Homework Question on Labour Economics
Q1.The finding of a negative relationship between an individual’s daily hours of work and daily wage along his or her labour supply curve suggests that this individual is not maximising his or her utility in accordance withthe predictions of the standard labour supply model. (20 points)
Q2. In the long-run the firm uses less of both workers and capital as the price of capitalincreases. (20 points)
Q3.A production function of the following form: q=f(5E+3K) (for example, q=(5E+3K)) implies that the elasticity of substitution between capital and labour is 5/3.(20 points)
Q4.Garbage collectors are paid less than executives – this contradicts with the predictions of the model of compensating wage differentials. (20 points)
Q5. The distinction between policy implications of human capital and signalling models arises because while schooling model assumes a positive correlation between years of schooling and earnings it is not the case for the signalling model.(20 points)
Homework Answer on Labour Economics
Response to Q1:
The finding of the negative relationship between an individual’s daily hours of work and daily wage along the labor supply curve, which suggests that the individual is not maximizing his or her utility is false. We know from the labor supply model that an individual will allocate time between work and leisure in order to maximize his or her utility(Blumkin, Ruffle & Ganun2012).
The decision the individual will make concerning the number of hours of work and leisure time will be based on changes in the exogenous parameters; wage per hour (w) and non-labor income (G). For example, consider an individual with the utility function U(y, ℓ) where y is level of income and ℓ is time allocated for leisure, which is also equal to (T – h). If y and ℓ were goods, then the consumer in this case would prefer more of each item in which case U1>0 and U2>0.
To illustrate this relationship, we use the individual’s constraints given as h + ℓ = T and y = wh + G. As a single-variable maximization problem, we would have the equation written as:
Max h for U (wh + G, T – h)
The first order conditions for the maximum U1 and U2 can be written in a single equation as wU1(wh + G, T – h) – U2(wh + G, T – h) = 0 so that, w = U2/U1 = MU (leisure)/ MU (income). This expression shows that a rational individual will maximize utility by allocating equal proportion of time for work and leisure at a given wage rate.