True-False, Answer the following questions. For each, provide a high-quality explanation including one or more graphs to get full credit.

a. For the labor supply curve to bend backward (so that less labor is supplied as the wage rate goes up), leisure must be an "inferior" good. Hint: Your graphical analysis should not show a labor supply curve!

b. Imposition of a binding minimum wage on a monopsonist employer can cause employment to increase, compared to an unregulated monopsony, but at the same time can cause unemployment.

c. As a general rule, to maximize the present discounted value of the wood obtainable from a tree, the forester should wait until the tree has reached its maximum size. 

a. False

b. True

c. False

Step-by-step explanation

a.

The labor supply shows the relationship between the wage rate and hours of labor supplied at the given wage rate. The labor supply is positively sloped until the wage rate increased to W*, i.e. when the wage rises the labor increased the hours of labor and reduces the leisure. This is because due to increase in wage rate, leisure becomes expensive and the worker substituted leisure for work. This shows that hours of working is a normal good and the substitution effect is higher than income effect.

However, after the wage reaches to a certain high point W*, the hours of labor becomes inferior good and the income effect dominates the substitution effect. This is because the worker has enough income and now he values leisure more than the higher income. The labor supply curve becomes negatively sloped after W*.

Therefore, the statement is false.

b. Minimum wage rate is the limit on how low the wage can be. This is binding when it is set higher than the market wage rate.

Monopsony is when there is only one employer in the whole market and many employee or workers who supply labor. When there is minimum wage imposed on the labor market with single employer/monopsony, it can increase employment, in contrast to a competitive market where imposing minimum wage cause unemployment.

The monopsony hire labors until the marginal factor cost (MFC) equals marginal revenue product of labor (MRP). Minimum wage divided the MFC into two section; one is horizontal section caused by minimum wage line and one is upward sloping curve.

MFC increases due to minimum wage and thus, firm hire more labor in monopsony.

An increase in wages caused by minimum wage in monopsony would means a national increase in wages in labor market as there is only one employer. This would also cause unemployment among unskilled workers.

Therefore, the statement is true.

c. The forester should not wait until the tree reaches its maximum value as the financial value maximum can differ from its biological maximum of the tree.

The tree should cut when it's value reaches equal to or above the value of alternate asset's rate of return. The tree could be thought as a principle deposit in the bank. Thus, we should take care of inflation and external things as well and not just the nominal increase in interest rate.

Thus, the statement is false.

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