Labor Economics: Exercise 1 Percentage Grade = (Total number of points / 90 x 100 1. The textbook mentioned that, in the early 1970s, Egypt experienced a dramatic outfow o construction workers seeking higher wages in !audi "rabia, at the same time that the demand or their ser#ices rose within Egypt. $raphically represent these two shits o supply and demand, and then use the graph to predict the direction o change in wages and employment within Egypt%s construction sector during that period.
Answer : The graph should show wages on the vertical axis and the number number of workers workers on the horizontal horizontal axis. axis. The outow of construc construction tion workers workers should shift the labor supply curve of Egypts construction sector to the the left while ile the the deman mand curve rve for the servi ervic ces of Egyp gyptia tian construction workers should shift to the right. !oth shifts should increase the e"uilibrium wage. The two shifts have opposite e#ects on employment so the change in employment should be ambiguous. $raph % & points' text % & points &. "naly'e the impact o the ollowing changes on wages and employment in a gi#en occupation( a. " decrease in the danger o the occupation.
This will make the occupation more attractive shifting the supply curve to the right' lowering wages and increasing employment in the occupation. () points* b. "n increase in product demand.
This will shift the demand for labor curve to the tight increasing wages and employment. () points* c. )ncreased wages in alternati#e occupations.
This will shift the supply curve of the occupation to the left raising wages and reducing employment as workers move to the alternative occupations. occupations. () points* d. "n increase in the price o machines used in the occupation.
This will shift the demand for labor curve to the tight increasing wages and employment as +rms substitute labor for the relatively more expensive capital. () points*
*. !uppose that the working age population is &10 million, and there are 1*0 million who are employed and + million who are unemployed. alculate the unemployment rate and the labor orce participation rate.
,nemployment rate % (unemployed-labor force* x // % (unemployed-employed 0 unemployed* x // % (1 million- )/ million 0 1 million* x// % (1 million-)1 million* x // % ).23 ( point* 4abor force participation rate % (labor force-working age population* x // % (employed 0 unemployed-working age population* x // % ()1 million-5/ million* x // % 6&.)3 ( point* -. !uppose that the supply cur#e or schoolteachers is L! &0,000/*+0 and the demand cur#e or schoolteachers is L 100,00021+0, where 3 the number o teachers and the daily wage. a. 4lot the demand and supply cur#es. b. hat are the e5uilibrium wage and employment le#els in this market6 c. ow suppose that at any gi#en wage &0,000 more workers are willing to work as schoolteachers. 4lot the new supply cur#e and 8nd the new wage and employment le#el. hy doesn%t employment grow by &0,0006 Answer:
a.
7ee the +gure. 8lot the 4 d and 4s curves by solving for desired employment at given wage rates. 9f % 1//' for example' employers desire 51'/// workers (4 d % //'/// ; 1/ 1//*< if % &//' they would desire &/'///. 7ince the e"uation above is for a straight line' drawing a line using these two points gives us the demand curve. ,se the same procedure for the labor supply curve. (1 points*
b. To +nd the e"uilibrium' solve for the wage at which the "uantity of labor supplied e"uals the "uantity of labor demanded: 4s % 5/'/// 0 )1/ % //'/// ; 1/ % 4 d . 7olve for by adding 1/ to both sides and subtracting 5/'/// from both sides to yield 1// % =/'///. >ividing both sides by 1// reveals that % ?6/ per day. 8lugging % ?6/ into both the labor demand and supply e"uations shows that 4 % 26'/// schoolteachers. (5 points* c. The new labor supply curve is L &/'/// 0 )1/. 7etting this e"ual to 4d and solving shows that % ?5/ per day< 4 % =5'/// school teachers. Employment doesnt grow by 5/'/// because the shift in the supply curve causes the wage to fall' which induces some teachers to drop out of the market. () points* ′
s
=
+. The marginal re#enue product o labor at the local sawmill is :4 3&020.+3, where 3 the number o workers. ) the wage o sawmill workers is ;10 per hour, then how many workers will the mill hire6 Answer: The mill will hire workers until MRP L
W. MRP L = 20
0.5L
10 when L
20
workers. (1 point)
<. The ollowing table shows the number o cakes that could be baked daily at a local bakery, depending on the number o bakers. umber o =akers 0
umber o akes 0
1 & * a. b. c. d.
