Labor Economics: Exercise 1

Name: _________________________________ Date: ___________

1. Analyze the impact of the following changes on wages and employment in a given occupation:

a. A decrease in the danger of the occupation will shift the labor (demand, supply) supply curve
to the (right, left) right and in the new equilibrium, wages are (higher, lower) lower_ and employment
(higher, lower) higher.

b. An increase in product demand that raises the price of the product will shift the labor
(demand, supply) demand curve to the (right, left) right and in the new equilibrium, wages are (higher,
lower) higher and employment (higher, lower) higher.

c. An increase in labor productivity will shift the labor (demand, supply) demand curve to the
(right, left) right and in the new equilibrium, wages are (higher, lower) higher and employment (higher,
lower) higher.

d. Increased wages in alternative occupations will shift the labor (demand, supply) supply curve
to the (right, left, ) left and in the new equilibrium, wages are (higher, lower) higher and employment
(higher, lower) lower.

e. When the scale effect dominates, an increase in the price of machines used by the firm will
shift the (demand, supply) demand curve of labor to the (right, left,) left and in the new equilibrium,
wages are (higher, lower) lower and employment (higher, lower)_lower_.

f. When the substitution effect dominates, an increase in the price of machines used by the firm
will shift the (demand, supply) demand curve of labor to the (right, left,) right and in the new
equilibrium, wages are (higher, lower) lower and employment (higher, lower) higher.

2. The following table provides information on the labor market of an imaginary country.

Population 260 million

Employed 130 million
Unemployed 10 million
Under Age 15 60 million

a. Given the data above, the working age population is _200 million.

b. Given the data above, those of working age who do not belong to the labor force equals
60 million

c. Given the data above, the labor force equals 140 million_.

d. Given the data above, the labor force participation rate is 70 %

 e. Given the data above, the unemployment rate is 7.1%.

3. The following table shows the average nominal hourly earnings and CPI of US workers.

YEAR EARNINGS CPI

1980 $6.85 82.4
1990 $10.20 130.7
2009 $18.60 214.5

The real hourly earnings for workers was $8.31 in 1980, $7.80 in 1990, and $8.67 in 2009.

4. The following table shows the number of cakes that could be baked daily at a local bakery, depending
on the number of bakers.

Number of Bakers Number of Cakes MPL MRPL

0 0 --- ---
1 10 10 100
2 18 8 80
3 23 5 50
4 27 4 40
a. Calculate the MPL for each additional worker.
b. Diminishing marginal product begins with the 2nd baker.
c. Suppose each cake sells for $10. Calculate the MRPL.
d. If the wage equals $80/day, how many bakers will the firm hire? 2.
e. How many cakes will be baked and sold each day? 18

5. Suppose skilled and unskilled workers are substitutes in production. An increase in the wages of
skilled workers shall (increase, decrease) decrease the demand for unskilled workers when the scale
effect dominates and (increase, decrease) increase the demand for unskilled workers when the
substitution effect dominates. When the scale effect dominates the cross-wage elasticity of demand is
(positive, negative) negative and when the substitution effect dominates it is (positive, negative)
positive.

6. Airline pilots and planes are (gross substitutes, gross complements, complements) complements or
(gross complements) and their cross-wage elasticity of demand are always (positive, negative,
ambiguous) negative.

7. Suppose that the demand for dental hygienists is LD=5000-20W, where L=the number of dental
hygienists and W= the daily wage.
a. What is the own-wage elasticity of demand for dental hygienists when W= $100 per day? 2/3
or -2/3 or .667 or -.667.
 b. Is the demand curve elastic or inelastic at this point? inelastic
c. What is the own-wage elasticity of demand when W=$200 per day? 4 or -4
d. Is the demand curve elastic or inelastic at this point? elastic

8. Suppose that the demand for burger flippers at fast-food restaurants in a small city is L D=300-20W,
where L= the number of burger flippers and W= the wage in dollars per hour. The equilibrium wage is $4
per hour, but the government puts in place a minimum wage of $5 per hour.
a. The minimum wage will cause employment to (increase, decrease) decrease from 220
workers to 200 workers in these fast-food restaurants.
b. Suppose that in the city above, there is an uncovered sector where L S=-100+80W and
LD=300-20W, before the minimum wage is put in place. 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. Wages in the uncovered sector will (increase, decrease)_decrease
from $4 to $3.80 and employment to (increase, decrease) increase from 220 to 224.

9. When the cost of dough-making machines fell by 10%, the demand for assistant bakers fell by 15%.
The cross-wage elasticity of demand for assistant bakers in this case is 1.5 and assistant bakers and
dough-making machines are (gross substitutes, gross complements) gross substitutes.

10. A firm is considering hiring a worker and providing the worker with general training. The training
costs $1000, and the worker’s MRPL during the training period is $3,000. If the worker can costlessly
move to another employer in the post-training period and that employer will pay a wage equaling the
new MRPL , how much will the training firm pay the worker in the training period? $2000.

11. Suppose the marginal expense of hiring another worker is $150 and the marginal expense of hiring
current workers for an extra hour is $10. The added output associated with an added worker, holding
both capital and average hours per worker constant, is 120. The added output generated by increasing
average hours per worker, holding capital and the number of employees constant, is 7. If the firm is
interested in maximizing profits it should hire (more, less) more workers and have each worker work
(fewer, longer) fewer hours.

12. The supply of labor is given in the following table for Teddy’s Treats, a dog biscuit company, which is
a profit-maximizing monopsonist.

Offered Supply of Total Labor MEL MRPL Increase (+)

Wage($) Labor(Hours) Cost decrease (-)
in profits($)
4 18 72 29
5 19 95 23 27 +4
6 20 120 25 25 0 (no
change)
7 21 147 27 23 -4
8 22 176 29 21 -8
 a. Calculate the total labor cost and the marginal expense of labor for each level of
employment.
b. If Teddy’s Treats is maximizing profits, how many hours of labor will be hired?_20_. What
wage will be offered? $6

13. Suppose that the XYZ Company hires labor and capital in competitive input markets.
Assume that labor costs W = $200 per day and that a unit of capital costs C = $150 per day. At
the current level of production, labor's marginal product is MPL = 40 units of output produced
per day and capital's marginal product is MPK = 30 units of output per day.
a) To minimize costs in the long run, the firm should (increase, decrease, not change)
not change the amount of capital used and (increase, decrease, not change) not change the
amount of labor used. Given the initial input prices and factor marginal products, the firm is
minimizing the cost of current production, as the cost of producing the marginal unit of output

using either labor or capital is the same at $5 per unit ( = = $5 = ).

b) If the wage were to increase to = $240 per day, to minimize costs in the long run,
the firm should (increase, decrease, not change) increase the amount of capital used and
(increase, decrease, not change) decrease_ the amount of labor used. If the daily wage

increases to $240, = = $6 > = $5. The firm can avoid some of the cost hit from

the higher wage now by substituting capital for labor

Other pointers for review:

Please study the Hicks-Marshall Laws of Derived Demand as applied to the own-wage
elasticity and the cross-wage elasticity of demand for labor