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ECON 4020 002 EXAM 1: Ch 3
ECON 4020 002/U of U/ Bilginsoy/ Spring 2008
Undergraduate 3

Additional Economics Flashcards




Define income effect
When w/p increases labor decreases because you don’t have to work as much.
Define substitution effect
When w/p increases labor increases because people want to take advantage of the extra earnings.
* Studies show the substitution effect dominates the income effect.
Calculate the marginal productivity of labor (MPL).
MPL = delta Y/ delta L
Where does the profit maximization lie for firms
Where MPL = w/p
What 4 issues affect wage
1. Minimum wage
2. Labor unions
3. Efficiency wage
4. Informal contract
Define the 3 categories of unemployment
1) Employed: Have you worked for pay in the last week?

2) Unemployed: Have you actively searched for a job in the last 4 weeks?

3) Out of the labor force: If no to both above questions then you are out of the labor force.

* Critique: Conservatives say that unemployment is overstated because people sit around and collect unemployment benefits so they are actually out of the labor force, NOT unemployed.
How would severance pay effect the separation rate? The NRU?
Severance pay would increase the cost of firings and provide incentive for employers to keep workers. This would decrease the rate of job finding (because firms would be more cautious in hiring). Therefor, it is ambiguous how this would effect the NRU, it depends upon which effect is more dominant.
If a country sees a reduction in productivity:
a) What happens to the demand curve?
b) How would employment, unemployment and real wages be affected if the labor market is perfectly competitive?
c) How would your answer to part (b) be affected if workers were covered by collective bargaining?
d) How would your answer to part (c) be affected if real wage were determined by efficiency wage considerations?
a) Reduces the demand curve.
b) Real wage and employment would drop, unemployment would increase (but it would all be voluntary unemployment b/c market is perfectly competitive.
c) Real wage and employment decline, unemployment increases, voluntary unemployment increases, involuntary employment increases.
d) Real wage remains unchanged, employment declines and unemployment increases, voluntary unemployment stays the same, involuntary employment increases.
* Counter-argument: Employers are not concerned w/ efficiency wage b/c cost of unemployment increases so employers aren't worried about shirking. Real wage drops, unemployment increases.

(For details, make sure to study graphs in assignment solutions)
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