10 1> &* &7 alculate the 43. o you obser#e the law o diminishing marginal returns6 Explain. !uppose each cake sells or ;10. alculate the :4 3 raw the :43 cur#e, which is the demand cur#e or bakers.
Answer:
a.
Number of Bakers
Number of Cakes
MP L
MRP L
0
0
—
—
1
10
10
100
2
18
8
80
3
23
5
50
4
27
4
40
The marginal product of labor (MP L ) is calculated in the third column, using the following formula: (5 points) MP L
(Number of cakes)/ L
b. Yes, the marginal product of labor declines as more bakers are hired. (1 point) c. The marginal revenue product of labor (MRP L ) is calculated in the fourth column, using the following formula: (5 points) MRP L
MP L P
d. The demand for labor is the MRP L curve: (3 points)
e. If each baker is paid $80 per day, 2 bakers would be hired and 18 cakes would be baked and sold daily. (2 points)
7. !uppose that the demand or dental hygienists is 3 +0002&0, where 3the number o dental hygienists and the daily wage. hat is the own2wage elasticity o demand or dental hygienists when ;100 per day6 )s the demand cur#e elastic or inelastic at this point6 hat is the own2wage elasticity o demand when ;&00 per day6 )s the demand cur#e elastic or inelastic at this point6
Answer: Elasticity of demand % 3@ "uantity demanded-3@ wage % (@4> -4> *-(@- *% (@4> -@* x (-4> * % 5/ x (//-)///* % 5-). The demand curve is inelastic at this point. (5 points* >. !uppose that the demand or burger fippers at ast2ood restaurants in a small city is 3 *002&0, where 3 the number o burger fippers and the wage in dollars per hour. The e5uilibrium wage is ;- per hour, but the go#ernment puts in place a minimum wage o ;+ per hour. a. ?ow does the minimum wage a@ect employment in these ast2ood restaurants6 raw a graph to show what has happened, and estimate the e@ects on employment in the ast2ood sector.
Answer: The graph should show the downward sloping demand curve for labor showing e"uilibrium employment at 55/ when the e"uilibrium wage e"uals ?&' B)// ; (5/ x & C and employment falling to 5// when a minimum wage e"ual to ?1 is imposed B)// ; (5/ x &*C. (5 points* b. !uppose that in the city abo#e, there is an unco#ered sector where 3 !2 100/>0 and 3*002&0, beore the minimum wage is put in place.
!uppose that all the workers who lose their Aobs as burger fippers due to the introduction o the minimum wage seek work in the unco#ered sector. hat happens to wages and employment in that sector6 raw a graph to show what happens, and analy'e the e@ects on both wages and employment in the unco#ered sector.
Answer: The graph should show that the initial e"uilibrium wage in the uncovered sector is ?& per hour and 4 % 55/. Then the labor supply curve shifts over by 5/ to 4 7 % =/ 0 =/. The new e"uilibrium is % ?).=/ per hour and 4 % 55&. (& points* 9. hen the cost o dough2making machines ell by 10B, the demand or assistant bakers ell by 1+B. hat is the cross2wage elasticity o demand or assistant bakers in this case6 "re assistant bakers and dough2making machines gross substitutes or gross complements6
Answer: A / percent fall in the price of capital caused a 1 percent fall in the use of assistant bakers so the cross wage elasticity is 0.1. A positive elasticity indicates that the two are gross substitutes. (5 points* 10. " 8rm is considering hiring a worker and pro#iding the worker with general training. The training costs ;1000, and the workerCs :4 3 during the training period is ;*,000. ) the worker can costlessly mo#e to another employer in the post2training period and that employer will pay a wage e5ualing the new :4 3 , how much will the training 8rm pay the worker in the training period6
Answer: !ecause mobility costs are low for employees of the +rm' the +rm cannot recover the costs of providing general training so that the workers must pay for the training. Dence' during the training period the worker pays for the training by receiving a wage % F8 4 (during training* ; cost of training % ?)/// ?/// % ?5///.( point* 11. The supply o labor is gi#en in the ollowing table or TeddyCs Treats, a dog biscuit company, which is a pro8t2maximi'ing monopsonist.
