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Economic Theory

Application Questions

1. Answer the following questions about your own experience in the
labor force:

1.1. When you or one of your friends is looking for a part-time job,
how many weeks does it typically take? After you find a job, how many

weeks does it typically last?
1.2. What is the natural rate of unemployment for the population you
represent?
2. Suppose that a country experiences a reduction in productivity –

that is, an adverse shock to the production function.
2.1. What happens to the labor demand curve?
2.2. How would this change in productivity affect the labor market –

that is, employment, unemployment, and real wages – if the labor market
was always in equilibrium?
2.3. How would this change in productivity affect the labor market if
unions prevented real wages from falling?

3. In any city at any time, some of the stock of usable office space is
vacant. This vacant office space is unemployed capital. How would you
explain this phenomenon? Is it a social problem?

4. A government passes a family-friendly law that no companies can
have evening, nighttime, or weekend hours, so that everyone can be home
with their families during these times. Analyze the effect of this law using
a demand and supply diagram for the labor market: first assuming that

wages are flexible, and then assuming that wages are sticky downward.

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