Week 3 - Labour & Leisure

Question 1

Labour force =

Answer 1

Employed + unemployed

Question 2

Participation rate =

Answer 2

Labour force
Population

Question 3

Employment rate =

Answer 3

Employed /
Population.

Question 4

Unemployment rate =

Answer 4

Unemployed/
Labour force

Question 5

U (c, l) = u(c) + v(l) In this utility function what does c and l stand for

Answer 5

• c stands for consumption and l stands for leisure

Question 6

What is the budget constraint for a labour and leisure

State the formula

Answer 6

c ≤ w(1 − l)

Question 7

v′(l)/ u′(c) = w. Explain what this describes. Discuss indifference and the marginal rate of substitution

Answer 7

describes how Sezarya trades off dedicating time to
market work or to leisure activities.
* At the margin, Sezarya must be just indifferent between allocating
an extra unit of time to labour or leisure activities.
the slope of the indifference curve is the marginal rate of
substitution v′(l)/u′(c) which, at the optimal allocation, is equal to the
slope of the budget constraint, w

Question 8

a temporary rise will see
a lower c1 which leads to a higher u′(c1) (from diminishing returns)
lower (v′)−1 (since (v′)−1 is a decreasing function) ⇒ lower l1 ⇒
higher L1.
Therefore, Sezanda’s labour supply rises more in response to a
temporary increase in wages than a permanent rise.

Explain in simple terms why

Answer 8

If a wage rise is temporary, Sezanda doesn’t feel much richer
so the income effect is weak and the substitution effect
dominates. Sezanda sells more time as it becomes temporarily
expensive

Question 9

Think about marginal product of labour

w = FL(K , L),
gives us the labour demand curve. Please explain this equation in words and what the demand curve tells us

Answer 9

firms demand labour up to
the point where the marginal product of labour equals the wage
rate.

The demand curve tells how much the firm is going to hire