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Chp2Review - AP/ECON3240 Review Material for chapter 2 A...

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Benjamin: Labour Market Economics 6e Instructor’s Manual 2-1 AP/ECON3240: Review Material for chapter 2 A. Required Reading: Textbook (BGLR) pp. 31-60 B. Answers to End-of-Chapter Review Questions Review questions 1-6 on page 77. 1. If leisure were an inferior good, which is pretty inconceivable, then there would not be a backward sloping portion to the labour supply curve, even for high wages. Note that according to this question, leisure is still a good; it is not a bad. Whether leisure is a normal or an inferior good is reflected in the form of the indifference map. As the wage rate is increased progressively, the budget line rotates clockwise. In this particular case, the points of tangency move successively to the left, approaching the vertical axis. Referring to figure 2.11b, imagine the tangency with indifference curve U 3 lying to the left of the tangency with indifference curve U 2 . The tangency with indifference curve U 4 , which does not appear in the diagram, would lie to the left of the tangency with indifference curve U 3 . This implies that the labour supply curve will always slope upwards, as higher wage levels always generate lower levels of leisure. (See diagram 2.11 on page 55 of the text). 2. The labour force is calculated as the sum of the employed and the unemployed, which in this case is 22,000,000 + 1,000,000 = 23,000,000. The labour force participation rate is calculated as the ratio of the labour force to the working age population: 23,000,000 / 30,000,000 = 77 %. The unemployment rate is calculated as the ratio of the number of unemployed workers to the size of the labour force: 1,000,000 / 23,000,000 = 4.3 %. 3. Forget about the indifference curves for this question. a) Assuming that you have discretion over how to spend 16 hours out of each day, your time endowment is 16*7 = 112 hours per week. That would be the answer to the first question. Your pre-determined, non-labour income gives the position of the lower right-hand corner of your budget constraint. That indicates how much consumption you can support without working. 122 hours multiplied by your wage plus the non-labour income gives the Y-intercept of your budget constraint. That is the maximum level of income that you can receive. The slope of your budget constraint is the negative of your hourly wage. b) Assuming that you have discretion over how to spend 52 weeks per year, that is your time endowment. That would be the answer to the first question. From that information you have to decide how many weeks of vacation you are going to take. Your pre-determined, non-labour income gives the position of the lower right-hand corner of your budget constraint. That indicates how much consumption you can support without working. 52 weeks multiplied by your weekly earnings plus the non-labour income gives the Y-intercept of your budget constraint. That is the maximum level of income that you can receive. The slope of your budget constraint is the negative of your weekly earnings.
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Benjamin: Labour Market Economics 6e Instructor’s Manual 2-2 4. a) The poor who are at minimum subsistence and who aspire to middle class
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