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(a) Draw a CLG for the typical firm.
Answer
One point is earned for a correctly labeled graph with a horizontal demand curve at the equilibrium price, PE.
One point is earned for showing the equilibrium quantity, QE, at MR = MC.
One point is earned for showing that ATC is below demand or MR at Q.
(b) Assume there is an increase in the market wage rate for labor, variable input. Show on your graph in part (a) the effect of the wage increase on the marginal cost curve in the short run.
The MC curve shifts left,,, (MC, think VC or wages)
(c) Assume the avocado producers hire labor from a perfect competitive labor market. Draw a graph of the labor supply and demand for a typical firm and label the supply curve MFC and the demand curve MRP. Assume the market wage rate increases form w1 to w2. Show the effect of a wage increase on the graph, the initial quantity of laboured hired at QL1 and the new quantity of labor at QL2.
Since the firm can hire its labor in a perfectly competitive labor market, the wage rate is determined by the market rate and it is a horizontal line. (They can hire all they want at that price)
Answer - One point is earned for drawing a correctly labeled graph with a horizontal MFC1 curve at w1 and a downward-sloping MRP curve and showing QL1. One point is earned for shifting the MFC curve up to w2 and showing the new equilibrium quantity of labor hired, QL2, which is smaller than QL1.
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