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Chapter 8 Compensating Differences In addition to the questions that follow solve review questions 5 and 7 and problems 1 and 2 at the end of chapter 8 Wage Rate 0 RAX R Risk of Injury Suppose that the isoprofit curves for two types of firms X and Y are given by XX39 and YY39 in the above diagram Also suppose that this firm has zero rofits at every point on the isoprofit curves Suppose that there are two types of workers A and B with indifference curves labeled by A39s and B39s 1 Comparing A and B workers which workers are more willing to put up with risk How can you tell 2 If risk is currently at R is it cheaper to reduce risk at X or Y firms How can you tell 3 Suppose that there are 4 types of firms 39 are type X firms that offer R39 X2 firms are type X firms that offer Wax Rax Y1 firms are type Y firms that offer R39 Y2 firms are type Y firms that offer be be a If these firms are profits of each firm typ b Which type of worker will prefer X1 firms X2 firms Y1 firms Y2 firms c Based on your answer to B will all firm types be able to su ive d Of the surviving rm types what is the nature of the quotmatching39 able to attract workers with their compensation package what are the e7 7 39 between workers and firms d Of the surviving firm types what is the nature of the quotmatchingquot between workers and firms 2 The Environmental Protection Agency uses estimates of compensating wage differences associated with pollution to estimate the benefits of reducing pollution a If workers are covered by health insurance some of the damage of air pollution would be paid for by the health insurance Consequently explain how coverage by health insurance would affect the quality of compensating differences as a measure of pollution costs b Explain how compensating differences for pollution could be used to obtain an estimate of the quotvalue of lifequot c Suppose that the value of life is estimated by relying on the compensating difference for the risk of being fatally injured on the job Explain how ex postquot awards for a workrelated death affects the quality of the estimated value of life ii Suppose that one researcher compares wages on jobs with 001 and 002 risk of death to get an estimate of the value of life A second reacher oompares jobs with 001 and 010 risk of death to get the estimate Who is likely to get the larger value of lifequot estimate Why 3 President George Bush Sr vetoed the Family Leave Act in 1992 Among its provisions was a requirement that firms allow for a 15 week unpaid leave at the birth of a child To examine the consequences of this legislation three points need to be considered First some firms say this is a costly mandate since longer leaves will require them to hire expensive andor less productive temporaries or leave work undone Estimates of the cost to business range as high as 15 billion Second workers benefit from the leave since it reduces the risk of being forced to search for another employer after childbirth Finally workers differ in the value they place on the guarantee and firms differ in the cost of the guarantee a Given the above considerations how should the wages of quotequally productivequot workers compare at firms with and without a leave guarantee Why b Given that workers and firms differ in terms of the costs and benefits of leaves and assuming that workers are freely mobile which workers will be at the firms with leaves Which firms will offer leaves c President Bill Clinton signed the Family Leave Act For the workers and firms that already have guaranteed leaves this should have little effect How will it affect the workers at firms that did not previously offer leaves How about the firms Explain d Suppose that workers who lose their jobs as the result of childbirth are eligible for unemployment insurance How would this affect the desirability of the parental leave mandate Hint consider insuranoe externalities Contrast the case where unemployment insurance premiums are equal across all firms to that where premiums are based upon the unemployment history of each firm39s prior employees e Suppose that a firm offers a pension that defers pay Do you expect that such a firm is more or less likely to offer a guaranteed leave Explain Hint consider how a pension will affect the value workers place on a leave guarantee 4a Explain how introduction of nondiscrimination rules for fringe benefit provision can induce the following i an increase in the number of part time or quotleasedquot employees ii an increase in fringe benefits for low income but a decrease in fringe benefits for high income workers iii an increase in labor costs for employers Where possible use the graphic analysis developed in class to support your answers b Assuming that nondiscrimination rules are in effect who should have more fringe benefits a low skill worker who works at a firm that consists primarily of low skill workers or a low skill worker who works at a firm that consists primarily of