Solutions to Chapter 2 Labour Economics
Chapter 2 Exercises Solutions
Answer to end of chapter questions:
2. The labour force is calculated as the sum of the employed and the unemployed, which in this case is 22,000,000 + 1,000,000 = 23,000,000. The labour force participation rate is calculated as the ratio of the labour force to the working age population: 23,000,000 / 30,000,000 = 77 %. The unemployment rate is calculated as the ratio of the number of unemployed workers to the size of the labour force: 1,000,000 / 23,000,000 = 4.3 %.
4. a) The poor who are at minimum subsistence and who aspire to middle class consumption patterns: This group values income highly relative to leisure, so the indifference curve is relatively flat. As the wage increases, the income constraint line rotates clockwise, and we would expect a relatively large increase in hours worked. This response is dominated by a substitution effect, but there may be a small income effect working in the direction of increased leisure.
b) The wealthy who have acquired an abundance of material goods and who now aspire to be members of the idle rich: This group values leisure highly relative to income earned from wages, so the indifference curve is relatively flat. They would presumably have high non-labour income, which would shift the income constraint line upward in parallel fashion from the bottom right-hand corner. As the wage increases, the income constraint line rotates clockwise, and we would expect a decrease in hours worked. In this income range -- high up and to the left in the leisure-income diagram -- very strong income effects work to outweigh the substitution effect. Recall that for this labour supply model, the two effects always work in opposite directions. This group is on the backward bending part of their labour supply curve.
c) Workers who have a strong attachment to the labour force and who are reluctant to change their hours of work: This situation can be depicted by the intersection between
Answer to end of chapter questions:
2. The labour force is calculated as the sum of the employed and the unemployed, which in this case is 22,000,000 + 1,000,000 = 23,000,000. The labour force participation rate is calculated as the ratio of the labour force to the working age population: 23,000,000 / 30,000,000 = 77 %. The unemployment rate is calculated as the ratio of the number of unemployed workers to the size of the labour force: 1,000,000 / 23,000,000 = 4.3 %.
4. a) The poor who are at minimum subsistence and who aspire to middle class consumption patterns: This group values income highly relative to leisure, so the indifference curve is relatively flat. As the wage increases, the income constraint line rotates clockwise, and we would expect a relatively large increase in hours worked. This response is dominated by a substitution effect, but there may be a small income effect working in the direction of increased leisure.
b) The wealthy who have acquired an abundance of material goods and who now aspire to be members of the idle rich: This group values leisure highly relative to income earned from wages, so the indifference curve is relatively flat. They would presumably have high non-labour income, which would shift the income constraint line upward in parallel fashion from the bottom right-hand corner. As the wage increases, the income constraint line rotates clockwise, and we would expect a decrease in hours worked. In this income range -- high up and to the left in the leisure-income diagram -- very strong income effects work to outweigh the substitution effect. Recall that for this labour supply model, the two effects always work in opposite directions. This group is on the backward bending part of their labour supply curve.
c) Workers who have a strong attachment to the labour force and who are reluctant to change their hours of work: This situation can be depicted by the intersection between