Problem 1
(a) Explain why the marginal product of labour eventually declines. (b) Show in a diagram the effect of an increase in the firm's capital stock on its demand curve for labour.
Problem 2
(a) Over the past 100 years the real wage has risen but the length of the working week has fallen. Explain this result using income and substitution effects. (b) Explain how an increase in the real wage could cause everyone in employment to work fewer hours but still increase the total amount of work done in the economy.
Problem 3
Why should the labour supply curve to an industry slope upwards even if the aggregate labour supply to the economy is fixed?
Problem 4
Common fallacies Why are the following statements wrong? (a) There is no economic reason why a sketch that took Picasso one minute to draw should fetch £100 000. (b) Higher wages must raise the incentive to work.
Problem 5
(a) Why can a top golfer earn more in a weekend than a university professor earns in a year? (b) Why can students studying economics expect to earn more than equally smart students studying philosophy?
Problem 6
The labour supply and the labour demand in a competitive labour market are reported in the following table: \(W^{D}\) is the inverse labour demand and \(W^{S}\) is the inverse labour supply. In a graph with the wage \(W\) on the vertical axis and labour \(L\) on the horizontal axis, show the labour market equilibrium. Suppose that labour demand comes from many identical perfectly competitive firms. If the price of the output produced by those firms is reduced by half because of a recession, explain what happens to labour demand. How will the equilibrium of the labour market be affected?
Problem 7
Suppose that the labour supply of workers is \(L^{S}=w-5\) and the labour demand is \(L=20-w\). Derive the labour market equilibrium.
Problem 8
Could a university degree increase your subsequent job prospects, even if the subject that you studied at university had no relevance whatsoever to your subsequent career?
Problem 9
Consider the market for theatre actors where some actors are paid high wages and some are paid low wages. Some actors are ready to work even at zero wages. Show on a graph what happens if all the actors must be paid the highest wage rate necessary to attract more actors into the industry. What is the economic rent earned by the actors?
Problem 10
'A minimum wage set sufficiently high will always reduce jobs, but whether a modest level of minimum wage reduces or increases employment depends entirely on the degree of competition in the labour market.' Explain.
