Economics 3721 Labour Economics Instructor: Dr.

Carla VanBeselaere Department of Economics, Mount Allison University, Winter 2012 Assignment #2 Due: mar. 14, 2012 by 4:00 p.m.
Instructions: - Assignments must dropped in the economics drop box outside Avard-Dixon 216 or submitted on Moodle. - The Assignment MUST have your name, the class number, and my name at the top of the first page. - You are allowed to work with your classmates but you must submit your own work. - Show your work! Partial credit will be given if you demonstrate an understanding of the problem even if you dont get the correct answer. - Late assignments will be deducted 10% for every day past the deadline.

Questions: (All questions are worth 20 pts. Total Points: 100.) 1. Wasp Collector Inc. employs workers to collect wasps and help produce wasp desensitizing drugs. This job requires capital (a hand held vacuum) and labour to be used in fixed proportions: one labourer per vacuum per day. Assume also that in one day a collector can collect 10lb of wasps. Show the isoquant corresponding to 100 lb of wasps collected. Show the cost-minimizing input combination if a dayscosts $50, a vacuum costs $10 to rent for one day, and the firm wishes to collect 100 lb of wasps. Depict the scale and substation effects if the wage decreases to $25 per day. What does the short-run labour demand look like? What does the long-run labour demand look like? 2. Suppose that the demand for burger flippers at fast-food restaurants in a small city is LD 200 20W , where L is the number of burger flippers and W is the wage in dollars per hour. The equilibrium wage is $4 per hour but the government puts in place a minimum wage of $5 per hour. a. Assuming that none of the firms has any monopsony power, how does the minimum wage affect employment in these fast-food restaurants? Draw a graph to show what has happened and estimate the effects on employment in the fast-food sector. b. Suppose there is a sector which is not affected by the minimum wage legislation (called an uncovered sector). Before the minimum wage, the demand and supply in this sector were LD 300 20W and LS 100 80W respectively. Suppose that all the workers who lose their 1

jobs as burger flippers due to the new minimum wage seek work in this uncovered sector. Draw a graph to show what happens and analyze the effects on both wages and employment in the uncovered sector.\ 3. A company trains workers in a certain job and calculates that, to recoup its investment costs, workers wages must be $5 below their marginal revenue product (MRP). Suppose that after training wages are set at $5 below MRP at the time that wages were set but that developments in the product market quickly (and permanently) reduce MRP by $2 per hour. If the company does not feel it can lower wages or employee benefits, how will the companys employment be affected in the short-run? How the companys employment be affected in the long-run? Explain, being sure to define what you mean by short-run and long-run. 4. Assume that apple-picking can be done by children or adults, but that adults are twice as efficient as children (i.e., they pick twice as fast). The production function for apple-picking is thus Q 20LA 10LC , where output, Q, is measured in bushels of apples, labour is measured in days, LA is the number of days of adult labour, and LC is the number of days of child labour. a. Depict the isoquants for a typical orchard in terms of fruit-picking. Label the diagram carefully. b. Assume the wage rate for adults is $100 per day and the wage for children is $60 per day. Show the isocost lines. c. Show the cost-minimizing input choice when the profit-maximizing output is 1000 bushels of apples. d. What does the demand curve for child labour look like when adult wages are $100 per day? 5. Outline the pros and cons of the following payment systems that exist for medical doctors, being sure to discuss the incentive effects they create. Considering the parties to these transactions are doctors, patients, and the government, who should like which scheme and why? a. Fee-for-service with no annual maximum b. Fee-for-service with an annual maximum c. Capitation or fixed salary based on the number of patients in the doctors roster d. Fixed salary independent of the services rendered.