high skill workers Explain using the graphic analysis developed in class 5 Suppose that people that work in chicken processing plants have a high risk of getting carpel tunnel syndrome OSHA enters the picture and mandates changes in the process that will reduce the risk a Did chicken processors have any incentive to eliminate the risk without OSHA intervention Explain b After OSHA intervenes are workers better or worse off Explain What about the chicken processing firms and chicken consumers c If the chicken processing plant purchases health insurance to cover the treatment of carpel tunnel syndrome explain why the OSHA intervention might be betterjustified Chapter 11 PAY AND PRODUCTIVITY WAGE DETERMINATION WITHIN THE FIRM Answer questions 2 4 and 6 in the textbook la Describe the advantages and disadvantages of quotpiece ratequot pay from the employer perspective b Explain how a worker s risk aversion would affect their preference for piece rate pay instead oftime based pay c Explain how a worker s ability or skills would affect their preference for piece rate pay instead of time based pay 2 Describe the Meij er pay scheme for cashiers discussed in class and point out some of its advantages and disadvantages 3a Explain why paying CEOs on the basis of relative performance might make sense What could explain companies unwillingness to set pay this way b Describe why compensating a CEO with stock options can lead to risk taking How could the compensation scheme be altered to reduce such risk taking behavior 4 Why is the incentive effect of a profit sharing plan less effective at larger rms 5a What is an quotefficiency wage premiumquot b Explain how payment of efficiency wage premiums could be used to i reduce turnover ii reduce shirking iii reduce employee theft iv reduce monitoring costs c Explain why a company that pays efficiency wage premia may discriminate against older workers when hiring d Using a isocost and isoquant diagram demonstrate how a reduction in the cost of monitoring will impact the mix of efficiency wage premia and monitoring e Given your answer to d how would a reduction in the cost of monitoring worker output impact employer preferences for hiring younger workers 6a Explain why a firm would prefer to use deferred pay instead of an efficiency wage premium to reduce turnover b What prevents firms from firing workers once they reach the point in their career where their wage exceeds their marginal revenue product c In some states quotemployment at willquot laws are in force which allow firms to fire workers without any justification required In other states firms cannot dismiss workers without justification just cause laws Would workers in employment at will states be more or less willing to accept a deferred pay package Why 7 Explain why the disincentive for quotcheatingquot at work drops with age when the rm has an ef ciency wage package 8 Suppose that a rm has a sales force of 10 employees and each receives a 10 commission on their own sales The average sales person receives commissions of 5000 per month There are however systematic uctuations in sales across the workers in which sales randomly rise and fall over time At the same time in any given month some workers sell more than others so there is also variation across workers at a given point in time The rm is considering switching to a new compensation scheme that includes some tournament aspects It will cut its commission from 10 to 5 and use the proceeds ofthe reduced commission to create tournament prizes If sales remain constant the reduction of the commission to 5 would generate 25000 of prize money The rm will distribute this among the top 5 sales people with prizes of 10000 7000 5000 2000 and 1000 a Consider the effect of this switch in compensation structure on total compensation First assume that all workers have an equal chance of winning the tournament Suppose sales uctuate sharply from month to month across all workers e g Sales 10000 in half the months and sales90000 in the other half Will the new structure lead to more or less variation in compensation across months Given your answer will risk averse sales people prefer the new structure or the old b Suppose that some sales people consistently have lower sales than other sales people How does the tournament structure affect the willingness of the most and least able sales people to take risky strategies in their sales tactics Answers to Ch 3 review questions Multiple choice lc 2a 3c 4a 5c 6b 7b 8d 9b 10b lld 12a 13a 14b 15c 16b 17a 18c 19a 20d 21a 22a 23c l Answers to EvenNumbered Review Questions 2 Assume that wages for keyboarders data entry clerks are lower in India than in the United States Does this mean that keyboarding jobs in the United States will be lost to India Explain Answer Indian data entry clerks will be substituted for American ones only if the ratio of their wage to their marginal productivity is lower Thus it is not wage alone that affects the incentives to substitute marginal