Problem 1 [5 points]
Does the labour supply schedule have a negative or positive slope if the magnitude of the income effect of the wage
increase exceeds the magnitude of the substitution effect of the wage increase and leisure is a normal good ?
Problem 2 [5 points]
The marginal rate of substitution for the worker is MRS(C, L) = qCL . Her total available time is 16 hours. The
worker receives non-labour income YNL = 10000 and her available market wage is 20. The worker receives a subsidy
s from the government, so that her after-subsidy wage is 20(1 + s). For what range of the subsidy values will it be
optimal for the worker to participate in the labour market ?
Problem 3 [5 points]
In the household production model, does the increase in the price of pre-made food have positive or negative substi
tution effect on the consumption of home-made food ?
Problem 4 [5 points]
Suppose that in the economy low-skill and high-skill labour are complements in production. The value of the mar
ginal physical product of high-skill labour is V MPH(H) = 500 + 5L − 10H and the value of the marginal physical
product of low-skill labour is V MPL(L) = 300 + H − 3L. The supply of domestic high-skill and low-skill workers
is perfectly inelastic : Hs = 20, Ls = 50,. Suppose that 10 low-skill immigrants who are perfect substitutes for the
domestic low-skill workers arrive to the country.
(a) What is the equilibrium wage of low-skill and high-skill workers before the migration ?
(b) What is the equilibrium wage of low-skill and high-skill workers after the migration ?
Problem 5 [5 points]
If labour is an inferior factor of production, will the increase in the rental rate of capital lead to
— positive or negative substitution effect on the employment ?
— positive or negative scale effect om employment ?
Problem 6 [5 points] Consider a monopsony with the value of the marginal product of labour and labour supply
as described on the Figure 1. What is the level of underemployment of the monopsony relative to the competitive
Problem 7 [5 points]
Suppose that Alex has only two periods after high school. He can choose to work in both periods at the salary of
CAD 15,000/period. Otherwise, he can go to college in the first period, pay tuition fee of CAD 6000 and a cost of
textbook of CAD 500, and earn CAD 20,000 in the second period. Consider the first period as present, what is the
internal rate of return ?
Problem 8 [5 points]
Does the degree of underemployment of a monopolist relative to a perfectly competitive firm decrease or increase as
the demand for monopolist’s product becomes more elastic ?
Problem 9 [5 points]
Will the increase in the cost of migration increase or decrease the likelihood of migrating for the worker ?
Problem 10 [5 points]
Suppose that the average experience [exp] is 12 years for male workers and 10 years for female workers and the esti
mates from the simple human capital earnings function are
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