4. What are the functions and limitations of an economic model?
Answer: The major function of an economic model is to strip away real world complexities and focus on a particular cause/effect relationship. Economic models will often focus on a particular kind of behavior and ignore complexities that are either not germane to that behavior or only of indirect importance. Models used to generate insights about responses to a given economic stimulus are often not intended to forecast actual outcomes.
5. a. This behavior is entirely consistent with the model of job quitting described in the text. Workers are assumed by economic theory to be attempting to maximize utility (happiness). If all other aspects of two jobs are similar, this theory predicts that workers will prefer a higher-paying to a lower-paying job. However, two jobs frequently differ in many important respects, including the work environment, personalities of managers, and the stresses placed on employees. Thus, one way to interpret this woman's behavior behavior is that she is willing to give up 50 cents an hour to be able to work in an environment freer of stress.
b. There is no way to prove that her behavior was grounded in "rationality." Economists define rationality as the ability to make considered decisions that are expected (at the time the decision is made) to advance one's self interest. We cannot tell from any one individual act whether the person involved is being rational or not. Certainly, as described above, this woman's decision to quit could be interpreted as a move calculated to increase her utility (level of happiness). However, it could also be that she became uncontrollably angry and made her decision without any thought of the consequences.
c. Economic theory does not predict that everyone will act alike. Since economic agents are assumed to maximize utility, and since each person can be assumed to have a unique preferences, it is entirely consistent with economic theory that some workers would respond to a given set of incentives and that others would not. Thus, it could not be correctly concluded from a situation described that economic theory applied to one group of workers but not to another. It might be that other workers were less bothered by stress and that they were not willing to give up another 50 cents an hour to avoid this stress.
2. Analyze the impact of the following changes on wages and employment in a given occupation:
a.) A fall in the danger of the occupation.
b.) An increase in product demand.
c.) Increased wages in alternative occupations.
Answer: (a) A fall in the danger of the occupation, other things being equal, should increase the attractiveness of that occupation, shifting the supply curve to the right and causing employment to rise and wages to fall.
(b) An increase in product demand will shift the demand for labor curve to the right causing both wages and employment to increase.
(c) Increased wages in other occupations will render them relatively more attractive than they were before and cause the supply curve to the occupation in question to shift to the left. This will cause employment in this market to fall and wages to rise.
5. If the wages for arc welders are above the equilibrium wage, the company is paying more for its arc welders than it needs to and as a result is hiring fewer than it could. Thus, the definition of overpayment that makes the most sense in this case is one in which the wage rate is above the equilibrium.
8. Suppose that the Consumer Product Safety Commission issues a regulation requiring an expensive safety device to be attached to all power lawnmowers. This device does not increase the efficiency with which the lawnmower operates. What, if anything, does this regulation do to the demand for labor of firms manufacturing power lawnmowers? Explain.
Answer: This regulation would cause the demand for labor curve of the firms that manufacture power mowers to shift to the left. The demand for labor is in part derived from product demand. Because it is more costly now to manufacture lawnmowers, the prices that will be charged to consumers will rise. This price increase will move the firm upward and to the left along its product demand curve. With less product demanded for any given wage rate paid to workers, the end result is a leftward shift of the labor demand curve. (If, however, consumer preferences for greater safety were to shift the product demand curve to the right, employment losses would be mitigated.)
1. Unemployment rate = 100 x (number unemployed)/(number unemployed + number employed) = 100 x (5M)/(135M) = 3.7%
Labor force participation rate = 100 x (number employed + number unemployed)/adult population = 100 x (135M)/(210M)=64.3%
a. Plot the demand and supply curves.
b. What are the equilibrium wage and employment level in this market?
c. Now suppose that at any given wage 20,000 more workers are willing to work as school teachers. Plot the new supply curve and find the new wage and employment level. Why doesn't employment grow by 20,000?
Answer: a. See the figure. Plot the Ld and Ls curves by solving for desired employment at given wage rates. If W = 500, for example, employers desire 25,000 workers (Ld = 100,000 – 150x500); if W = 400, they would desire 40,000. Since the equation above is for a straight line, drawing a line using these two points gives us the demand curve. Use the same procedure for the labor supply curve.
b. To find the equilibrium, solve for the wage at which the quantity of labor supplied equals the quantity of labor demanded: Ls = 20,000 + 350W = 100,000 – 150W = Ld. Solve for W by adding 150W to both sides and subtracting 20,000 from both sides to yield 500W = 80,000. Dividing both sides by 500 reveals that W = $160 per day. Plugging W = $160 into both the labor demand and supply equations shows that L = 76,000 schoolteachers.
c. The new labor supply curve is Ls' = 40,000 + 350W. Setting this equal to Ld and solving shows that W = $120 per day; L = 82,000 school teachers. Employment doesn't grow by 20,000 because the shift in the supply curve causes the wage to fall, which induces some teachers to drop out of the market.
3. see back of book.
Answer: The mill will hire workers until MRPL = W. 20 - .5L = 10 when L = 20 workers.