Assignment 1

Problem Set 1

Questions # 1 Suppose that the adult population is 210 million, and there are 130 million who are
employed and 5 million who are unemployed. Calculate the unemployment rate and the labor force
participation
rate.

Answer:
(number unemployed )
Unemployment rate= x 100
(number unemployed +number employed )
(5 million)
¿ x 100=3.7 percent .
(135 million)

(number employed + number unemployed )

Labor force participation rate= x 100
adult population
(135 million)
¿ x 100=64.3 percent .
(210 million)

Questions # 2. Suppose that the supply curve for schoolteachers is LS = 20,000 + 350W, and the demand
curve for schoolteachers is LD = 100,000 - 150W, where L = the number of teachers and W = the daily
wage.
a. Plot the supply and demand curves.
b. What are the equilibrium wage and employment levels in this market?
c. Now suppose that at any given wage, 20,000 more workers are willing to
work as schoolteachers. Plot the new supply curve, and find the new wage and employment level.
Wage
LS

160

LD

56000 Employment

b. What are the equilibrium wage and employment levels in this market?

Solution:
 LS = LD
20,000 + 350W =100,000 - 150W
500W = 80000
W = 80000/500
Equilibrium wage=W=160

LS= 20,000 + 350W

LS= 20,000 + 350(160)
LS= 56000=LD

c. Now suppose that at any given wage, 20,000 more workers are willing to
work as schoolteachers.
Solution:
Now the labor supply is
LS= 20,000 + 350W+20,000

LS= 40,000 + 350W

Equating labor supply and labor demand now

LD=LS
100,000 - 150W = 40,000 + 350W

W= 60,000/500

W= 60,000/500
W= 120
Employment is now
LS= 40,000 + 350(120)
LS= 40,000 + 42,000
LS= 82,000=LD
Wage LS

LS1

160

120

LD

56000 82000 Employment

Questions # 3 The daily budget constraint of an individual is shown in the following chart. Employer
pays him a base wage rate plus overtime if he works more than the standard hours. What is daily nonlabor
income of this individual? What is base wage rate? What is overtime wage rate? How many hours does
this individual need to work to receive overtime?

Solution:
Teddy’s nonlabor income is 100.
His base wage rate is (170−100)/(16−9)=70/7=$ 10 per hour .
His overtime wage rate is (350−170)/(9−0)=$ 180/9=$ 20 per hour .
Teddy needs to work at least 7 hours before he receives overtime.

Questions # 4: Suppose that the supply curve for lifeguards is LS = 20 , and the demand curve for
lifeguards is LD = 100 - 20W, where L = the number of lifeguards and W = the hourly wage.
a) Graph both the demand and supply curves and identify equilibrium wage rate.
b) Now, suppose that the government imposes a tax of $1 per hour per worker on companies hiring
lifeguards. Draw the new (after-tax) demand curve in terms of the employee wage. How will this
tax affect the wage of lifeguards and the number employed as lifeguards?

Answer:
 Ls=Ld
20 = 100 - 20W
W = 80/20 = $4

After imposition of tax labor demand is

Ld’= 100 – 20(W+1)
Ld’= 100 – 20W-20
Ld’= 80 – 20W
Equating labor demand and labor supply to get equilibrium wage
Ls=Ld’
20 = 80 – 20W
W=60/20
W=3
After imposition the wage is $3.

Question # 5: Creative Dangles is an earring design and manufacturing company. The production
function for earrings is Q = 25KL, where Q = pairs of earrings per week, K = hours of equipment used,
and L = hours of labor. Workers are paid $8 per hour, and the equipment rents for $8 per hour.
a. Determine the cost-minimizing capital labor ratio at this firm.
Solution:

Pick K and L so that

(MP L/ MP K )=W /C ,

MP L=dQ/dL=25 K
MP L=dQ/dL=25 L
Putting in equilibrium condition
(25 K /25 L)=8/8=1.
 So labor and capital will be used in same ratio.

b. How much does it cost to produce 10,000 pairs of earrings?

c. Suppose the rental cost of equipment decreases to $6 per hour. What is the new cost-minimizing
capital-labor ratio?

b. How much does it cost to produce 10,000 pairs of earrings?

Solution:

Since the cost-minimizing capital-labor ratio is 1, the firm should use equal amounts of capital and labor.
To produce 10,000 pairs of earrings, the calculation is as follows:

Q=25 K∗L
10,000=25 K∗L
400=K∗L
Since K =L ,
400=K∗K .
20=K
20=L

C=r∗K +w∗L
(8∗20)+(8∗20)=320

20 units of both K and L must be used, and at $8 per unit the cost comes to $320.

