. An increase in the wage can cause an increase in leisure when the substitution effect of the change in wage is directly (or positively related) to the change in leisure.

1. An increase in the wage can cause an increase in leisure
when the substitution effect of the change in wage is directly (or positively
related) to the change in leisure.
True/false/explain, using the income-leisure model.

2. Use the income-leisure model to show the likely effects
of the Social Security Disability Program. Assume the workers affected were
working 40 hours prior to the increase in disability payments.

3. Suppose that the wage increases, other things constant. Show that in the long run the firm will hire
fewer workers. Decompose the employment
change into substitution and scale effects.
Label your graph clearly.

4a. What happens to the firm’s long-run labor-demand curve
if the demand for the firm’s output increases?
Explain in words–no graph required.
b. What happens to the firm’s long-run labor-demand curve if
the price of capital decreases? Explain,
using the isoquant-isocost model.

4. Consider a firm for which production depends on two
normal inputs, labor and capital, with prices w and r, respectively. Initially, the firm faces market prices of w
= 12 and r = 8. Then the wage rate falls
to 8 and the rental rate on capital falls to 4.
a. In which direction will the substitution effect change
the firm’s employment of labor and capital?
Explain in words.
b. In which direction will the scale effect change the
firm’s employment of labor and capital?
Explain in words.
c. Can it be conclusively determined whether the firm will
use more or less labor? More or less
capital? Explain your answer in
words.

5. Suppose a firm hires labor in a competitive labor market
and sells its output in a competitive product market. The firm’s elasticity of demand for labor is
-0.4. If the wage increases by 20 percent,
what will happen to the number of workers hired by the firm? What will happen to the marginal productivity
of the marginal worker hired by the firm?

6. What factors determine the elasticity of an industry’s
labor demand curve?

7. What is the capital-skill complementarity
hypothesis?

8. Read the document, “Calderon On Complementarity.” Show this statement on a graph: “In the absence of low-skill migrant labor,
many U.S. farmers would have invested more heavily in labor-saving
technology.” This is an exercise in the
“counter-factual” occurrence—that is, without the large influx of immigrant
farm labor that did occur, the wage rate for farm labor would have been higher
and there would have likely been an increase in the capital-labor ratio.

9. Which of Marshall’s rules suggest that labor demand for
public school teachers is probably inelastic?
Which rule suggests that demand for school teachers might be elastic?

10. “Small firms create most of the new jobs in the U.S.
economy.” True/false/explain.

11. Union A wants to represent workers in a firm that would
hire 2,000 workers if the wage rate is $12 and would hire 1000 workers if the
wage rate is $15. Union B wants to
represent workers in a firm that would hire 3000 workers if the wage rate is
$20 and would hire 3300 workers if the wage rate is $15. Which union is more likely to be successful
in organizing? Explain.

12. Read the documents, “Taxing Kim Kardashian” and
“Mickelson and Tax Migration.”
a. Cite one way in which a tax has affected your behavior or
the behavior of someone you know.
b. In your opinion, do income taxes reduce labor supply?
c. Show your belief on a graph of the income-leisure
model.
d. On the other hand, your opinion might be wrong. Why?