Problem #15 Consider two factors of production: capital and labor. Assume that capital can earn wK = 1 if it chooses to work on its own and that labor can earn wL = 1 E on its own if it stays in autarky. Let the total supply of labor be equal to L. Furthermore, assume that a unit of capital and a unit of labor can form a joint unit and produce y units of output together. Assume that the surplus - if any - generated in the joint sector is shared equally between the two factors. Now, assume that capital becomes specific to a given relationship if it chooses to form a joint unit. Moreover, assume that capital loses completely its outside option if it forms a joint unit. Do you expect to observe any segmentation (unemployment) in the labor market in this case?

a) Yes b) No c) Yes, if y is large enough d) Yes, as long as L is large enough

ans A

Problem #16 Consider two factors of production: capital and labor. Assume that capital can earn wK = 1 if it chooses to work on its own and that labor can earn wL = 1 E on its own if it stays in autarky. Let the total supply of labor be equal to L. Furthermore, assume that a unit of capital and a unit of labor can form a joint unit and produce y units of output together. Assume that the surplus - if any - generated in the joint sector is shared between the two factors. Assume that capital receives fraction < 1 2 of the surplus and labor receives 1 > 1 2 of the surplus. Now, assume that capital becomes specific to a given relationship if it chooses to form a joint unit. Moreover, assume that capital loses completely its outside option if it forms a joint unit. How does unemployment respond to a reduction in ?

a) It does not as it does not exist b) It exists, but it is unaffected by c) It falls d) It increases

ans D