Question 1: A positive oil shock, labor market:

Suppose scientists discover a new way to exact oil from deposits that were previously

though to be unrecoverable. The extra supply of oil leads oil prices to decline by $5

per barrel. Explain the eect on wages and the employment-population ratio. You can

think of oil like an additional input into the rms production function. In particular:

(a) Explain how this discovery might aect the labor supply-demand diagram we stud-

ied in class.

(b) Graphically show how this discovery aects wages, employment and the employ-

ment to population ratio.

Question 2: Labor supply and demand model

In this problem, you are asked to use the labor supply - labor demand framework

developed in class. Illustrate the eect of various shocks using a diagram of labor

supply and labor demand.

(a) An unusually warm summer increases workers' preference for leisure time. What eect

will this shock have on employment and wages?

(b) A natural disaster damages part of a nation's public infrastructure. What eect will

this shock have on employment and wages?

(c) Congress passes a law funding national pre-kindergarten education by raising taxes on

investment income. What eect will this shock have on employment and wages?