ D'

tim hires mere laba lhein, dlemanol of Labr intreases uhauw dana tor shrr ineraises ren to ben、 e of laban vrie increase ern ㈧tow, as showin con increases, it nmeans se ㈧age. IAJ e 2 hires Laber rnan r in.olullnes mave 6verseas. As a γeAnitr wd.e gore worill tire mae labins bil at a dame wage rale uettv enestang inemkes dacreanes clu to srickt eation taken bit irm nerases k wng ann e of labr ill increase to meet its eauilihsium

atle hire mare labar to meel its tticient opi wilに melitada erill Ice Idee. It nilį lead to decrease moye more Ca lal inlefs ef eapital