Labour Economics — DU B.A. (Hons.) Economics Previous Year Question Papers

Diagrams should be used wherever appropriate. Q1. (a) What is the effect of an increase in the price of market goods on a worker's reservation wage, probability of entering the labor force, and hours of work? Explain using the standard neoclassical model of labor-leisure choice. (9 Marks) (b) Under current law, most Social Security recipients do not pay federal or state income taxes on their Social Security benefits. Suppose the government proposes to tax these benefits at the same rate as other types of income. What is the impact of the proposed tax on the optimal retirement age? Explain using the life cycle model. (9 Marks) Q2. (a) Shelly's preferences for consumption (C) and leisure (L) are given by U = (C - 150)(L - 30). There are 110 hours in the week available to split between work and leisure. Shelly earns $12 per hour after taxes. She also receives $300 worth of welfare benefits each week regardless of how much she works. 1. Graph Shelly's budget line. 2. What is Shelly's marginal rate of substitution when L = 80 and she is on her budget line? 3. Find Shelly's optimal amount of consumption and leisure. (10 Marks) Q3. (a) "In the long run, a profit-maximizing firm will hire a combination of labor and capital such that the ratio of their marginal products equals the ratio of their prices." Prove and explain this condition using isoquants and isocost curves. How does the firm adjust its employment if the wage rate falls? (9 Marks) (b) Suppose a competitive firm's marginal revenue product of labor is MRPE = 50 - 0.5E, where E is the number of workers. i. ii. If the market wage is $25, how many workers will the firm hire? Suppose the government imposes a payroll tax of $5 per worker on the firm. Calculate the new equilibrium employment level. iii. Assuming the labour supply to the firm is perfectly elastic, calculate the deadweight loss generated by this payroll tax? (9 Marks) Q4. (a) According to the human capital model, what is the impact of a worker's discount rate on their optimal level of schooling? Use the wage-schooling locus and the marginal rate of return schedule to explain why identical twins with different discount rates might acquire different levels of education. (9 Marks) Q5. (a) Suppose a worker can either enter the labor market immediately out of high school and earn $35,000 every year for 3 years, or go to college for 1 year by paying $12,000 in tuition and earning zero labor income, and then earn $55,000 for the next 2 years. Assume that all payments occur at the end of each year. If the interest rate is 8 percent, calculate the present value of both educational streams. Based on lifetime wealth maximization, which option will the worker choose? (10 Marks) (b) Explain the shirking model of efficiency wages. Why does a firm deliberately choose to pay a wage higher than the competitive market-clearing wage? How does the threat of unemployment ensure worker effort? (8 Marks)