1. Suppose that you have the following information for Country X:

Population: 100,000

Employed: 60,000

Unemployed: 3,000

Not in labor force: 37,000

Calculate the size of the labor force, the labor force participation rate, and the unemployment rate.

2. Let w denote the wage rate, let V denote weekly non-labor income, and let T be the number of hours in the week.

a. Sketch the budget constraint. Label the x-axis, the y-axis, the x-intercept, the y-intercept, the slope and the endowment point (point where work zero hours in the labor market).

b. On the same graph as above sketch how the budget constraint changes when the wage decreases from w to w’.

c. Suppose that when wages go down labor supply decreases. Use your graph to illustrate the income effect, the substitution effect and the total effect.

d. Which effect dominates?

3. Sally, a college student at UConn, earns $10 per hour working at Friendly’s. Her parents also give her $100 per week to help with expenses. Lately, Sally’s parents have been concerned about her grades and want her to spend less time at work and more time studying. In order to encourage Sally to spend less time at work, her parents consider two possibilities:

Plan A: Reduce her weekly allowance by $2 for every hour that she works.

Plan B: Increase her weekly allowance from $100 to $200 per week.

a. Given that there are 168 hours in a week, sketch Sally’s weekly budget constraint before and after the implementation of Plan A. Label the x-axis, the y-axis, the x-intercept, the y-intercept, the slope and the endowment point.

b. Given that there are 168 hours in a week, sketch Sally’s budget constraint before and after the implementation of Plan B. Label the x-axis, the y-axis, the x-intercept, the y-intercept, and the slope.

c. Which plan is guaranteed to reduce the number of hours that Sally spends at work each week? Your answer should include a clear discussion of the income effect and the substitution effect associated with each policy. No graph is necessary.

4. Consider the following hypothetical information about the occupational distribution of Country Y. Assume that 100 employed men and 100 employed women work in either Occupation A or Occupation B.

Employed Women Employed Men

Occupation A 70% 20%

Occupation B 30% 80%

Total 100% 100%

a. Calculate the index of occupational segregation by sex using the formula given in footnote 5, Chapter 5.

b. Explain exactly what the number you obtained in (a) means in light of the definition of the sex segregation index.

5. Carefully explain using a diagram how the following hypothetical situations would affect the cost-benefit calculation of going to college:

a. It is increasingly the case that full-time undergraduate students need 5 years to complete all of the requirements for a bachelor’s degree. Explain using a diagram.

b. The real earnings of college-trained workers increase while those for high school–trained workers decrease. Explain using a diagram.

6. This year Jacob Verytall signs a “Fifty Million Dollar” contract with the Mission City Muckrakers, a new basketball team. If he takes the job, he will pay $1000 dollars in moving costs immediately. Then he will be paid $10 million per year over the next 5 years beginning next year. The interest rate is 10%. In terms of this year’s dollars, how much is this “Fifty Million Dollar” contract worth? If the interest rate falls, what will happen to the present value of this income stream?

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