Economics Assignment

1. Consider a country with a civilian population of 200 million, of which 56 million are either under 16 years of age or institutionalized. Of the potential labor force, 36 million people are neither employed nor looking for work. The civilian employment-population ratio is 62.5%.

(a) What is the civilian labor force participation rate for this country?

(b) How many civilians are employed in this country?

(c) What is the civilian unemployment rate for this country?

2. Indicate in each of the following instances whether the specified circumstances will cause a rational worker to want to work more, fewer, or the same number of hours.
(a) The wage rate increases and the substitution effect is greater than the income effect.

(b) The wage rate decreases and the income effect is greater than the substitution effect.

(c) The wage rate decreases and the substitution effect is greater than the income effect.

(d) The wage rate increases and the income effect is greater than the substitution effect.

3. Suppose Mary is currently working 40 hours per week. Assume this is utility-maximizing behavior given her current wage rate, non-labor income, and preferences for leisure and income. Suppose you also know that Mary's wage-elasticity of labor supply is currently 2.5. If Mary's wage rate decreases by 10%, by how much will her optimal hours of work change, all else equal? And, what can you infer about the relative magnitudes of the income and substitution effects given Mary's behavior?

4. Joe has $716 of non-labor income, and can earn a wage rate of $12 per hour working. There are 168 total hours in a week for Joe to allocate between labor and leisure. Joe's pref- erences for income (to be used for consumption) and leisure can be expressed as the following utility function, where Y represents dollars and L represents hours of leisure.

U (Y, L) = (Y - 20) ∗ (L - 10)

This utility function implies the following marginal utilities:

Joe's marginal utility of leisure is (Y - 20). Joe's marginal utility of income is (L - 10).

(a) Sketch Joe's budget line. Label each axis, all intercepts, and the slope.

(b) Calculate Joe's marginal rate of substitution of leisure for income if he has $956 of income and 148 hours of leisure this week. Is he maximizing his utility at this choice of income income and leisure hours? Briefly explain why or why not.

(c) Calculate Joe's reservation wage. Is it optimal for Joe to participate in the labor force at the current wage rate of $12 per hour? Briefly explain why or why not.

(d) Solve for Joe's optimal quantity of income, hours of leisure, and hours of work per week. Label this optimal point and draw the appropriate indifference curve in your sketch from part (a).

5. Suppose an income maintenance program offers $500 basic benefit per month, with a benefit reduction rate of 0.20.

(a) What will be the size of the monthly subsidy received by a family that earns $1,200 of income per month?

(b) What will be this family's total income per month? (c)What break-even level of income does this program imply?

6. In economic terms, clearly explain how an income maintenance program like the one described in problem (5) both reduces labor force participation rates and hours worked for the population as a whole.