Example exercises exam

Excercise1 The original constraint is line abc. The new constraint is line abd.

a) By how much has the wage decreased?

b) What is the income effect of the wage decrease? What is the substitution effect of
the wage decrease?
c). Find the coordinates of two points on this individuals labor supply curve. Is the
labor supply curve upward or downward sloping over the range of the wage change?

Exercise 2 Consider an individual who currently earns $20,000 as an unskilled

laborer. Suppose that by taking courses full time at a community college for one year,
the person can qualify for a more skilled job paying $23,000 that is guaranteed to last
for 10 years (after which the person would retire). Assume the cost of tuition and books
at the community college for one year is $2,000 and that the current interest rate is 6%.
Is this a good investment?

Excercise 3 Suppose that the population aged 16 or over in a particular area could be
categorized as follows:
Not in the labor force=300,
Employed=460,
Looking for work=30,
Waiting to be recalled from a layoff =10.

a. Compute the unemployment rate.

b. Compute the labor force participation rate.
c. Compute the employment rate.
d. If the unemployment rate rises 2 percentage points above its initial level, how much
would the labor force participation rate have to increase to keep the employment rate
constant?