150a_test2_key

# 150a_test2_key - Econ 150a Labor Economics Practice test...

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Econ 150a Labor Economics Practice test for Ch 3 and 4. Suggested solutions 1. A firm can use 2 inputs for production, capital or labor. These two inputs are perfect substitutes with one machine producing or two employees producing Q=1. The price of capital is \$750 and wages are \$400. a. What quantities of capital and labor will the firm use in the short-run? Capital is not a fixed cost. Use all capital since cost capital<cost labor. b. What quantities of capital and labor will the firm use in the long-run? If the costs remain the same, the firm will use all capital since cost capital<cost labor. This also assumes the firm’s profit >=0 which you should check if price was given. 2. In a particular industry, labor supply is S = 10 + w while labor demand is D = 40 - 4 w , where E is the level of employment and w is the hourly wage. a. What is the equilibrium wage and employment if the labor market is competitive? S = D 10 + w = 40 – 4w W=6 S=10+6=16 w=6 E=16 b. Suppose the government sets a minimum hourly wage of \$8. How many additional workers would want a job at the minimum wage? How many workers would lose their jobs? S=10+8=18 Originally E=16 now it’s E’=18 so 2 people enter the market. D=40-4(8)=8 So there were originally 16 employed so now 16-8=8 so 8 people are now unemployed.

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c. What is the unemployment rate? 8 people who lost their job + 2 who entered the labor market for higher wages so 8+2=10. The unemployment rate would be 10/18, or 55.6 percent.
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