Question # 6:The ABC Corporation produces tables at its factory. Both its labor and capital markets are
competitive. Wages are $12 per hour, and table-making equipment (a computer controlled plastic
extruding machine) rents for $4 per hour. The production function is ,

where q is table per week, K = hours of equipment used, and L = hours of labor. What is marginal product
of capital and labor. Determine the cost minimizing capital-labor ratio at this firm.

Answer:

As the chapter explains, to minimize cost, the firm picks K and L so that

w/MPL = r/MPK, where C is the rental cost of capital. Rearrange this MPL/MPK = W/C and substitute in the
information from the problem:
So labor and capital will be used in same ratio.

Question # 7: The following table gives the demand and supply for cashiers in retail stores.

Numbe
r
Number of
of Cashie
Wage Cashiers rs
Rate Demand Supplie
($) ed d
3 210 80
4 190 110
5 180 130
6 160 160
7 140 150
8 120 185
9 90 200

a. Plot the supply and demand curves.

Solution:

b. What are the equilibrium wage and employment levels in this market?
c. Suppose the number of cashiers demanded increases by 10 at every wage rate. Plot the new demand
curve. What are the equilibrium wage and employment level now?
Question # 8: From the original demand function in Problem 6 (see table), how many cashiers would
have jobs if the wage paid were $8.00 per hour? Discuss the implications of an $8 wage in the market for
cashiers.

Question # 9:The demand curve for gardeners is

, where G = the number of gardeners, and W = the hourly wage. The

supply curve is .

a. Graph the demand curve and the supply curve. What is the equilibrium wage and equilibrium number
of gardeners hired?
Solution:
Gd=Gs
19 - W= 4 + 2W
-3W= -15
Equilibrium wage=W= 5
Equilibrium number of gardeners hired=Gd =Gs = 14

b. Suppose the town government imposes a $2 per hour tax on all gardeners. Indicate the effect of the tax
on the market for gardeners. What is the effect on the equilibrium wage and the equilibrium number of
gardeners hired? How much does the gardener receive? How much does the customer pay? How much
does the government receive as tax revenue?Wage
Solution: G’s
After tax the supply curve is Gs
Gs = 4+2(W-2)
Gs = 4+2W- 4 E’
6.33
Gs =2W
5 E
By equating the demand supply curve
4.33
19-W=2W
W=19/3 = 6.3
Equilibrium wage now is 6.33
Equilibrium employment now is Gd
Gs =2(6.3)=12.7 Employment
12.7 14

Gardener receive $4.33 per hour

Customer pay $6.33
6.33 – 2 = 4.33

Government Revenue is 2 X 12.7 = 25.4

Question # 10: Suppose that the demand for dental hygienists is LD = 5,000 – 20W, where L = the
number of dental hygienists and W = the daily wage. 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?

Solution:
Elasticity of demand=% ∆ (quantity demanded)/% ∆(wage)
At W =100 ,
LD=5,000 – 20(100)
L D=3,000 ,
You will note that (∆LD/∆W) is the slope of the labor demand function (the change in employment demanded
brought about by a one-unit change in the wage). This slope equals -20.
Therefore, own−wage elasticity of demand=−20 X (100/3,000)=−2 /3.
The demand curve is inelastic at this point.

Use the same approach to calculate the elasticity at W = 200. In this case, the own-wage elasticity of demand = -20 *
(200/1,000) = -4. The demand curve is elastic at this point.

Question # 11: Suppose that the demand for burger flippers at fast-food restaurants in a small city is LD =
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. How does the minimum wage affect employment in these fast-food restaurants?
Draw a graph to show what has happened, and estimate the effects on employment in the fast-food sector.
Solution:
LD = 300 – 20W
At equilibrium wage
LD = 300 – 20*4
LD = LS = 300 – 80=220 = Employment
At minimum wage
LD = 300 – 20*5
LD = 300 – 100 = 200 = Employment

Question # 12: Calculate the own-wage elasticity of demand for occupations a, b, and c below. ED and
W are the original employment and wage. E*D and W* are the new employment and wage. State whether
the demand is elastic, inelastic, or unitary elastic.
 a. %∆ED = 5, %∆W = –10
Solution:
E=% ∆ ED /% ∆ W
E=5/−10=−0.5

b. ED = 50, W = 7
E*D = 40, W* = 8

Solution:

% ∆ ED=(40−50)/50∗100=−20 %
% ∆ W =(8−7)/7∗100=14.2 %
E=−25/12.5=−1.4

c. ED = 80, W = 8
E*D = 100, W* = 6

Solution:

% ∆ ED=(100−80)/80∗100=25 %
% ∆ W =(6−8)/8∗100=−25 %
E=25/−25=−1