ECON 101 Tutorial: Week 21
Shane Murphy
s.murphy5@lancaster.ac.uk
Office Hours: Monday 3:00-4:00 – LUMS C85
Outline
• Roll Call
• Problems
Chapter 23: Problem 2
What is the national unemployment rate right now?
What is the unemployment rate for your
demographic? Why might this be higher or lower
than the national average?
http://www.deptofnumbers.com/unemployment/de
mographics/
http://www.nytimes.com/interactive/2009/11/06/b
usiness/economy/unemployment-lines.html
Chapter 23: Problem 7
Consider an economy with two labor markets, neither of
which is unionized. Now suppose a union is established
in one market.
a) Show the effect of the union on the market in which
it is formed. In what sense is the quantity of labor
employed in this market an inefficient quantity?
In the unionized market, the supply curve shifts up and
to the left. Wages rise and the quantity of labor demand
falls in the unionized market.
b) Show the effect of the union on the non-unionized
market.
In the non-unionized market, the supply curve shifts
down and to the right. Wages fall and the quantity of
labor demanded rises.
Chapter 23: Problem 9
Suppose the government passes an employee
benefit that raises the cost of an employee by €4 per
hour (assume no workers currently receive this
benefit and workers value the benefit equal to cost)?
a) What effect does this have on the demand for
labor?
b) What effect does this law have on the supply of
labor?
c) How does this effect wages and quantity of
labor?
Chapter 23: Problem 9 (a-c)
Chapter 23: Problem 9
d) If a minimum wage prevents the wage from
balancing supply and demand, what happens?
Chapter 23: Problem 9
e) Now suppose workers do not value the benefit.
What now?
Chapter 23: Problem 10
Statistics from 2011 suggest that there are 75 million
young people between 16 and 23 unemployed
worldwide. Young people are 3 times more likely to be
unemployed than those in other age groups and each
month out of work prior to age 23 increases the
likelihood that they will experience longer periods of
unemployment later in life.
a) Why are such statistics of importance to
policymakers?
b) What specific costs might be associated with youth
unemployment to young people and to society?
c) Should policymakers devote more resources to
dealing with youth unemployment compared to
other groups in society? Justify your response.
Chapter 35: Problem 1
Using the new Keynesian AS curve, explain why
when the output gap is very large the AS curve has
an almost horizontal slope.
The output gap is the gap
between full employment
and actual output. This is
represented by (YFE minus
Y1). When the output gap
is big then many of the
factors of production are
lying idle, so bringing
them into use won’t
involve firms bidding
against other firms. There
won’t be much of a trade
off between growth and
price increases.
Chapter 35: Problem 2
Why might governments find it difficult to accurately
measure the size of the output gap?
It is difficult to know where on the AS curve an
economy is at and what the actual output gap is. The
models used vary and the size of the various
parameters that modellers input into the equations
can lead to widely differing results. Remember that
the economy is complex based on millions of
individual decisions.
Chapter 35: Problem 6
What sort of assumptions underlie the policy that cuts
in income taxes would increase the supply of labor
hours offered in an economy?
Cuts in other workers’ income tax change incentives to
work. A reduction in tax acts like an increase in wages so
there is a substitution effect from leisure to work. There
is an opposing income effect, because these earners
have more income to buy leisure.
The effect of the cuts are believed to differ according to
the levels of income concerned. High tax rates provides
a substantial disincentive to work. It assumes for these
earners the substitution effect outweighs the income
effect.
Chapter 35: Problem 9
A government announces a decision to increas
investment on higher education with the intension
of increasing participation rate in higher education
by young people to 45%.
a) Does it matter what sort of degrees these young
people do?
b) To what extent is the proportion of young people
going on to university an important factor in
improving the quality of human capital?
c) What else might the government need to put in
place to ensure that the policy was a longer-term
success?
Chapter 35: Problem 10
How would a government be able to tell whether a policy of increasing private sector
involvement in public sector services provision actually lead to a more efficient outcome
compared to having those same services provided by the public sector?
There has been an increase in transferring public ownership of assets to the public sector
throughout Europe. The latest in the UK has been the privatization of the Post Office. The idea
being that driven by providing high quality services and the profit motive, privatized
companies are more likely to provide the services required by the public at lower cost, at
higher productivity levels and more efficiently than if provision was in the public sector. The
outcomes to look for are therefore better services, improved products at lower prices with
more choice and produced with greater efficiency or productivity.
This may sound simple, but the jury is still out. For example looking at the case of gas and
electricity, then the issue becomes clouded by both external and internal factors. Externally
gas and oil is subject to global supply and demand and internally many of the firms have
complex pricing structures. Some energy producers are also retailers of energy and it is not
clear how the cost centers work.
In addition government procurement of services can be a cause of concern. Sometimes
governments may tie themselves into long-term contracts which are poor value. At the other
extreme firms may bid down their tender submission to stand a chance of getting the
contract. It then might be cheap, but the service provided is poor and occasionally the
provider loses money and defaults on the contract.