Assignment:
Answer the following questions in words (graphs, equations will not be graded). Submit a typed document, about 1 to 2 pages in length.
1. Jacob and Ellen are students at the University of Alberta, and also work part-time at A&W. Jacob works 6 hours a week and Ellen works 8 hours a week. Suppose wages at A&W rise by 20 percent so that both Jacob and Ellen earn 20 percent more for each hour they work. After the wage increases, Jacob decides to work 5 hours a week and Ellen decides to work 10 hours a week. The manager at A&W thinks Ellen is being wise while Jacob is being foolish regarding the hours they work.
a. Explain why it is possible, using the economic theory we have covered, that Jacob and Ellen are both making wise decisions with respect to how many hours they work.
b. Next, explain why it is possible that Ellen is being foolish and Jacob is being wise. (Think outside the box.)
2. Consider the world of the representative firm that faces a downward sloping labour demand curve with respect to the wage (or marginal product of labour). Explain why an increase in the minimum wage rate can raise unemployment. Use the insights of the framework to articulate your point. Next, explain the key assumption(s) of this framework that generates this result, and whether you think it is reasonable.