Economics 0401
Homework Problems #1
NOTE: * Indicates
that a graph is required.
1. Using the material from the Chapter 2 in the text on Supply
and Demand, analyze the following:
*a. Assume
there are two markets for labor - a military market and a civilian market - and
there is a wage differential between these two markets. Show and explain the
difference between a volunteer army and a conscript army.
*b. How
would a decrease in the unemployment rate affect the supply of military
recruits? The military wage?
*c. Graph
and explain what might happen when the government puts a ceiling on CEO pay for
public corporations which reduces CEO pay below its current level. Assume that
there are two labor markets, one for public corporate CEOs and one for private
corporate CEOs and that the initial wage differential between the two markets
is zero. Explain how a welfare loss and a misallocation of labor resources occurs because of this policy.
d. EXTRA
CREDIT: Show and explain what happens to the wage differential between ice road
truckers in Alaska and truckers in the lower 48 states when oil production is
expanded in Prudhoe Bay and more truckers are needed in Alaska. Assume the two
markets are initially in equilibrium.
2. Using
the material from the chapter 3, do the following:
*a. In a
recent survey of health economists, 90% of them agreed with the statement
“Workers pay for employer-sponsored health insurance in the form of lower wages
or reduced benefits.” If President Obama’s compulsory health plan (mandated
universal health insurance) passes Congress it will also have a provision for
penalizing employers who do not comply with the law (do not offer health
insurance). The CBO has warned that these fines will also be passed on to
workers in the form of lower wages. Show and explain how labor markets for
primary and secondary workers will be affected by this and explain why such a
program would produce welfare losses. (Hint: Be sure to explain what a welfare
loss is.) NOTE: President Obama claims this is not a tax. Is he correct?
Explain.
*b. Assuming unskilled labor and capital are
gross substitutes and skilled labor and capital are gross complements, show and
explain how an investment tax credit will affect these two labor markets. Explain
how the skill composition of employment changes.
*c. Assume
the minimum wage is imposed on the seamless hosiery workers labor market in the
South in 1938 (see Example 4.2 on page 113 in the text). Show and explain how
this affected the introduction of certain machinery into the seamless hosiery
industry and explain whether workers and machines were gross substitutes or
gross complements.
*d. EXTRA
CREDIT: Show and explain what happens when the corporate income tax is
abolished. (Hint: Start with a tax in place in the capital market and show what
happens in both labor and capital markets when the tax is abolished.) Are
capital and labor gross substitutes or gross complements? Explain.
e. EXTRA
CREDIT: Is technological change a threat to unskilled workers in particular and
total employment in general? Explain the text’s answer to this question and how
Baird’s article on “Recycling Labor” is an important part of the answer.
3. Using
the material from the chapter 4, do the following:
*a. Assume
two groups of workers A and B where workers in group A are relatively unskilled
16-19 year olds and workers in group B are relatively more skilled 20-24 year
olds with more schooling and experience. Also assume that these two markets
start with an equilibrium wage differential before the minimum wage is imposed.
Then impose the minimum wage in the market for group A (assuming group B’s
wages are above the minimum wage). Show and explain what happens in these two
markets when group A and B are gross substitutes.
*b. When
the minimum wage law was first introduced in 1938 the seamless hosiery industry
which was one of the largest manufacturing industries in the South was
significantly affected by this law. See Example 4.2 in the text on page 113 for
details. Northern manufacturers who paid their workers higher wages (because
their opportunity costs were higher) strongly supported this law in order to
hamper competition from their lower cost competitors in the South (where wages
were lower). Assume two labor markets for seamless hosiery workers, one in the
North (N) and one in the South (S) before passage of the law with a wage
differential between them. Then impose the minimum wage law which only affected
the Southern labor market. Show and explain what happened to these two markets
after the law was passed using information from Example 4.2. (Hint: What
happened to the output markets in both the North and South?)
*c. "Each
time the minimum wage has been raised total employment has continued to grow.
Therefore, those who claim that the minimum wage causes job loss are simply not
correct." Graph and analyze this statement. Is it true or false? Why?
*d. Using
some of the Hicks-Marshall laws, explain why unions (1) oppose repealing import
quotas, (2) attempt to organize an entire industry (instead of part of it) and
(3) try to limit the substitution of other inputs.
4. Using
the material from lecture, do the following:
a. Suppose
a man and a woman are being considered for a position which requires specific training. The man will work for six periods after the
training period while the woman will work four periods (assume the woman drops
out of the labor force in period 2 and 3 to have children and raise them). Explain the conditions under which: (i) the man will be hired; (ii) the woman will be
hired. Assume that MP = $20,000, W =
$15,000 and i = 10% for both people in all time
periods. (NOTE: The wage for the woman in case ii must change.)
*b. Suppose that women as a group decide to
postpone having and raising children until period 3 and 4. Using the assumptions from part a, explain
what difference this makes in the decision to (i)
hire the man and (ii) hire the woman. Graph and explain what effect this will
have on the wage differential between men and women. (HINT: Use two supply and
demand graphs: one for men and one for women.)