04 Jun Question PROBLEM SET HOWARD ECON 315: Labor Economics
Question
PROBLEM SET HOWARD
ECON 315: Labor Economics
Spring 2015
1. Equilibrium. Explain, using Supply/Demand analysis, the effects of the following. For each, draw two graphs,
one for the labor market (workers), and one for the output market (the product). Clearly lable each graph,
curves, and equilibrium points.
(a) A machine is developed that harvests oranges mechanically (on the market for laborers, and the orange
market).
(b) An economic expansion leads to a boom in housing construction (on the market for architects, and the
housing market).
(c) A large natural gas reserve outside of Pittsburgh is discovered (on the market for workers in the natural
gas industry, and on the market for natural gas).
(d) World War II kills a substantial fraction of unskilled (primarily young) workers in the countries involved
(on the market for products made by low-skilled labor, and on the market for low-skilled labor).
2. Equilibrium. Assume the child care industry is a perfectly competitive industry, and that child care workers
are hired in a perfectly competitive labor market. There is a sizable Child Care Tax Credit, which lowers the
taxes of those parents who put their children in (paid) child care while they (the parents) work.
(a) Illustrate, on an S/D graph, the effect of the tax credit on the price and quantity of child care in the short
run.
(b) Illustrate, on an S/D graph, the effect of the tax credit on wages and employment in the nursing market
(many nurses require child care for their children while they are at work).
(c) Illustrate, on an S/D graph, the effect of the tax credit on wages and employment in the child care industry.
An academic study (really) has found that the supply of child care workers is quite elastic. Be sure this is
shown in your graph. Which changes more: the wages of child care workers, or the total number of child
care workers employed? Why?
3. Labor Demand. Around 1830, the invention of the chainsaw improved the harvest methods of lumber. Lumber
became much cheaper to harvest and lumber production exploded in the United States. In the 1980s, with the
invention of the single grip harvester, fewer lumberjacks were needed to harvest lumber.
(a) Are chainsaws and lumberjacks complements in production or substitutes in production? Are single grip
harvesters substitutes in production or complements in production with lumberjacks?
(b) Consider the effect of the chainsaw on the demand for lumberjacks. Which is the primary reason demand
increases: a scale effect of a substitution effect?
(c) Consider the effect of the single grip harvesters on the demand for lumberjacks. Which is the primary
reason demand increases: a scale effect of a substitution effect?
14. Elasticity Assume that labor demand for life guards is perfectly inelastic and is given by the equation L
d = 250,
while the supply curve for life guards is given as L
s = 150 + 10?, where ? represents the hourly wage rate.
(a) What is the level of employment, wage and unemployment rate if the minimum wage is set at $7.25 per
hour?
(b) If the minimum wage is raised to $12 per hour, how many workers will lose their job? What is the
unemployment rate?
2
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