Problem Set No.

Instructor: Costanza Naguib

Teaching Assistant: Clemente Pignatti

Instructions: Solutions to the problem set must be submitted on Moodle by 22 October 2020 at 16:15 at the latest,

before the virtual class will start. No late submissions will be accepted.

LONG QUESTIONS (GRADED)

1. (10 points) Use data from Eurostat to produce a table reporting the overall unemployment rate (i.e. age group

15 to 74) in the 27 countries of the European Union for the year 2019. Is the overall unemployment rate generally

higher or lower than the youth unemployment rate (i.e. the latter corresponding to the unemployment rate for

the age group 15 to 24)?

2. Consider the following short-run production function:

3
Y = 30L − L2
2

(a) (2 points) Compute the marginal product of labour.

(b) (4 points) 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 30?

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) (2 points) Write down the profit function for this firm.

(b) (2 points) 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 ):

LD = 200 − w
1
LS = 50 + w
2

where w is the market wage. Assume the selling price of the firms’ output is equal to 1.

(a) (5 points) Compute the equilibrium wage and the equilibrium level of employment.
Labour Economics Problem Set N.1

(b) (5 points) Assume now that the workers’ wages are subject to a lump sum tax of 50. Compute the new

equilibrium wage and employment. How much of the tax is effectively paid by the workers (i.e. comparing

the take-home income obtained here with the equilibrium wage obtained in the previous point)?

(c) (5 points) Assume now that the same tax of 50 is levied on the employers instead of the workers. In other

words, employers are required to pay 50 to the state for each worker they hire. Compute the equilibrium

and discuss how it differs from the one obtained in the point above. How much of the tax is effectively paid

by the employer?

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

U = C 2/3 + L2/3 (1)

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) (5 points) 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) (10 points) Compute the marginal rate of substitution between consumption and leisure and graphically

represent the map of indifference curves.

(c) (10 points) Derive the demand of consumption goods, the demand of leisure and the labour supply of the

agent. Represent the optimal choice graphically.

(d) (5 points) Assume now that the agent also has some non-labour income equal to v = 12 per day. Write

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

(e) (10 points) Derive the new optimal choice of consumption and labour supply under the new budget constraint

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

(f) (5 points) 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 = 160 − 2w

LS = −120 + 2w

(a) (5 points) Compute the equilibrium wage and employment under the assumption that the market is perfectly

competitive.

(b) (15 points) 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 (assume the price

of the consumer good is 1).

Labour Economics Problem Set N.1

MULTIPLE CHOICE QUESTIONS (NOT GRADED)

Exercice 1
The following are labour market indicators for Austria, Germany and Greece for the year 2018

Which are the correct values for the letters A to F?

(a) A=4.5, V=4.4%, C=41.9, D=4.4%, E=4.1, F=1

(b) A=4.5, B=4.4%, C=41.9, D=3.4%, E=4.1, F=1

(c) A=4.5, B=6.4%, C=41.9, D=3.4%, E=3.6, F=1.5

(d) A=4.1, B=4.4%, C=44.9, D=3.4%, E=3.6, F=1.5

(e) A=4.1, B=5%, C=44.9, D=4.4%, E=4.1, F=1.5

Exercice 2

Which of the following definitions best describes a panel database?

(a) An individual is observed repeatedly over time

(b) The same group of individuals is observed repeatedly over time

(c) A group of individuals is observed once

(d) Different groups of individuals are observed at different points in time

(e) None of the above

Labour Economics Problem Set N.1

Exercice 3

Consider a firm with the following production function

1
Y = 2L 2

with the price of the final good being equal to 2 and the wage equal to 1/2. What is the profit maximizing level of

labor demand?

(a) 12

(b) 4

(c) 16

(d) 8

(e) 20

Exercice 4

How would your answer to question (3) change if the wage level increases to 3?

(a) 4/9

(b) 8

(c) 12

(d) 2

(e) 1/3

Exercice 5

In a perfectly competitive economy, LD =160-10w and LS =-40+10w. What are the equilibrium levels of employment

and wage?

(a) W=40, L=60

(b) W=10, L=40

(c) W=60, L=10

(d) W=10, L=60

(e) W=0, L=60

Labour Economics Problem Set N.1

Exercice 6

How would your answers to the previous question change if a lump sum tax of 10 is now levied on the worker?

(a) W=15, L=10

(b) W=15, L=15

(c) W=10, L=15

(d) W=10, L=10

(e) W=20, L=20

Exercice 7

Consider now that the labour demand is completely inelastic, with LD=160. Compute the wage levels that would

arise in equilibrium under the settings of questions (5) and (6)

(a) Without tax: W=20. With tax=W=20

(b) Without tax: W=30. With tax=W=30

(c) Without tax: W=20. With tax=W=20

(d) Without tax: W=30. With tax=W=20

(e) Without tax: W=20. With tax=W=30

Exercice 8

Consider an economic agent with utility function

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

facing a price of goods p=2 a wage w=10 and with time endowment T=20. What is her optimal choice of consumption

(C), leisure (L) and labour supply (H)?

(a) L=10, C=40, H=10

(b) L=15, C=75, H=5

(c) L=10, C=50, H=10

(d) L=10, C=50, H=14

(e) L=5, C=25, H=15

Labour Economics Problem Set N.1

Exercice 9

How would your answers to the previous question change if she now has some non-labour income equal to 100?

(a) L=10, C=50, H=10

(b) L=15, C=75, H=5

(c) L=15, C=60, H=5

(d) L=15, C=75, H=9

(e) L=10, C=75, C=5

Exercice 10

Most of a payroll tax is eventually paid by

(a) Employers if the supply of labor curve is very inelastic

(b) Employers if the labor demand curve is very elastic

(c) Workers if the supply of labor curve is very inelastic

(d) Workers if the supply of labor curve is very elastic

(e) The burden of payroll taxes is always equally divided between the employers and the workers