Chapter 2 Exercises Solutions
Answer to end of chapter questions:
2. The labour force is calculated as the sum of the employed and the unemployed, which in this case is 22,000,000 + 1,000,000 = 23,000,000. The labour force participation rate is calculated as the ratio of the labour force to the working age population: 23,000,000 / 30,000,000 = 77 %. The unemployment rate is calculated as the ratio of the number of unemployed workers to the size of the labour force: 1,000,000 / 23,000,000 = 4.3 %.
4. a) The poor who are at minimum subsistence and who aspire to middle class consumption patterns: This group values income highly relative to leisure, so the indifference curve is relatively flat. As the wage increases, the income
The initial value of Yn is $160, and the coordinates of point A are (T, $160). The budget line has a slope of - 10. There is a solution at point E0. Next, the budget shifts down in parallel fashion such that the coordinates of the right endpoint are (T, $120). There is a new equilibrium that lies to the south-west of the original one. It involves a lower amount of labour income and a higher number of hours worked for the wife.

b) In this case, we allow for the possibility that the husband might react to having his wages cut by altering the number of hours that he works. In his income-leisure choice diagram, the slope of the budget line changes from -20 to -15, which means that it becomes flatter. If the substitution effect dominates the income effect, he will work fewer hours, and he will earn much less income than before. If the income effect dominates the substitution effect, he will work longer hours, and he will be able to recoup some or all of his lost income. We are not given the information that is required to solve this problem. Until we know what his labour income is, we do not know what the wife’s non-market income is, so we cannot say much about how she reacts to the wage cut that is imposed on her husband.

c) If the husband collects unemployment insurance (UI), he has to stop working on the labour market. The wife’s non-labour income falls from $160 to $40 per day, and we repeat the analysis in part