Mid1324S05Answers - ECONOMICS 324, SPRING 2005 D. Hamermesh...

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Unformatted text preview: ECONOMICS 324, SPRING 2005 D. Hamermesh FIRST MIDTERM EXAM Answer all the questions in your bluebook. I. (5 minutes each) Define the concept; and tell how it affects the second item listed in the question. 1. Added workers Size of the labor force over the business cycle. Workers who enter the labor force in a recession. If they dominate, this means that the labor force is overstated, and the unemployment rate is overstate, during recessions. 2. Fixed costs of working Hours of work. Those time and money costs of working even one hour, such as commuting, some childcare, grooming, etc. They lead us to observe very few people working only 1 hour per day, since without some larger number of hours utility is higher if one stays at home (because the fixed costs are not then borne). 3. Income effect of a wage increase Hours of work The decrease (or perhaps increase) in hours of work produced by a higher wage after sufficient unearned income has been taken away from the worker to leave him/her on the same indifference curve. Since leisure is unlikely to be an inferior good, we assume that this effect is negative. 4. Elasticity of substitution in Long-run labor-demand elasticity production The elasticity of substitution is defined as dln(L/K)/dln(MP L /MP K ). It shows the ease of substitution of one input for the other. The higher is the elasticity of substitution, the greater the long-run labor demand elasticity. II. (20 minutes) Magically everybody in the U.S. has an extra two hours per day beyond the 24 we now enjoy. We still expect to live as many years as before, but we now have more time every day. Assume that wage rates dont change. Use the indifference curve apparatus we have developed in class to help yourself to answer these questions. What is the effect of this increase in available daily hours on: 1. Hours worked per year by people already in the labor force. 2. The labor-force participation rate of people age 35. 3. The labor-force participation rate of people age 65. As explained above, an increase in the endowment of time should create an increase in labor force participation for any age group. However, the preferences of people age 65 may be different from those of the 35 year-olds. Perhaps the older group has a high marginal utility of leisure and so, while their participation will increase, it will not increase by as much as the younger group. 4. Average hours of work in a year of all Americans. In Part 1 we said that average hours of work for those already participating should increase and in Part 2 we said that labor force participation should increase. So, overall hours of work for all Americans should increase. 26 Y 24 An increase in available time essentially acts as an increase in wealth. Assuming that both consumption and leisure are normal goods, a person already in the labor force will choose to consume more of both goods and leisure. Usually, an increase in leisure corresponds with a decrease in hours of work. However, because available hours have increased, this worker will end up working more than before. (He will because available hours have increased, this worker will end up working more than before....
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Mid1324S05Answers - ECONOMICS 324, SPRING 2005 D. Hamermesh...

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