Question

Suppose that the firm has a minimum quantity of employment, N*, that is, the firm can produce no output unless the labour input is greater than or equal to N*. Otherwise, the firm produces output according to the same production function as specified in this chapter (Y = zF(K,N^d). Given these circumstances, determine the effects of an increase in the real wage on the firm's choice of labour input. Construct the firm's demand curve for labour.

Answer 1

So, as we know that “N=labor” is the input used in the production to produce output. So, the “labor demand” should be negatively sloped function, => as the “real wage” decreases, => “Nd” increases and vice versa. But here the min level of “Nd” is “N*”, => the “labor demand” is vertical for “W > W*”, => “N=N*” and is down ward sloping for “W < W*”. Consider the following fig.

So, mathematically, => Nd = F(W), “F’() < 0” and “N=N* for “W > = W*”.