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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
outflow of construction workers seeking higher wages in Saudi Arabia, at the same
time that the demand for their services rose within Egypt. Graphically represent
these two shifts of supply and demand, and then use the graph to predict the
direction of 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 of workers on the horizontal axis. The outflow of construction
workers should shift the labor supply curve of Egypt’s construction sector
to the left while the demand curve for the services of Egyptian
construction workers should shift to the right. Both shifts should increase
the equilibrium wage. The two shifts have opposite effects on employment
so the change in employment should be ambiguous.
Graph = 4 points, text = 4 points
2. Analyze the impact of the following changes on wages and employment in a
given occupation:
a. A decrease in the danger of the occupation.
This will make the occupation more attractive shifting the supply
curve to the right, lowering wages and increasing employment in the
occupation. (3 points)
b. An increase in product demand.
This will shift the demand for labor curve to the tight increasing
wages and employment. (3 points)
c. Increased wages in alternative 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. (3 points)
d. An increase in the price of machines used in the occupation.
This will shift the demand for labor curve to the tight increasing
wages and employment as firms substitute labor for the relatively more
expensive capital. (3 points)

If W = 500. and there are 130 million who are employed and 5 million who are unemployed. Suppose that the supply curve for schoolteachers is LS = 20.000? Answer: a.000. where L= the number of teachers and W= the daily wage. drawing a line using these two points gives us the demand curve. employers desire 25.000-150W. Use the same procedure for the labor supply curve.3. Since the equation above is for a straight line. (5 points) . a. they would desire 40. Plot the Ld and Ls curves by solving for desired employment at given wage rates.3% (1 point) 4. What are the equilibrium wage and employment levels in this market? c. b. Suppose that the working age population is 210 million.000 – 150  500). for example. Why doesn't employment grow by 20.000 more workers are willing to work as schoolteachers. See the figure.000+350W and the demand curve for schoolteachers is LD = 100. Plot the demand and supply curves.000 workers (Ld = 100. Plot the new supply curve and find the new wage and employment level. Now suppose that at any given wage 20.7% (1 point) Labor force participation rate = (labor force/working age population) x 100 = (employed + unemployed/working age population) x 100 = (135 million/210 million) x 100 = 64. Calculate the unemployment rate and the labor force participation rate. if W = 400. Unemployment rate = (unemployed/labor force) x 100 = (unemployed/employed + unemployed) x 100 = (5 million/ 130 million + 5 million) x100 = (5 million/135 million) x 100 = 3.

000.000 + 350W. (2 points) c. MRPL = 20   0.5L.000 because the shift in the supply curve causes the wage to fall. solve for the wage at which the quantity of labor supplied equals the quantity of labor demanded: Ls = 20. Number of Bakers 0 Number of Cakes 0 .000 + 350W = 100. Setting this equal to Ld and solving shows that W = $120 per day. then how many workers will the mill hire? Answer: The mill will hire workers until MRPL   W. Employment doesn’t grow by 20. depending on the number of bakers. The new labor supply curve is Ls  40. which induces some teachers to drop out of the market. Plugging W = $160 into both the labor demand and supply equations shows that L = 76. To find the equilibrium.000 school teachers. The marginal revenue product of labor at the local sawmill is MRP L=20-0.5L   10 when L   20  workers.000 – 150W = Ld.000 schoolteachers. Dividing both sides by 500 reveals that W = $160 per day. (3 points) 5. L = 82.000 from both sides to yield 500W = 80. The following table shows the number of cakes that could be baked daily at a local bakery. Solve for W by adding 150W to both sides and subtracting 20.b. (1 point) 6. If the wage of sawmill workers is $10 per hour. where L= the number of workers.

Number of Bakers Number of Cakes MPL MRPL 0 1 2 3 4 0 10 18 23 27 — 10 8 5 4 — 100 80 50 40 The marginal product of labor (MPL) is calculated in the third column. the marginal product of labor declines as more bakers are hired. The demand for labor is the MRPL curve: (3 points) . The marginal revenue product of labor (MRPL) is calculated in the fourth column. Suppose each cake sells for $10. c.1 2 3 4 a. Do you observe the law of diminishing marginal returns? Explain.  using the following formula: (5 points) MRPL   MPL   P d. Calculate the MRP L Draw the MRPL curve. (1 point) c. Answer: a. d. 10 18 23 27 Calculate the MPL. which is the demand curve for bakers. Yes. b. using the  following formula: (5 points) MPL    (Number of cakes)/ L b.

(2 points) b. Answer: The graph should show the downward sloping demand curve for labor showing equilibrium employment at 220 when the equilibrium wage equals $4. [300 – (20 x 4 ] and employment falling to 200 when a minimum wage equal to $5 is imposed [300 – (20 x 4)]. (2 points) 7. before the minimum wage is put in place. Suppose that in the city above.e. The equilibrium wage is $4 per hour. a. . The demand curve is inelastic at this point. where L=the number of dental hygienists and W= the daily wage. How does the minimum wage affect employment in these fast-food restaurants? Draw a graph to show what has happened. Suppose that the demand for burger flippers at fast-food restaurants in a small city is LD=300-20W. Suppose that the demand for dental hygienists is L D=5000-20W. 2 bakers would be hired and 18 cakes would be  baked and sold daily. where L= the number of burger flippers and W= the wage in dollars per hour. What is the own-wage elasticity of demand for dental hygienists when W= $100 per day? Is the demand curve elastic or inelastic at this point? What is the own-wage elasticity of demand when W=$200 per day? Is the demand curve elastic or inelastic at this point? Answer: Elasticity of demand = %Δ quantity demanded/%Δ wage = (ΔLD/LD)/(ΔW/W )= (ΔLD/ΔW) x (W/LD) = -20 x (100/3000) = -2/3. there is an uncovered sector where L S=100+80W and LD=300-20W. (2 points) 8. If each baker is paid $80 per day. and estimate the effects on employment in the fast-food sector. but the government puts in place a minimum wage of $5 per hour.

