ECON333 Assignment 2
Due 2 June 5:00pm on Nuku
[Each small question is worth of 5 marks]
1. Union A wants to represent workers in a firm that would hire 20,000 workers if the wage rate is $12 and would hire 10,000 workers if the wage rate is $15. Union B wants to represent workers in a firm that would hire 33,000 workers if the wage is $15 and would hire 30,000 workers if the wage is $20.
a) Calculate the elasticity of labour demand for union A when price increases from $12 to $15 and for union B when price increases from $15 to $20.
b) Which union is more likely to organize and succeed in negotiating a higher wage? Explain.
2. Card and Krueger (1994) estimate the effects of minimum wage on employment of fast-food industry. The table reports the average full-time equivalent (FTE) employment per restaurant.
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FTE Employment
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Pennsylvania
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New Jersey
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February 1992
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23.3
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20.4
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November 1992
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21.2
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21.0
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a) Calculate the difference-in-difference estimate for the effect of minimum wage on employment. The standard error for the difference-in-difference estimate is 1.3. Is the estimate statistically significant at 5% level?
b) The minimum wage had increased by 20%. Calculate the labour demand elasticity based on the difference-in-difference estimate in (a).
c) What are the treatment and control groups? State the required assumption for the difference-in-difference estimate to represent the causal effect of minimum wage on employment.
d) If the assumption in (c) holds, what would be the counterfactual employment for the treatment group in November 1992?
e) Is the finding consistent with a competitive labour market? Explain.
f) Is the finding consistent with a monopsony market? Explain.
3. Draw a graph to illustrate that an increase in minimum wage creates more unemployment in an industry with an elastic labour demand curve than in an industry with an inelastic labour demand curve.
4. Suppose the wage rate is $20 and the price of each unit of capital is $20. The price of output
(p) is constant at $60 per unit. The production function is
f(E,K) = E(2/3)K(1/3),
where E is the level of employment and K is the level of capital. Report answers in three decimal places.
a) If the current capital stock is fixed at 100 units, how much labour should the firm employ in the short run?
b) Suppose the wage decreases from $20 to $12. How much labour should the firm employ in the short run?
c) Calculate the elasticity of short-run labour demand curve when the wage decreases from $20 to $12.
d) Calculate the long-run capital-labour ratios (K/E) when wage is $20 and when wage is $12.
e) What is the elasticity of substitution as the wage falls from $20 to $12?
f) When the wage falls from $20 to $12, how does the substitution effect change the firm’s employment and capital stock? How does the scale effect change the firm’s employment and capital stock? Can we say conclusively that the firm will use more labour or less labour?
Can we say conclusively that the firm will use more capital or less capital?
5. Suppose the supply curve of physicists is given by w = 10 + 5E, while the demand curve is given by w = 50 – 3E.
a) Calculate the equilibrium wage and employment level.
b) Calculate the labour demand elasticity at the equilibrium in (a)
c) Suppose now that the demand for physicists increases to w = 70 – 3E. What is the new
equilibrium wage and employment level?
d) Assume the market is subject to cobwebs. Calculate the wage and employment level in
each round up to round 6. (Round 0 is the old equilibrium.)
e) Draw a graph to illustrate the wage and employment level in (d).