part one

1. The first two columns of the following table show a car company's annual production schedule during a time period at which the amount of capital does not change. Suppose that all of the workers are the same in terms of skills, education, and experience. The workers' annual wage is determined in the labor market and the firm has no control on it. The price of each car that is produced by the car company is also determined in the related market and is $20,000. Number of workers Production Marginal product of employment Average product of employment Value of marginal product of employment Value of average product of employment E Q MPE APE VMPE VAPE 100 100 101 108 102 116 103 123 104 129 105 135 106 141 107 146 108 150 109 154 110 158 111 161 112 163 113 166 114 168 115 170 116 172 117 173 118 175 119 176 120 176 121 177 122 177 a. Fill the rest of the table. 2 b. According to the marginal productivity theory, how many workers will the car company's manager hire in the wage it has to pay for each worker is equal to $80,000? What is it changes to $30,000? 2. Draw long-run and short-run labor demand lines in one diagram and explain why their slopes are different.

part two

1. Compensating wage differential during the Covid pandemic for a job with increased risk Use a simple labor supply and demand graph to illustrate the following. Consider the situation when the pandemic first broke out. Think about the situation of delivery drivers. For them, the Covid outbreak initially presented an increased risk, at least until we knew how to mitigate transmission and no-contact deliveries became common. a. First, graph the effect of increased risk on the labor supply of delivery drivers, assuming that there was an increased risk and they were aware of the increased risk. (For now, assume demand for labor is constant.) How does labor supply change as a result of this new risk? What will happen to wage and employment? b. Now, consider the fact that at the same time, everyone started ordering more things online. What happened to the demand for labor? What happens to wages and employment? 2. Consider your own preferences towards job characteristics. What job characteristics are so important to you that would you be willing to accept a wage cut? What job characteristics would you only accept if you were given a large wage premium?

part three

Problem 1. Suppose a person's utility function is: U = 20 C + 10L a. Find three baskets of C and L that give her the following levels of utility. Choose L in the range of 50 to 150. A) U = 5,000 B) U = 10,000 C) U = 15,000 D) U = 20,000 b. Draw the indifference curves of the person for each of the above utility levels. Use one graph. Problem 2. Shelly's preferences for consumption and leisure can be expressed as U(C, L) = (C - 100) (L - 40). This utility function implies that Shelly's marginal utility of leisure is C - 100 and her marginal utility of consumption is L - 40. a. What is Shelly's marginal rate of substitution when L = 100 and C=$420? What does this number tell us exactly (apply the definition of MRS) b. What is Shelly's marginal rate of substitution when L = 110 and C=$320? What does this number tell us exactly (apply the definition of MRS) c. What can we say based on the comparison of these two MRS numbers? (i.e. what does the What property of Indifference Curves that we discussed in the lecture video does this reflect? Problem 3. Consider your own preferences towards leisure and consumption. a. Would you say your indifference curves are relatively steep or flat? I.e. how do you value your leisure time? b. Now consider two cases: 1) On Sunday night at 10 pm, during a week when you are so busy, you feel like you have had no leisure time at all, and it is the first time you have a chance to rest 2) During a week when you have a lot of leisure time What would your MRS be? Meaning: how many dollars (worth of consumption) would you need to compensate you for giving up 1 hour of leisure time?