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Unformatted text preview: CHAPTER 16 LABOR MARKETS Because the subject of labor demand was treated extensively in Chapter 9, the problems in this chapter focus primarily on labor supply and on equilibrium in the labor market. Most of the labor supply problems (16.1–16.6) start with the specification of a utility function and then ask students to explore the labor supply behavior implied by the function. The primary focus of most of the problems that concern labor market equilibrium is on monopsony and the marginal expense concept (problems 16.7 – 16.10). Comments on Problems 16.1 This is a simple algebraic example of labor supply that is based on a Cobb– Douglas (constant budget shares) utility function. Part (b) shows, in a simple context, the work disincentive effects of a lump-sum transfer—3/4 of the extra 4000 is “spent” on leisure which, at a price of $5 per hour implies a 600 hour reduction in labor supply. Part (c) then illustrates a positive labor supply response to a higher wage since the $3000 spent on leisure will now only buy 300 hours. Notice that a change in the wage would not affect the solution to part (a), because, in the absence of nonlabor income, the constant share assumption assures that the individual will always choose to consume 6000 hours (= 3/4 of 8000) of leisure. 16.2 A problem using the expenditure function approach to study labor supply. Shows why income and substitution effects are precisely offsetting in the Cobb-Douglas case. 16.3 A risk-aversion example that shows that wages must be higher on jobs with some uncertainty about the income stream promised if they are to yield the same utility as jobs with no uncertainty. The problem requires students to make use of the concepts of standard deviation and variance and will probably make little sense to students who are unfamiliar with those concepts. 16.4 A problem in family labor supply theory. Introduces (in part [b]) the concept of “home production.” The functional forms specified here are so general that this problem should be regarded primarily as a descriptive one that provides students with a general framework for discussing various possibilities....
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- Spring '09
- Supply And Demand, Labor Supply, marginal expense