D@ered age;F + < 7 >
!upply o 3aborumber o ?oursF 1> 19 &0 &1 &&
a. alculate the total labor cost and the marginal expense o labor or each le#el o employment.
b. raw the supply o labor cur#e and the marginal expense o labor cur#e.
Answer: a. (/ points* D@ered age;F + < 7 >
!upply o 3aborumber o ?oursF 1> 19 &0 &1 &&
Total 3abor ost ;F
arginal Expense o 3abor
7& 9+ 1&0 1-7 17<
22 &* &+ &7 &9
b. (& points*
1&. TeddyCs Treats, the dog biscuit company in 4roblem 11, has the ollowing :4 3(
umber o ?ours 1> 19 &0 &1 &&
:43 &9 &7 &+ &* &1
a. "dd the marginal re#enue product cur#e to the drawing in 4roblem 11.
Answer: 7ee downward sloping dotted curve above which is also the demand for labor curve. (5 points*
b. ) TeddyCs Treats is maximi'ing pro8ts, how many hours o labor will be hired6 hat wage will be o@ered6
Answer: The pro+tmaximizing number of hours is 5/ and Teddys Treats will o#er a wage of ?6 per hour. (5 points*
1*. !tella can work up to 1< hours per day at her Aob. ?er wage rate is ;>.00 per hour or the 8rst > hours. ) she works more than > hours, her employer pays Gtime and a hal.H raw !tellaCs daily budget constraint. Answer: (4 points)
7tellas earnings are e"ual to the following: BGumber of hours (within +rst = hours* ?=C 0 BGumber of hours (among next = hours* ?5C. The budget constraint for the +rst = hours of work is the segment to the right of the dotted vertical line at = hours. The budget constraint for subse"uent hours of work is the segment to the left of the dotted vertical line at = hours.
1-. !uppose a single parent can work up to 1< hours per day at a wage rate o ;10.00 per hour. Iarious income maintenance programs ha#e been de#eloped to assure a minimum le#el o income or low2income amilies. "id to Jamilies with ependent hildren "JF was established with the !ocial !ecurity "ct o 19*+. The amily was gi#en an income subsidy depending on amily si'e. Knder this program, the amilyCs bene8t was reduced by ;1 or e#ery dollar
earned. !uppose the maximum subsidy or the single parent described abo#e is ;-0. a. raw the daily budget constraint without program participation or the single parent described abo#e. b. Dn the same graph, draw the daily budget constraint under "J or the single parent described abo#e. c. hat e@ect might this program ha#e on the incenti#e to work iF or those with steep indi@erence cur#es who are not workingL iiF or those with steep indi@erence cur#es who work less than - hours a dayL iiiF or those with fat indi@erence cur#es who work more than - hours a day6
"ns#er:
(a* and (b*. (1 points*
Those with relatively steep indi#erence curves' who were c. not working before' will still not work with the subsidy< with the subsidy' their e#ective wage rate is zero. 9f the maximum AH>I subsidy is ?&/' eligible participants who would work up to & hours per day can attain a higher utility if they choose to receive the subsidy under AH>I and not work at all. (5 points* !eyond & hours of work' money income would be higher if the person worked. This encourages some eligible individuals to refuse program participation and work instead. These individuals who continue to work have relatively at indi#erence curves. (5 points*
