Problem Set No.

Instructor: Michele Pellizzari

Teaching Assistant: Angela Doku

Instructions: Solutions to the problem set must be submitted to the TA by the beginning of class on

02/11/2017 at the latest, before the problems will be solved. You can also send your solutions via

email to the TA before the class. No late submissions are accepted.

QUESTIONS

1. Use data from the OECD to produce a table of the most recent youth unemployment rates (15-24

year olds) in Switzerland and the countries of the European Union.

2. Consider the following (short-run) production function:

1 2
Y = 50L L
6

(a) Compute the marginal product of labour.

(b) How much labour would be demanded in a perfectly competitive market where the consumption

price of the final good were 2 and the market wage were 20?

3. Consider a firm using capital (K) and labour (L) according to a generic production function Y (K, L).

Assume all markets are perfectly competitive (i.e., the labour market, the capital market and the

product market). Let w be the prevailing wage rate and c the cost of renting capital. The firm sells

its product at the market price P .

(a) Write down the profit function for this firm.

(b) Derive the optimality conditions for the maximisation of profits when the firm can adjust both

labour and capital.

4. Consider a perfectly competitive labour market with the following labour demand (LD ) and labour

supply (LS ):

1
LD = 800 w
4
1
LS = 20 + w
2

where w is the market wage. Assume the selling price of the firms’ output is equal to 1.
Labour Economics Problem Set N.1

(a) Compute the equilibrium wage and the equilibrium level of employment. Represent the equi-

librium graphically.

(b) Assume now that the workers’ wages are subject to a lump sum tax of 300. Compute the new

equilibrium and represent it graphically.

(c) Assume now that the same tax of 300 is levied on the employers instead of the workers. In other

words, employers are required to pay 300 to the state for each worker they hire. Compute the

equilibrium and represent it graphically.

5. Consider an economic agent with the following utility function:

U = C 1/2 + 2L1/2 (2)

where C is consumption and L is leisure. Assume that the price of the consumption good is p = 3,

the wage is w = 6 and the total endowment of time is T = 24.

(a) Write down the budget constraint of the agent assuming she does not have any non-labour

income. Represent this budget constraint graphically, indicate its slope and vertical intercept,

and explain their economic meaning.

(b) Compute the marginal rate of substitution between consumption and leisure and graphically

represent the map of indi↵erence curves.

(c) Derive the demand of consumption goods, the demand of leisure and the labour supply of the

agent. Represent the optimal choice graphically.

(d) Assume now that the agent also has some non-labour income equal to v = 9 per day. Write

down the new budget constraint, represent it graphically and compare it to that of question a.

(e) Derive the new optimal choice of consumption and labour supply under the new budget con-

straint in question d and compare this with the previous one (question c).

(f) Compute the minimum level of the daily non-labour income that would induce the agent to

withdraw from the labour force.

6. Consider a labour market characterised by the following labour demand and labour supply schedules:

LD = 180 2w

LS = 120 + 3w

(a) Compute the equilibrium wage and employment under the assumption that the market is per-

fectly competitive.
Labour Economics Problem Set N.1

(b) Suppose now that the demand side of the market is dominated by a single monopsonistic em-

ployer. Compute the equilibrium wage and employment level and represent it graphically (as-

sume the price of the consumer good is 1).