problem set 1

# problem set 1 - = 50 units of labor no matter what the...

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Econ 1110 Spring 2007 Assignment 1: Labor markets 1. Exercise 1 in [AB] (Numerical problems of Chapter 3). 2. (Minimum wage). Assume that the labor demand curve is given as: W P =10 0 . 1 N Labor supply is inelastic to changes in the wage, so that households are willing to supply N =50 units of labor, no matter the wage. (a) Compute the equilibrium real wage. (b) Assume that the government imposes a minimum wage of 8 . Compute the resulting unemployment. Also compute the total revenue of labor; i.e., N · W P before the minimum wage is imposed and thereafter. 3. Exercise 5 in [AB] (Numerical problems of Chapter 3) 4. (European Unemployment) This exercise illustrates some of the aspects of European un- employment discussed in class. Assume that the labor demand curve is given by: W P = AK 0 . 1 N, and that originally K =20 ,A =1 . Assume that P =1 . Labor supply is inelastic to changes in the wage. In other words, households are willing to supply N
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Unformatted text preview: = 50 units of labor, no matter what the wage. (a) What is the equilibrium real wage? Now suppose that in response to a negative productivity shock (say an unexpected increase in the price of raw materials), A drops (permanently) to . 9 . (b) Re-compute the equilibrium real wage that would result in a competitive market. (c) Assume now that the workers attempt to keep their real wage at its pre-shock level by forcing it through collective bargaining. Use the post-shock labor demand curve to compute the resulting level of employment and unemployment. (d) Assume now that the high real wage that has been attained through collective bar-gaining, makes capital f ow abroad leaving behind K = 18 . However, wages are still forced to remain at their pre-shock level as computed in part (a). What is the level of employment and unemployment now? 1...
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