324ans - ECONOMICS 324 D. HAMERMESH ANSWER KEY FOR...

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ECONOMICS 324 D. HAMERMESH ANSWER KEY FOR PROBLEMS/QUESTIONS ON PARTICIPATION AND HOURS 1. How would you classify the labor-force status of the following, and why? a. My 86-year-old mother, who does 20 hours per week of unpaid volunteer work teaching other older people how to use the Web. Out of the labor force because she is not performing or seeking paid work. b. My eight-year-old grandson, who works 20 hours per week for pay on a paper route. The CPS doesn’t collect data for people under age 16, so he’d be out of the labor force. c. A guy whose union is out on strike. The CPS classifies striking workers as employed. d. A 61-year-old man who is in a nursing home. Out of the labor force assuming that he is not actively seeking work. e. A 16-year-old who is doing 20 hours per week of unpaid work in his father’s business. Employed because he is 16 or older and, although the work is unpaid, it is for a family business. 2. Let a worker’s daily utility function be U = U(L, Y) = LY, where L is leisure and Y is income. The worker earns a wage of w per hour, and there are 16 hours available in the day. Her income is Y = I + w[16-L], where I is unearned income, with both I and w taken as given by the worker. For now let I=1000 a. Draw the worker’s indifference map between leisure and income. L (hours per day) Y The slope of this worker’s indifference curves is – MU L /MU Y =-Y/L. 10 5 2 10 2 4
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b. What value of the wage rate w would induce the worker not to participate in the labor force? The workers reservation wage is equal to the marginal rate of substitution at the endowment point of (16, 1000). At this point, MU L /MU Y =1000/16=$62.50. So if the wage rate falls below $62.50 per hour, this worker would not supply any hours of labor. c. If the wage rate is $1 per hour, how many hours per day will the worker supply? d. The wage now rises to $2 per hour. What happens to her hours of work, her leisure and her income? Why don’t her hours double? e. Let I now equal 2000. What happens to hours of work? Why?
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A 3. Draw an indifference map and show how the requirement that workers receive time- and-a-half for overtime affects their desired hours of work. Then draw the budget constraint so that the worker receives the same total income and examine how her supply of hours changes. L (hours per week) Y 70 110 40w 40w + 70(1.5w) This worker has 110 hours available for work or leisure in a week. If he works more than 40 hours (has less than 70 hours of leisure), he is paid time and a half, causing a kink in his budget constraint. In the absence of overtime laws the worker would choose to work 35 hours per week (Point A). However, if overtime is available he can reach a higher level of utility by working 50 hours per week (Point B). So overtime laws cause this worker to increase his labor supply. If instead the worker simply received the same total income as at Point B, then he would choose to locate at Point C, would work fewer hours than under overtime laws, and would be better off than in either of the first two cases.
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This note was uploaded on 01/22/2012 for the course ECON 308 taught by Professor Olson during the Spring '09 term at Alabama.

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324ans - ECONOMICS 324 D. HAMERMESH ANSWER KEY FOR...

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