Labor Market

Labor Market Economics

1. Evaluate the following statement using concepts from our class discussions (3-6 sentences):
“Any decrease in the unemployment rate is a sign that labor market conditions have improved.”

2. a) Draw the basic labor market model. (Make sure to label the axis, supply and demand curves and equilibrium point carefully).

Labor Market Economics

b) Describe an economic situation that would cause in increase in the supply of labor. Show this increase on the diagram from part a.

3. You can either take a bus or drive your car to work. A bus pass costs $ 5 per week, whereas driving your car to work costs $ 60 weekly ( parking, tolls, gas, etc.). You spend half an hour less on a one- way trip in your car than on a bus. How would you prefer to travel to work if your wage rate is $ 10 per hour? Will you change your preferred mode of transportation if your wage rate rises to $ 20 per hour? Assume you work five days a week and time spent riding on a bus or driving a car does not directly enter your utility.

4. The federal minimum wage was increased on July 24, 2009 to $6.65 from $7.25. If 16 hours per day are available for work and leisure, draw the daily budget constraint for a worker who was earning the minimum wage rate of $5.15 and the new budget constraint after the increase.

5. Shelly’s preferences for consumption and leisure can be expressed as:

U f( C, L) = ( C – 200) * ( L – 80)

This utility function implies that Shelly’s marginal utility of leisure is C 200 and her marginal utility of consumption is L 80. There are 168 hours in the week avail-able to split between work and leisure. Shelly earns $ 5 per hour after taxes. She also receives $ 320 worth of welfare benefits each week regardless of how much she works.

Labor Market Economics

a. Graph Shelly’s budget line.
b. What is Shelly’s marginal rate of substitution when L 100 and she is on her budget line?
c. What is Shelly’s reservation wage?
d. Find Shelly’s optimal amount of consumption and leisure.