productivity is also critical Suppose that prisons historically have required inmates to perform without pay various cleaning and food preparation jobs within the prison Now suppose that prisoners are offered paid work in factory jobs within the prison walls and that the cleaning and food preparation tasks are now performed by nonprisoners hired to do them Would you expect to see any differences in the technologies used to perform these tasks Explain Answer When inmates were required to work without pay their wage was essentially zeroiand we would expect that prisons to have adopted laborintensive technologies using the argument inherent in equation 380 When wages rise the cost of expanding output using labor becomes greater and we expect prisons to adopt the use of more capital in the production process Fquot Suppose the government were to subsidize the wages of all women in the population b paying their employer 50 cents for every hour they worked What would be the effect on the e rate women received What would be the effect on the net wage employers paid The net wage would be the wage women received less 50 cents Answer Consider a simple competitive labor market in which the demand and supply of omen are both expressed in terms of the wage received by women which in the absence of any subsidy is assumed to be equal to the wage paid by employers Given the demand curve DD and the supply curve Sn market clearing wage and employment levels will be Wu and En respectively Wage Received by Women Wo 50 W1 W0 E051 Ez Employment of Women in hours Suppose the government now subsidizes employers by paying them 50 cents for every hour women work Viewed in terms of the wage received by women the employers demand curve will shi up by exactly 50 cents re ecting the fact that this amount will be paid by the government At the old market clearing wage received by women Wu the number of women employers want to hire E2 exceeds the number who are willing to work Eu This puts upward pressure on the wage received by women and this wage rises until the excess demand for labor is eliminated This equilibrium occurs at the wage rate W1 and the employment level E It is clear from the gure that the wage received by women increases by less than 50 cents as long as the supply of labor curve is not vertical ie as long as labor supply is responsive to wages Indeed the more responsive labor supply is to the wage rate the less the women s wage will rise Since the wage paid by employers now equals the wage women receive less the 50cent subsidy it is also clear that the wage paid by employers declines by 50 cents minus the increase in the wage women receive It is important to stress to students that one would reach identical conclusions if one analyzed the subsidy in terms of the wage employers pay If supply an demand curves are drawn in terms of this variable a 50centanhour subsidy for women would shi the female labor supply curve down by 50 cents At the old wage paid by employers the supply of female labor would now exceed the demand Downward pressure would be placed on the wage paid by employers and it would fall by less than 50 cents as long as labor supply was responsive to the wage As a result the wage received by women would rise by 50 cents less the fall in the wage paid by employers If antisweatshop movements are successful in raising pay and improving working conditions for apparel workers in foreign countries how will these changes abroad affect labor market outcomes for workers in the apparel and retailing industries in the United States Explain Answer If increased labor costs abroad are not accompanied by increases in marginal productivity then there will be incentives to substitute for these foreign workers with capital or workers elsewhere including the United States However increased costs of manufacturing university apparel also would be eXpected to reduce sales and the scale of output which will put downward pressure on employment in the American apparel and retailing industries The presence of both substitution and scale effectsiworking in opposite directionsiimplies that the ultimate effect on American workers in these industries cannot be predicted by theory alone Answers to EvenNumbered Problems The marginal revenue product of labor in the local saw mill is MRPL 20 7 05L where L the number of workers If the wage of saw mill workers is 10 per hour then how many workers will the mill hire Answer The mill will hire workers until MRPL W 20 7 05L 10 when L 20 workers The output of workers at a factory depends on the number of supervisors hired see below The factory sells its output for 50 each it hires 50 production workers at a wage of 100 per day and needs to decide how many supervisors to hire The daily wage of supervisors is 500 but output rises as more supervisors are hired as shown below How many supervisors should it hire Supervisors Output units per day 0 11000 1 14800 2 18000 3 19500 4 20200 5 20600 Answer The rm needs to compare the marginal cost