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- Fringe benefits:a. As you might have suspected, employee nonwage (fringe) benefits make up a muchlarger percentage of labor costs in the United States today than they did a few generationsago (refer to Table 3.1 in the textbook). Fringe benefits as a form of labor compensationis also very unique to the U.S. and other developed nations. Do you think that thegrowing fringe benefit share of labor costs has made the level of employment moreresponsive or less responsive to changes in labor demand over the ups and downs in theoverall economy? In other words, has it given the employers of labor more or lessflexibility as they try to adapt to continuously changing economic conditions?Consider the representative consumer who decides consumption and leisure. Theenvironment is the same as in Lecture 5. Keep the same notation. The preference is givenby U (C,L) = αln C + (1 −α) ln L. Assume h = 1, i.e., the time endowment is one day.(a) Write down the utility maximization problem.(b) Derive the demand for consumption and the supply for labour.(c) Suppose the non-wage income π −T increases while the wage rate w falls at the sametime. The size of the changes can be different. Determine the effects on consumptiondemand and labour supply (i.e., leisure demand). Use the indifference map to explainyour results in terms of income and substitution effects for the following cases:(i) The increase in π −T exactly cancels out the drop in w, i.e., |∆ (π −T)|= |∆w|.(ii) The increase in π −T is greater than the drop in w, i.e., |∆ (π −T)|> |∆w|.(iii) The increase in π −T is smaller than the drop in w, i.e., |∆ (π −T)|< |∆w|.(d) Suppose the utility function is Cobb-Douglas: U…No written by hand solution 2. Fringe benefits: a. As you might have suspected, employee nonwage (fringe) benefits make up a much larger percentage of labor costs in the United States today than they did a few generations ago (refer to Table 3.1 in the textbook). Fringe benefits as a form of labor compensation is also very unique to the U.S. and other developed nations. Do you think that the growing fringe benefit share of labor costs has made the level of employment more responsive or less responsive to changes in labor demand over the ups and downs in the overall economy? In other words, has it given the employers of labor more or less flexibility as they try to adapt to continuously changing economic conditions?
- Consider worker 1 with non-labour income Y facing a wage offer w and a utility function defined over consumption and leisure U(c,l) = lnC + 4lnl 1) Provide the functional form of the income effect from a marginal decrease in income. 2) Provide the functional form of the substitution and total income effects of a marginal increase in wage. 3) Show that the Slutsky equation holds for this worker.Alternative explanations of wage disparities Suppose that a labour economist finds that one of her research subjects has earned significantly higher wages throughout his lifetime than would be predicted by standard measured variables. The economist also noted that each of the subject's positions was found through connections at his family's exclusive country club. Which one of the following most likely explains this person's unusually high earnings? a) Effort b) Compensating differentials c) Chance d) Efficiency wages Suppose that Frances receives higher pay at her workplace than her colleagues do, even though they perform essentially the same type of work. If Frances's productivity is about 25% higher than that of each of her colleagues, which of the following wage concepts can explain this wage disparity? Check all that apply. a) Efficiency wages b)The superstar phenomenon c) Discrimination d) Human capital e)…Consider worker 1 with non-labour income Y facing a wage offer w and a utility function defined over consumption and leisure. U(c,l) = lnC + 4lnl Queston: Show that the Slutsky equation holds for this worker
- Explaining the college premium in the 1970s: As shown in Figure 7.8, the col-lege wage premium declined in the 1970s. Using a supply-and-demand graph, explain why this decline might have occurred.Consider worker 1 with non-labor income Y facing a wage offer w and a utility function defined over consumption and leisure U(c,l) = lnC + 4lnl Compare worker 1 with worker 2 whose utility function is described by U(c,l) = cl. Which worker places a higher value on labor market work?Consider worker 1 with non-labour income Y facing a wage offer w and a utility function defined over consumption and leisure. U(c,l) = lnC + 4lnl a) Compare worker 1 with worker 2 whose utility function is described by U(c,l) = cl. Which worker places a higher value on labour market work? b) Suppose the worker participates in the labour market. Derive worker’s compensated labor supply function and the compensated labour supply elasticity with respect to wage as a function of utility level and wage. c) Derive worker’s uncompensated labour supply function (for labour market participants and non-participants) and the uncompensated labour supply elasticity (for labor market participants) with respect to wage as a function of non-labour income and wage.
- Consider the following labor-leisure choice model. U(C,L) = C^2/3L^1/3 C = wN + π – T H= N+ L Where C: consumptionL: leisureN: hours workedH = 50 : total hoursw = 4 : hourly wageπ = 20 : non-labor income T = 10 : lump-sum tax Suppose the hourly wage changes to w = 5. Perform a decomposition and fill in the table C L N Substitution Effect Income Effect Total Effect22 Suppose there is a negative compensating differential for risk (i.e., the riskier the job is, the less it pays). a) Under what economic behavior or condition would this make sense? b) Draw the indifference curves for the above scenario in a carefully labeled risk-wage diagram.(5) Steven has non-labor income each week of $500. He can work up to 100 hours per week foran hourly wage of $10 per hour. His utility for recreation (R) and consumption (C) is given byU(R, C) = 2R2C. What is Steven’s reservation wage if the price of consumption is unity?(a) $30(b) $40(c) $50(d) $60(e) None of the above