Solutions to Chapter 2 Labour Economics

Topics: Consumer theory, Budget constraint, Indifference curve Pages: 5 (1724 words) Published: January 27, 2013
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 the upper left-hand corner of the income constraint and the highest indifference curve along the vertical axis (provided that the total time endowment available for working is feasible). The indifference curve is flatter than the income constraint line, so the marginal rate of substitution exceeds the wage. For a certain range, an increase in the wage will not cause a change in hours worked, and we could say that the wage elasticity of supply is perfectly inelastic.

d)Workers who have a weak attachment to the labour force and have viable alternatives to labour market work: This case is very similar to case b. If the wage falls, they might drop out of the labour force.

e)Workaholics are defined as those who have very strong preferences for labour market work: They have very flat indifference curves. One can expect a tangency near the vertical axis. Answer to end of chapter problems

2.This question pertains to the estimated linear equation of aggregate labour force participation for women. You are asked to interpret the coefficients. It is important to pay attention to the units that are given for each variable, which in turn is very important for the interpretation of the coefficient.

a)Ceteris paribus, this effect is -7 percentage points. As the husband's expected earnings increase, there is a fairly strong negative effect on the wives' participation rate, which is called a cross-income effect.

b)Ceteris paribus, this effect is +18 percentage points. As the wife's expected earnings increase, there is a very strong positive effect on the wives' participation. This is primarily attributable to a substitution effect.

c)We can interpret the effect of the husband's income as a pure effect stemming from non-labour income. Assuming that this cross-income effect is the same as the wife's own-income effect stemming from her own earnings, the substitution effect is +25 percentage points, which is partially offset by an income effect of...
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