to the marginal revenue of hiring an additional supervisor The marginal cost is always 500 for each eXtra supervisor The marginal revenue is the number of additional units produced times the price of output Number of Supervisors MC MR 500 050 x 3800 1900 2 500 050 x 3200 1600 3 500 050 x 1500 750 4 500 050 x 700 350 5 500 050 x 400 200 The rm will hire three supervisors since the marginal revenue generated from hiring the third supervisor exceeds 500 but the marginal revenue generated from hiring the fourth supervisor is less than 500 Chapter 10 Worker Mobility Migration Immigration and Turnover From the textbook answer review questions 2 4 and 6 1 Use the economic model of mobility to explain how each of the following would affect the likelihood that a person moves across state lines to take a new job marriage children age home ownership interest rates economic conditions in the home location economic conditions in the destination location lowerLows 2 Suppose that the US expands immigration quotas from their current level of 675000 per year Considering the difference between gross complements and gross substitutes among the native population 39 which workers are likely to see a reduction in their wages andor employment ii which workers are likely to see an increase in their wages andor employment Be sure to consider both labor supply and labor demand effects b It is well established that immigrants tend to settle in areas that have high concentrations of people from their homeland eg Chinese immigrants tend to initially locate in cities with a large Chinese population If immigrants are willing to accept a lower wage to be surrounded by people from their own culture how will this affect the wages of natives in the cities with large immigrant population How will this in turn affect the mobility decisions of natives living in areas with increasing immigrant populations c Other than the effects that immigrants have on native wages how else could immigration affect the standard of living of US natives 3 The marginal expense of labor MEL is equal to the increase in labor costs associated with hiring one additional unit of labor Using calculus it is straightforward to show that MEL W1le5 where W is the wage rate and e5 is the elasticity of labor supply Recall from earlier that e5 l change in quantity of labor supplied change in wage rate l a Suppose that a rm has quottowniesquot and quotimportsquot in its employ The townies have lived in the area all their lives and have many friends and family in the area The imports have moved into town only recently and have relatively few friends and family in the area Which group will likely have the greater elasticity of labor supply Why b If the firm is paying townies and imports identical wages how could it increase its profitability Explain c What rule should the rm use to set the wages of the two groups of workers 4a Based upon the data presented in class what are the major changes in the source of U S immigrants over the past 50 years b What are the different admission types of US immigrants What is the most common type of admission 5a Describe various ways that a firm may structure compensation to reduce turnover among workers b What job characteristics will make it especially important for a firm to reduce turnover 6 Describe the conclusions from the studies by Card and Borjas regarding the effect of immigrants on native wages Explain how the two studies differed in terms of their conclusions and the analysis they performed Chapter 7 Labor Supply Household Production the Family and the Life Cycle 1 Below is a description of the current State Teacher Retirement System of Ohio pension benefit STRS Salaryrelated bene t The annual salaryrelated benefit a life annuity at retirement is calculated by multiplying your first 30 years of service credit by 22 of the nal average salary average of your three highest years of Ohio public earnings The 3lst year of contributing service credit is multiplied by 25 of the nal average salary An additional onetenth of a percent is added to the calculation for every year of contributing service over 31 years 26 for the 32nd year 27 for the 33rd year and so on until 100 of the final average salary is reached Consider a person with 30 years of service at age 60 and a final average salary of 100000 Assume life expectancy of 85 and assume that earnings would remain at 100000 if the person continues working beyond age 60 Assuming that nal average salary does not change and an interest rate of 0 how does postponing retirement from age 55 to age 56 affect a the PV of the pension benefit give a numerical value and show your calculation b the PV of lifetime earnings give a numerical value and show your calculation When Professor Even arrived at Marni University all years were credited with 2 not 22 as now per year of service The credit did not increase beyond age 30 For the person described above draw budget constraints for a retirement age that begins at age 55 and may be as