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Homework answers / question archive / Question 1) Consider the labour markets for skilled labour and unskilled labour, which are defined as in the lecture notes

Question 1) Consider the labour markets for skilled labour and unskilled labour, which are defined as in the lecture notes

Economics

Question 1) Consider the labour markets for skilled labour and unskilled labour, which are defined as in the lecture notes.

The labour demand curve for skilled workers is given by w = e(50- 5L)/100. The labour demand curve for unskilled workers is w = 30- 2L. The labour supply for each of the two labour markets is given by L = 20.

The effort of a firm's skilled workers depends on their wage according to the following schedule:

                                                                Table 1

Wage (w)

20

25

30

35

40

45

Effort (e)

16

24

30

34

36

36

 

a) Calculate the equilibrium employment, unemployment, and wage for unskilled workers.

b) Calculate the profit-maximizing contract (w, e).

c) Calculate the equilibrium employment, unemployment, and wage for skilled workers.

d) In a single properly labeled graph in (w — L) space, illustrate the labour market equilibria for skilled and unskilled workers.

e) Calculate the cumulative income distribution for each labour market by reporting the cumulative shares for the following percentiles: 50 % and 100 %.

f) In a single graph, construct the Lorenz curves representing labour income inequality for each labour market. Construct the cumulative shares for the following percentiles: 50 % and 100%.

g) Briefly explain why the declining share of labour income in recent decades could entirely be attributed to the shape of the labour supply curve.

h) Briefly explain why the temporary foreign workers program run by the federal government influences the shape of the labour supply curve but the permanent residence program does not.

Question 2) Suppose that the wage of skilled labour equals 30 and the wage of unskilled labour equals 20. The total labour force is 35. In addition, the number of unskilled workers who are employed is twice as large as the number of skilled workers who are employed. The markets for skilled labour and unskilled labour are defined as in the lecture notes.

a) Calculate the opportunity cost of skill acquisition as a function of the probability of finding a job in the skilled sector.

b) Briefly describe the nature of the trade-off faced by an unskilled worker.

c) Calculate the number of employed workers in the skilled sector if unskilled workers are paid just enough to forego skill acquisition. Show ALL steps.

d) Briefly explain why neither of the two labour markets is in equilibrium if the probability of finding a job in the skilled sector is 80 %.

e) Briefly discuss the validity of the statement: “New jobs in the skilled sector increase unemployment in the skilled sector if the probability of finding a job in the skilled sector is 80%”.

 

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