80 per hour and L = 224. A firm is considering hiring a worker and providing the worker with general training. A positive elasticity indicates that the two are gross substitutes. Hence. the firm cannot recover the costs of providing general training so that the workers must pay for the training.5. The supply of labor is given in the following table for Teddy’s Treats. and analyze the effects on both wages and employment in the uncovered sector. What is the cross-wage elasticity of demand for assistant bakers in this case? Are assistant bakers and dough-making machines gross substitutes or gross complements? Answer: A 10 percent fall in the price of capital caused a 15 percent fall in the use of assistant bakers so the cross wage elasticity is +1. . If the worker can costlessly move to another employer in the post-training period and that employer will pay a wage equaling the new MRP L . a dog biscuit company. during the training period the worker pays for the training by receiving a wage W = MRP L (during training) – cost of training = $3000 .(1 point) 11. which is a profit-maximizing monopsonist. When the cost of dough-making machines fell by 10%. how much will the training firm pay the worker in the training period? Answer: Because mobility costs are low for employees of the firm. Answer: The graph should show that the initial equilibrium wage in the uncovered sector is $4 per hour and L = 220. (2 points) 10. the demand for assistant bakers fell by 15%. (4 points) 9.Suppose that all the workers who lose their jobs as burger flippers due to the introduction of the minimum wage seek work in the uncovered sector.000. Calculate the total labor cost and the marginal expense of labor for each level of employment. The training costs $1000.$1000 = $2000. and the worker’s MRP L during the training period is $3. What happens to wages and employment in that sector? Draw a graph to show what happens. Offered Wage($) 4 5 6 7 8 Supply of Labor(Number of Hours) 18 19 20 21 22 a. The new equilibrium is W = $3. Then the labor supply curve shifts over by 20 to LS = -80 + 80W.

Answer: See downward sloping dotted curve above which is also the demand for labor curve. Answer: a.b. (4 points) 12. Draw the supply of labor curve and the marginal expense of labor curve. Add the marginal revenue product curve to the drawing in Problem 11. the dog biscuit company in Problem 11. Teddy’s Treats. has the following MRP L: Number of Hours 18 19 20 21 22 MRPL 29 27 25 23 21 a. (10 points) Offered Wage($) 4 5 6 7 8 Supply of Labor(Number of Hours) 18 19 20 21 22 Total Labor Cost ($) Marginal Expense of Labor 72 95 120 147 176 -23 25 27 29 b. (2 points) .

Her wage rate is $8.b.00 per hour for the first 8 hours. (2 points) 13. Under this program. how many hours of labor will be hired? What wage will be offered? Answer: The profit-maximizing number of hours is 20 and Teddy’s Treats will offer a wage of $6 per hour. Suppose a single parent can work up to 16 hours per day at a wage rate of $10. Various income maintenance programs have been developed to assure a minimum level of income for low-income families.” Draw Stella’s daily budget constraint. If she works more than 8 hours. Aid to Families with Dependent Children (AFDC) was established with the Social Security Act of 1935.00 per hour. 14. Stella can work up to 16 hours per day at her job. The budget constraint for subsequent hours of work is the segment to the left of the dotted vertical line at 8 hours. her employer pays “time and a half. If Teddy’s Treats is maximizing profits. the family’s benefit was reduced by $1 for every dollar . The budget constraint for the first 8 hours of work is the segment to the right of the dotted vertical line at 8 hours. Answer: (4 points) Stella’s earnings are equal to the following: [Number of hours (within first 8 hours)  $8] + [Number of hours (among next 8 hours)  $12]. The family was given an income subsidy depending on family size.

These individuals who continue to work have relatively flat indifference curves. (2 points) Beyond 4 hours of work. (5 points) c. money income would be higher if the person worked. draw the daily budget constraint under AFDC for the single parent described above. their effective wage rate is zero. Those with relatively steep indifference curves. with the subsidy. who were not working before. (iii) for those with flat indifference curves who work more than 4 hours a day? Answer: (a) and (b). (2 points) . a. (ii) for those with steep indifference curves who work less than 4 hours a day.earned. eligible participants who would work up to 4 hours per day can attain a higher utility if they choose to receive the subsidy under AFDC and not work at all. will still not work with the subsidy. What effect might this program have on the incentive to work (i) for those with steep indifference curves who are not working. Suppose the maximum subsidy for the single parent described above is $40. On the same graph. b. Draw the daily budget constraint without program participation for the single parent described above. This encourages some eligible individuals to refuse program participation and work instead. If the maximum AFDC subsidy is $40. c.