high as 75 for the new and old systems without providing numerical detail d For a person that retired at age 55 under the old program is it possible to say whether the change would be more likely to cause an earlier or later retirement date Explain with reference to income andor substitution effects How does your answer change if at all for a person who retired at age 65 under the old program e An important complication in our analysis of pension benefit formulas is that postponing retirement by a year will typically affect the nal average salary which is based on the highest three years of earnings This was assumed away in the earlier part of the question Given that higher in ation is generally associated with higher nominal wage growth how would the slow down of in ation that has occurred over the past few decades affect the incentive to retire Explain by describing the effect on the budget constraints you drew above f Explain how and why the recent switch to defined contribution plans would affect the incentive to retire 2 Under the current Social Security system any person born in 1937 or earlier who retires at age 62 will receive 80 percent of the quotfullquot Social Security benefit that would have been received if they waited until age 65 If retirement is postponed from 62 to 63 the retiree would increase from 80 to 87 of the full bene t a Assuming a zero percent interest rate and life expectancy of age 80 is Social Security providing more or less than the quotactuariallyquot fair increment in bene ts To justify your answer indicate what the actuarially fair adjustment is ASSUME 0 INTEREST IN YOUR CALCULATION b Suppose that the Social Security formula was changed so that the bene t for retirement at age 62 is only 70 of that received at age 65 and the benefit at age 63 is 80 of that received at age 65 Demonstrate the effect of switching to this quotnewquot program on the lifetime budget constraint pv of lifetime wealth on vertical axis retirement age on horizontal Note that at age 65 the old and new system provide the same benefit c If someone previously retired at age 63 under the quotoldquot system will the change described above likely lead to earlier or later retirement Explain by pointing out the direction of any wealth or substitution effect of the change 3 In the retirement age pv of lifetime wealth diagram what does it say about a person s preferences if they have a atter indifference curves than typical Will such people retire sooner or later than a person with steep indifference curves Explain Chapter 9 Review Questions Investments in Human Capital Education and Training In addition to the problems below consider review questions 3 and 4 and problem 1 at the end of chapter 9 1 Fred could get ajob at 20000 per year with only a high school degree Ifhe goes to college he would pay 5000 tuition per year for 4 years but would earn 22000 per year His wage would not grow over time under either scenario Under either scenario he will retire at age 65 thus work 47 years if start after high school 43 years if start after college a Is the rate of return on a college education above zero Explain b Suppose that earnings would grow at 10 per year on both jobs How if at all would this affect the rate of return on the education investment Why c Suppose that there is a progressive income tax system How if at all would this affect the aftertax rate of return on the education investment d If Fred chose to retire at age 70 instead of 65 would the rate of return on the college education be higher or lower Explain e Other things being the same would you expect that a person who plans to retire at age 70 would be more or less likely to pursue a college degree than a person who plans to retire at age 60 Explain 2 Forty years ago women were less likely to pursue a college education than men Today the reverse is true Using the rate of return to education concept what changes have occurred over the past 40 years that could explain this reversal 3 It is well documented that men and women choose very different majors in college though these differences have diminished over time Explain how each of the following considerations may explain this pattern a willingness to invest in general versus specific capital b the depreciation of human capital when time is spent out of the labor force c socialization d anticipated discrimination 4 Suppose that John attended college and upon graduation earned a salary of 40000 Jack did not attend college and earned a starting salary of 25000 Explain why the 15000 per year earnings differential may be i an overstatement of the effect that college would have on Jack s earnings or ii an understatement of the effect that college would have on Jack s earnings Ch 5 Answer key Answers to EvenNumbered Review Questions MC answers lc 2c 3d 4c 5a 6d 7c 8c 9a 10d lld 12a 13c 14c 15b 16b 17c 18a 19b 20c 21c 22a 23b 24a 25b 4 Minimum wage laws help lowwage workers because they simultaneously increase wages and reduce the marginal