Problem Set No.
Instructor: Michele Pellizzari
Teaching Assistant: Utsoree Das
Instructions: Solutions to the problem set must be submitted on Moodle by the beginning of class on
27/10/2022 at the latest, before the problems will be solved. No late submissions are accepted.
Important information for the submission of exercise solutions with statistical software.
Exercise 3 in this problem set can be solved with any statistical software (e.g. Excel, Stata, R).
If you solve it in Excel: your solution should comprise a well-organized excel file.
If you solve it with other statistical softwares, your solution should comprise two main files: a code
file (e.g. a .do file in Stata, .r file in R) and a text file with the log of the execution of your program.
Many statistical softwares save log files in software-specific text formats, however a text option is always
available and you should use that. The log file should be executed in a single run of your program and
result in a clean and organized output. Make sure to comment your program appropriately, explaining
your choices. If you include any additional files (graphs, tables), make sure to describe them in a
[Link] file. Once your solution is ready, compress all files together in a zip folder before uploading
it on Moodle.
These instructions refer to exercise 3 specifically. The solution to the rest of the problem set should be
uploaded in .pdf format in a separate file.
QUESTIONS
1. Consider an employer with the following (short-run) production function:
Q = α · ln(L)
where ln(L) is the natural logarithm of L, which is the level of labour input. Assume α > 0. Assume
also that output is sold on a perfectly competitive market with equilibrium price equal 1.
(a) (2 points) Derive the function of L that describes the marginal product of labour.
(b) (5 points) Assume that the employer is hiring labour on a perfectly competitive market where
labour supply is described by the following function:
LS = β · w
where w is the market wage. Assume β > 0. Find the equilibrium level of L∗ and w∗ .
Labour Economics Problem Set N.1
(c) (5 points) Assume now the labour market is monopsonistic and compute the marginal cost of
labour for the employer.
(d) (5 points) Find the monopsonistic equilibrium levels of employment and wages, L∗∗ and w∗∗ .
(e) (3 points) Compare the perfectly competitive and monopsonistic equilibria and say under which
employment is higher, under which the wage is higher, under which the employer’s profits are
higher and if there is unemployment in any of them.
1/2
2α
(f) (5 points) Assume now that a minimum wage wmin = 3β is introduced in the monop-
sonistic market. Compute the profits of the monopsonist if she does not change her labour
demand (hence, she still employs L∗∗ ) and simply adapts wages (if needed) to conform with the
minimum wage legislation.
(g) (5 points) Assume now that the monopsonist hires all the labour supplied at the minimum wage
and pays wages equal to the minimum wage. Compute profits under this scenario.
(h) (3 points) Compare the profit levels you derived in questions f and g and say what is the
resulting equilibrium when the minimum wage is introduced in the monopsonistic labour market.
2. Consider an economic agent with the following utility function:
U = C 1/2 X 1/2 (1)
where C is consumption and X is leisure. Assume that the price of the consumption good is p = 1,
the wage is w = 4 and the total endowment of time is T = 16. The agent also disposes of non-labour
income V = 10.
(a) (3 points) Write down the budget constraint of the agent. Represent this budget constraint
graphically, indicate its slope and vertical intercept, and explain their economic meaning.
(b) (3 points) Compute the marginal rate of substitution between consumption and leisure and
graphically represent the map of indifference curves.
(c) (5 points) Derive the demand of consumption goods, the demand of leisure and the labour
supply of the agent. Represent the optimal choice graphically.
(d) (2 points) Compute the utility level that the agent enjoys in the optimum.
(e) (5 points) Now assume that the market wage declines to 1. Derive the new optimal choice of
consumption, leisure and labour supply and compare them with the previous ones (question c).
(f) (2 points) Compute the utility enjoyed by the agent with the new wage w = 1.
Labour Economics Problem Set N.1
(g) (5 points) Compute the level of non-labour income that would allow the agent to reach the
same level of maximised utility you derived in question f but with the wage equal to the initial
level of w = 4.
(h) (3 points) Compute the optimal choices of consumption, leisure and labour supply with w = 4
and non-labour income equal to the level you derived in question g.
(i) (5 points) Compute the income and substitution effects induced by the wage change from w = 4
to w = 1 and say which one dominates.
3. From the OECD website, download the following two data series for the year 2020 and for all the
OECD countries for which data are available:
1. the gender wage gap at the median, i.e. the percentage difference between the median wage of
men and the median wage of women;
2. the employment rate of women in the age group 15-64.
(a) (10 points points) Produce a simple scatter plot graph with the employment rates on the hori-
zontal axis and the wage gaps on the vertical axis.
(b) (10 points points) Exclude outliers with gender gaps above 30% and compute the correlation
between the two series and comment on the result.