Labor Markets

Department of Economics Prof. Andrew J. Buck

Temple University Economics 201

Name

A. Computer Programming

For your own use you should have a piece of graph paper as you go through this problem set.

Jane Pixel is employed as a computer programmer for Micro$oft. She can work as many hours per week as she chooses at a constant wage per hour (R); her nonwage income is zero. Each week she sleeps for 68 hours and then divides the remaining 100 hours between work (W) and leisure (L). Her utility level in any given week depends on her income (Y) and hours of leisure.

After long hours of observation the researchers at Murky Research have developed the following table showing Jane's utility for different combinations of Y and L:

Indifference Curves

I _{ 1}

I_{2}

I_{3}

-------------------

Y

L

--------

1000

7.5

1500

2.5

1400

25

800

10

1100

5

30

450

900

15

40

300

700

650

65

250

60

550

50

600

75

245

80

500

70

100

A1. Carefully plot three of her indifference curves (I_{1}, I_{2}, and I_{3}) in your graph using the data given above. Put income on the vertical axis and hours of leisure on the horizontal axis. Make each unit on the vertical axis equal $50, and each unit on the horizontal axis equal 5 hours.

A2. Write the equation showing how Jane’s weekly income varies with her wage rate (R) and the amount of time she devotes to leisure (L) (i.e., her income-leisure budget constraint).

Y =

Plot this relationship for R = 5 in your graph.

A3 What is the vertical intercept of the line you have just drawn?

A4. Interpret this number by choosing one phrase.

Reservation wage Maximum Hours of Work Maximum Income Maximum Leisure

A5. What is the horizontal intercept?

A6. Interpret this number by choosing one phrase.

Reservation Wage Maximum Hours of Work Maximum Income Maximum Leisure

A7. How does Jane divide her 100 waking hours between work and leisure if R = 5?

W = L =

Plot her income-leisure budget constraints for R = 10 and R= 15 in your graph.

A8. If R = 10, what is her weekly income?

Draw in her wage consumption line in your graph.

Using the information contained in your graph, plot Jane’s labor supply curve in a new graph. Put her hours of work supplied on the horizontal and her wage rate on the vertical.

A9. Check all the boxes that describe the appearance of Jane's labor supply curve:

Straight line (no bends) Concave Convex Negative slope Positive slope

A10. Between R = 10 and R = 15, which effect is greater, the income effect or the substitution effect? Explain your answer.

Income effect is greater Substitution effect is greater

B. Nursing

The market for nurses in Metropolis, a large city with many health care facilities, is perfectly competitive with the following daily supply and demand equations:

Supply: Q_{L} = 100R - 1000 Demand: Q_{L }= 1640 - 20R.

R is the hourly wage and Q_{L} is the quantity of labor measured in person-hours. All employed nurses in Metropolis work 8 hours per day.

Plot these relationships in graph of your own. Your graph will not be graded. It is for your use only.

B1. What is the nursing supply choke price, i.e., that wage below which no nurse will offer to work?

B2. What are equilibrium price and quantity? Price = Quantity =

B3. What is the aggregate daily income of nurses as a group in this equilibrium?

B4. How many nurses are employed?

Suppose now that the nurses in Metropolis form a union and bargain for a minimum wage of $25 per hour. Draw a horizontal line through your C at this wage rate.

B5. At this wage, how many person-hours of nursing services will be demanded by area

employers?

B6. How many person-hours will area nurses want to supply?

B7. How many nurses will be unemployed in the minimum wage equilibrium? (Remember that nurses work 8 hours per day and that an unemployed person wants to work at the prevailing wage but can’t find a job.)

B8. How many nurses will lose their jobs as a result of the imposition of the minimum? (Hint: Compare the competitive equilibrium with the minimum wage equilibrium.)

B9. Is the daily income of nurses as a group bigger or smaller as a

result of the imposition of the minimum? Bigger Smaller