expense of labor Analyze this statement Answer This statement has two aspects First minimum wage laws can increase wages and reduce the marginal expense of labor if the labor market is characterized by monopsonistic conditions and the nu39zu39mum wage increases are not too large that is they do not impose a wage higher than the preexisting marginal expense of labor Second however these changes can only help workers if the higher wage bills faced by employers do not drive their employers out of business Workers in a certain job are trained by the company and the company calculates that to recoup its investment costs the workers wages must be 5 per hour below their marginal productivity Suppose that after training wages are set at 5 below marginal productivity but that developments in the product market quickly and permanently reduce marginal productivity by 2 per hour If the company does not feel it can lower wages or employee bene ts how will its employment level be affected in the shortrun How will its employment level be affected in the long run Explain being sure to de ne what you mean by shortrun and longrun Answer In the short run that is when training investments have already been concluded so all that is variable is the employment levels of trained workers margina revenue product still exceeds wages by 3 per hour so it is advantageous for the company to continue employing workers it has already trained The company is not making back enough to make the training be a good investment but making back 3 per hour is better than laying off the workers and making back nothing Thus workers will not be laid off In the long run that is when the company is deciding about investing in new workers the 3 payback per hour is not suf cient to justify the training investment if wages remain as they are Thus the rm will not hire and train new workers under the current circumstances Employment will fall as the rm fails to replace those who leave and the decline in employment will eventually serve to raise the marginal productivity of labor The decline in employment will stop when the marginal revenue product of labor is once again 5 greater than the wage rate The manager of a major league baseball team argues Even if I thought player X was washed up I couldn t get rid of him He s in the third year of a fouryear 24 million deal Our team is in no position to eat the rest of his contract Analyze the manager s reasoning using economic theory Answer The manager is ignoring the fact that the cost of the player will be 24 million over the period whether the player is on the team or not Teams are always better off maximizing pro ts even if they are losing money under their current conditions and the team may be able to generate more pro ts if it replaced player X The condition for replacement is that the difference between the marginal revenue product of the new player and that of player X exceeds the salary of the new player the marginal expense of continuing player X is zero Answers to EvenNumbered Problems Assume that the labor supply curve to a rm is the one given I problem 1 above If the rm s marginal revenue product of labor WL 240 7 2E what is the pro tmaximizing level of employment E 39 and what is the wage level W the rm would have to pay to obtain E 39 workers Answer Total labor costs to the rm C equal HE which expressed in terms of E are as follows C Ex 155 0252 To maximize pro t the rm s marginal revenue product of labor 240 7 2E must equal the marginal expense of labor dCdE 240 7 2E 04E Solving the above equation for E yields Elf 100 Plugging E 100 into the labor supply equation E 5 W and solving for Wyields W 20 In addition to the multiple choice problems listed below complete the following from chapter 2 Review questions 1 3 5 6 8 9 Problems 1 2 Multiple Choice problems for chapter 2 TABLE 21 Population 260 million Employed 130 million Unemployed 10 million Retired 35 million Under Age 16 60 million 1 Given the data in Table 21 the labor force participation rate is A 54 2Given the data in Table 21 the unemployment rate is A 38 B 50 C 71 D 78 TABLE 22 Workers in the Widqet Industry rnings CPI 1966 8000 60 1976 15000 100 1986 22500 178 1996 30000 205 3 According to Table 22 real earnings in the Widget Industry in 1986 were A 22500 B 12640 C 11538 D 15730 4 According to Table 22 in which year were the real earnings of workers in the Widget Industry highest A 1966 B 1976 C 1986 D 1996 5 A worker39s income is equal to his A earnings B wage rate multiplied by hours worked C wages plus benefits D earnings plus employee benefits plus unearned income 6 When wages increase the substitution effect implies that employment will and the scale effect implies that employment will A increase increase B increase decrease C decrease increase D decrease decrease 7 When the price of capital increases the quantity of demanded will but the effect on is ambiguous A labor increase capital B labor decrease capital C capital increase labor D capital decrease labor 8 When