Economics 0401

Homework Problems #1

NOTE: * Indicates that a graph is required.

1. Using the material 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 lecture on the demand curve, 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.” 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.)

*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. EXTRA CREDIT: Show and explain how the elimination of the corporate income tax affects labor markets. (Hint: Start with a tax in place in the capital market and show what happens in capital markets when the tax is abolished.) Are capital and labor gross substitutes or gross complements? Explain.

3. Using the material from the lecture on elasticity and the minimum wage, 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. 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. (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.