1) What economic rule should a profit-maximizing company follow when deciding whether to add another worker. How can the profit-maximizing condition be expressed in real terms?

 

2) Define the term full-employment output.
 How is full-employment output affected by  in labor supply?
 By a beneficial supply shock?

 

3) What are the shortcomings of the classical model of the labor market when used to evaluate unemployment?

 

4) Define the following: Labor force, unemployment rate, participation rate, and  employment ratio.

 

 

5) Using FRED, determine the level of real output, real Capital, and the Labor Force for the U.S. economy in 1960, 1970, 1980, 1990, 2000, and 2010.  You can use December or the 4th quarter.

 

 

Assume that the production function is Y = AK0.3 N0.7.

a.    By what percentage did U.S. total factor productivity grow between each time period?

b.    What happened to the marginal product of labor between 1960 and 2010? Calculate the marginal product numerically as the extra output gained by adding 1 million workers in each of the two years.  

 

 

6)  The Greebe corporation the following production function.

 

Number of workers

Number of Greebes Produced

0

0

1

20

2

38

3

54

4

68

5

80

6

90

 

a.    Find the MPN for each level of employment.

b.    Greebe Corp. can get $2.75 for each greebe it produces. How many workers will it hire if the nominal wage is $30? If it is $40? If it is $50?

c.    Graph the relationship between Greebe Corp’s labor demand and the nominal wage. How does this graph differ from a real labor demand curve? Graph Greebe Corp’s labor demand curve.

d.    Suppose the nominal wage is fixed at $80, the price of greebes doubles from $2.75 each to $5.50 each. What happens to Greebe Corp’s labor demand and production?

e.    With the nominal wage fixed at $80 and the price of greebes fixed at $5.50, the introduction of a new automatic greebe maker increases the number of greebe that the same number of workers can produce by 25%. What happens to labor demanded and production?

f.     What is the relationship between your answers to part (d) and part (e)? Explain.

 

7) Image Baconland which has a marginal product of labor MPN = 215.25 - 4N, where N is the amount of labor used. In Baconland the amount of labor supplied, NS, is given by NS = -108.625 + 12.5w + 2T, where w is the real wage and T is a lump-sum tax levied on individuals.

a.    Suppose that T = 35. What are the equilibrium values of employment and the real wage?

b.    With T remaining equal to 35, the government passes minimum-wage legislation that requires firms to pay a real wage greater than or equal to 15. What are the resulting values of employment and the real wage?

 

8) Suppose that the production function is Y = 9K 0.5N 0.5. With this production function, the marginal product of labor is MPN = 4.5K 0.5N -0.5. The capital stock is K= 25. The labor supply curve is NS = 100[(1 - t)w] 2, where w is the real wage rate, t is the tax rate on labor income, and hence (1 - t)w is the after-tax real wage rate.

a.    Assume that the tax rate on labor income, t, equals zero.,  Find the equation of the labor demand curve. Calculate the equilibrium levels of the real wage and employment, the level of full-employment output, and the total after--tax wage income of workers.

b.    Repeat part (a) under the assumption that the tax rate on labor income, t, equals 0.6.

c.    Suppose that a minimum wage of w = 2 is imposed. If the tax rate on labor income, t, equals zero, what are the resulting values of employment and the real wage? Does the introduction of the minimum wage increase the total income of workers, taken as a group?

 

 

9) How would each of the following affect Helena Handbasket’s supply of labor?

a.    The value of Helena’s home triples in an unexpectedly hot real estate market.

b.    Originally an unkilled worker, Helena acquires skills that give her access to a higher-paying job. Assume that her preferences about leisure are not affected by the change in jobs.

c.    A temporary income tax surcharge raises the percentage of her income that she must pay in taxes, for the current year only. (Taxes are proportional to income in Helena’s country.)