the price of labor falls the quantity of demanded will but the effect on Is ambiguous A labor increase capital B labor decrease capital C capital increase labor D capital decrease labor 9 lfthe price of a product decreases due to a decrease in demand then A the firm moves to the left along the labor demand curve B the firm moves to the right along the labor demand curve C the labor demand curve shifts to the left D the labor demand curve shifts to the ht rig 10 Because workers have varying preferences about the type of work they like to do x x Because workers choose between 15 Workers in an industry are probably underpaid if A the market demand curve for chefs is A employers have difficulty hiring and downward sloping retaining qualified workers B the market supply curve for chefs is B the workers cannot afford to quit their upward sloping jobs C the firm supply curve for chefs is C the workers could receive a higher vertical salary in another occupation D the firm supply curve for chefs is D firms in the industry are making a horizontal positive profit x G Economic rent is A the value of a worker39s labor services B a worker39s wage rate C the income a worker receives from his or her labor D the amount by which a worker39s wage exceeds his or her reservation wage various employers offering the same type ofjob based primarily on wages A the market demand curve for chefs is downward slo ing B the market supply curve for chefs is upward sloping C the firm supply curve for chefs is vertical D the firm supply curve for chefs is horizontal 12 If a single small firm39s demand for secretaries increases then A its wage rate will increase and its employment level will remain the same B its wage rate will increase and its employment level will increase C its wage rate will remain the same and its employment level will increase D both its wage rate and i s employment level will remain the same 13 If more people enter the labor market for architects then A both the wage rate and the employment level will increase B both the wage rate and the employment level will decrease C the wage rate will increase and the employment level will decrease D the wage rate will decrease and the employment level will increase 14 lfthe price of capital increases in an industry and the scale effect dominates A wages and employment levels will both increase B wages and employment levels will both decrease C wages will increase and employment levels will decrease D wages will decrease and employment levels will increase Chapter 6 Problems In addition to the questions below answer review questions 1 2 4 and 7at the end of chapter 6 and problem 2 Problems 1 One part of the Ohio welfare system is called Ohio Works First The program provides cash assistance for families depending on the the number of dependents in the family and the family s earnings For example a single mother with two children is eligible for cash assistance if her earnings are at or below 630 If eligible for bene ts she will receive 630 minus an adjustment factor that equals onehalf of any labor earnings above the exemption of 250 per month For example a woman who earns 250 or less will be entitled to a monthly bene t of 630 A woman who earns 500 per month would receive 630125505 A woman earning more than 630 however is not eligible for bene ts To illustrate the effect of this program consider the budget constraint drawn below for Mary The budget constraint is drawn to re ect her job opportunities with no welfare program Income per month 41od 100 0 500 Hours of leisure per month Based on the budget constraint a what is Mary s wage rate b what is Mary s nonlabor income 7 if c On top of the above diagram draw the budget constraint created by the introduction of the OWF program For full credit you should label the numeric values of hours and income levels associated with any critical points on the budget constraint Be sure that you label the new budget constraint so that it is easy to identify d Based on the diagram you drew what range of hours would NOT be chosen by Mary if she has the opportunity to draw OWF bene ts Explain Chapter 6 Problems 2 Consider the budget constraint for Joe given below to answer the questions that follow Total income per week 1 22 500 300 100 O 72 92 112 hours of leisure per week a What is Joe s hourly wage and nonlabor income Wage 10 per hour Nonlabor income100 per week b On the budget graph above draw a budget line representing the following unemployment insurance program assuming that Joe previously worked 40 hours per week and becomes unemployed Provide numeric detail for earnings and hours associated with key points on the new budget line Upon being laid off the worker will receive an unemployment insurance check that replaces 50 of her prior labor earnings If he accepts a new job and earns up to 12 of prior earnings the unemployment insurance check is not reduced If he accepts a new job and earns more than 12 of prior earnings the unemployment insurance check is eliminated