Chapter 2 Problems

Question 1

The labor force consists of

Answer 1

All individuals aged 16 or older who are employed or unemployed.

Question 2

The labor force participation rate is defined as

Answer 2

The percentage of the total population aged 16 or older that is in the labor force.

Question 3

The unemployment rate is defined as

Answer 3

The number unemployed divided by the labor force.

The percentage of the population aged 16 or older that is not employed.

Question 4

When the real wage of a worker falls, one cannot necessarily conclude that the real income of the
worker has also fallen because

Answer 4

Although the words income, earnings, and wage are often used interchangeably in the
English language, in this chapter they each refer to a different measure. The wage is
defined as the payment per unit of time, while earnings equal the wage multiplied by
the units of time worked. Adding employee benefits to earnings yields a worker’s total
compensation. Total compensation plus any unearned income yields total income.
Therefore, even if the real wage falls, total income may not fall if the time spent working
increases, benefits increase, or unearned income increases.

Question 5

The curve labeled D shows the number of workers firms wish to hire at each wage assuming

Answer 5

The prices charged by construction firms for homes, office buildings, road construction, etc.,
remain constant.

The price of construction equipment remains constant.

Question 6

An economic reason why the curve labeled D slopes downward in the long run is that

Answer 6

As wages increase, the firm will substitute equipment for workers.

As wages increase, the optimal level of output for the firm will decrease.

Question 7

An algebraic expression consistent with the demand curve in Figure 2-4 would be

Answer 7

L = 12 − (1/3)W.

W = 36 − 3L.

Question 8

The demand curve in Figure 2-4 would shift to the right if

Answer 8

The price of construction equipment rises and the substitution effect dominates the scale effect.

Question 9

Assuming all construction jobs offer comparable working conditions, the supply curve facing an
individual construction firm will be

Answer 9

a horizontal line at a wage of $18.

Question 10

At the market clearing wage

Answer 10

1. The quantity demanded equals the quantity supplied.
2. No shortages or surpluses exist.
3. It is impossible to make someone better off without making someone else worse off.

Question 11

Unemployment rate

Answer 11

(Unemployment / Unemployment + Employment) x 100

Question 12

What is an unusual unemployment rate based on historical standards?

Answer 12

5%+

Question 13

When was the peak of unemployment rates?

Answer 13

The Great Depression; 24.9%

Question 14

What has been the general trend in the unemployment rate since 1950?

Answer 14

While the unemployment rate has tended to fluctuate less in recent years, the average
unemployment rate seems to be slowly climbing.

Question 15

Labor force participation rate

Answer 15

((Employment + Unemployment)/ Population) x 100

Question 16

By historical standards, would your answer to 60% represent a relatively high labor force
participation rate?

Answer 16

No, the labor participation rates were much higher in the 1980s and 1990s

Question 17

What has been the general trend in the labor force participation rate in the United States since 1950?
Has the trend been the same for men as it has been for women?

Answer 17

The overall labor force participation rate rose modestly.

The labor force
participation rate of men dropped significantly from nearly 87% to 73%.

The rate for women
increased from 34% to about 60%.

Question 18

What has been the general trend since 1950 in the type of work Americans perform?

Answer 18

The type of work has been changing steadily from goods producing to private-sector services.

Question 19

On the chart, it depicts an increase in wages and employment.

Is it safe to assume a rare upward sloping demand curve for union labor.

Answer 19

No.

Conclusions
1. The data reflect a series of equilibrium points (that is, both supply
and demand are changing
2. Demand is shifting, and thus the demand curve cannot be
identified from the data).

Question 20

Present an alternative explanation for the pattern shown in an increase in wages and employment

Answer 20

If the demand curve for this category of labor shifted to the right over time along a stable supply
curve, one would observe the wage and employment level rising together.

Question 21

How to calculate economic rent?

Answer 21

Economic rent is a triangular base

Area= 1/2bxh
Economic rent = 1/2 labor x wage

Question 22

If demand increases while supply is constant

Answer 22

A shortage will exist at the original equilibrium wage

The equilibrium wage will increase

Question 23

If supply and demand both increase

Answer 23

Employment will rise but the market wage may rise, fall, or stay the same.

Question 24

What is the rationale behind computing an index of real wages?

Answer 24

Make it easier to compare the real
purchasing power of a worker’s wage when product prices are changing.

Hold prices constant; any change in the index reflects a real
change in the worker’s command over goods and services, purchasing power

Question 25

Explain why $__ cannot be the market clearing wage

Answer 25

Step 1: Identify the quantity supplied at $wage compared to quantity demanded
Step 2: Identify the shortage/surplus
Step 3: means that the market does not clear

Sample:
At a wage of $6, the quantity supplied equals 3 (point b in Figure 2-6), while quantity demanded
equals 7 (point c in Figure 2-6). The shortage of 4 units means that the market does not clear and
that there will be upward pressure on wages.

Question 26

If workers earn economic rent, does that mean they are being overpaid?

Answer 26

No
Economic rent refers to the difference between what the worker actually earns and the
minimum he or she would be willing to accept

A worker is only considered overpaid in an
economic sense if the actual wage is above the equilibrium wage in the market.