Refer to your budget constraint above to describe the range of hours worked that would be inconsistent with utility maximization Why would working in this range be irrational Suppose that the program is adjusted so that the unemployment insurance bene t is reduced by 50 for every 1 earned Draw Joe s budget constraint for this system on the diagram above Provide numeric detail to illustrate key points on the budget line e Would the change in the UI program described in d cause a person to work more or less hours Why If the answer depends on how much they worked under the old program eXplain how and be sure to describe the income and0r substitution effects that are relevant 0 F Chapter 6 Problems 3a Draw a budget constraint for Mary assuming that she can have between 0 and 112 hours of leisure per week 100 of weekly nonlabor income and a wage offer of 10 per hour b Draw a second budget line for John which assumes the same wage rate and nonlabor income but assume that John has to spend 5 hours per week in commuting time if he chooses to work c Assuming the same preferences for John and Mary what predictions would you make regarding the difference in their work hours Explain 4 Use a budget constraint to illustrate how elimination of the earnings test in Social Security was likely to affect labor supply behavior of the elderly Refer to income andor substitution effects to describe the likely changes in work hours for different types of workers ECO361 Chapter 12 Review Questions 1 Consider the following estimated wage equations for men W 20 5 Education 2 Experience The average levels of education and experience are as follows Education Experience Men 14 10 Women 13 6 Suppose the average wage for men is 710 and the average wage for women is 500 a Based on the information provided decompose the 210 difference in average wages into quotdiscriminatoryquot unexplained and quotnondiscriminatoryquot explained parts b Suppose that another important determinant ofwages is whether the worker is employed by a union If women are less likely to be unionized than men how does the omission ofthis variable from the regression affect the size of the quotnondiscriminatoryquot gap Explain c Suppose that education is not identical for all types of workers and on average educational quality is higher for women than men Given this differential quality and the lack of control for it would the above estimate of discrimination against women be too high or too low Explain 2 Suppose that there are two types of workers that are equally productive natives and immigrants The primary difference between the two is that immigrants are less willing to move in response to a wage change because they are unwilling to leave the immigrant community that they live in Hence ifa firm cuts its wages it will lose more native than immigrant workers Given the implications for the elasticity of labor supply for the two groups which workers will receive higher pay Explain with the appropriate graphic analysis 3 Economic models ofdiscrimination point out that employer discrimination will lead to lower pro ts and eventually drive discriminating employers out of business Explain why this occurs 4 In a recent study Neumark Bank and Nort 1995 it was reported that high priced restaurants were much less likely to hire women than men controlling for the credentials of the applicants If this was due to employer discrimination why would this be costly If this was due to customer discrimination who would quotpayquot for the discrimination If it was due to employee discrimination how could employers improve their pro tability 5a This question refers to the article by Caroline Hoxby that we discussed in class Review the abstract and discuss how the asymmetry of peer effects or lack thereof is relevant to the desirability of grouping students in terms of ability Also how is asymmetry relevant to the debate over the desirability of school vouchers 5a This question refers to the article by Caroline Hoxby that we discussed in class Review the abstract and discuss how the asymmetry of peer effects or lack thereof is relevant to the desirability of grouping students in terms of ability Also how is asymmetry relevant to the debate over the desirability of school vouchers b What was the evidence on peer effects as it relates to boys versus girls c What was the evidence on peer effects as it relates to high versus low performers How did these effects vary by racial and ethnic status 6a Based on the article discussed in class explain how sex differences in the willingness to put up with fatality risk on the job contributes to the gender wage gap b Based on the article discussed in class explain how gender differences in the elasticity of labor supply affects the gender wage gap c Based on the report by the Presidential Council of Economic Advisors discussed in class what were the main factors leading to a decrease in the gender wage gap over the past 20 years
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