ECONOMICS 0401

HOMEWORK PROBLEMS #2

NOTE: * Indicates that a graph is required.

1. Using the concepts of human capital developed in lecture, do the following:

*a. Using the signaling model, do the following: If the government reduces subsidies to college education, how will this affect peoples' decisions to go to college and how will employers respond? Explain.

b. Explain the following:

(1) Given the work-family-work life cycle of the 'traditional' woman, it would be rational for such women to invest in less education than men.

(2) Suppose Congress passes a law requiring all persons aged 18 to enroll in a program of universal national service for 4 years. How will this affect the returns from investment in higher education? Explain.

(3) Suppose firms require all employees to retire at age 65; now suppose Congress passes a law prohibiting firms from requiring retirement at age 65. Explain how this affects the return from investment in higher education.

*(4) Suppose that college tuition is reduced to zero and textbooks are provided free of charge. Once equilibrium levels of college attendance are reached, what earnings differential would we expect to see between college grads and high school grads? Show and explain.

c. Suppose an unskilled worker who currently earns $20,000 a year enrolls in a community college (CC) for one year. Tuition and books cost him $2,000. After finishing his courses at the CC, he gets a job paying $25,000 a year. Suppose that this job lasts for 10 years and this worker retires at the end of this 10 year period. Assuming the interest rate is 6%, is this a good investment? (Hint: Use the annuity formula from lecture.) What if the interest rate is 10%?

2. Using the material in on migration developed in lecture, do the following:

*a. Assume that equilibrium wage differentials have been established between U.S. and Mexican low-wage labor markets. Explain how each one of the following policies will affect these two labor markets and the wage differential:

(1) Employer sanctions (fines) for hiring illegal aliens.

(2) Direct fines for illegal aliens when they are caught.

(3) Increased Border Patrol activity.

*b. Assume that equilibrium wage differentials have been established between U.S. and Mexican low-wage labor markets. Explain how a recession in the U.S. will affect this wage differential and the flow of immigrants between these two countries.

*c. Assume that two countries (U.S. and Korea) have a disequilibrium wage differential between their labor markets that cannot be eliminated because of a limit on immigration (such as immigration quotas). If Korean imports into the U.S. are lower-priced (in relative-price terms) than U.S. goods, show and explain what effect this will have on these two labor markets and the wage differential between them.

*d. How will an increase in the minimum wage affect immigration into this country? Explain using two low skilled labor markets (assume complete coverage for US market).

3. Using the material on unions developed in lecture, do the following:

*a. Using the rent-seeking model show what happens to the rent when unionized industries are declining. (Hint: The demand curve will decrease and become more inelastic.)

*b. Using a two sector model with a union labor market and a non-union labor market, show how unions in the home construction industry fared when they increased their wages a great deal in the 1970s by restricting the supply of union labor. (Hint: Use an inelastic demand for the SR and an elastic curve for the LR.)

*c. The West Coast Longshoremen had work rules which required shipping companies to have a crew on board a ship when it was unloading and a crew on the dock. Show how this featherbedding arrangement affected the demand for union labor and the rents that longshoremen unions received.

(1) Show what happened when the shipping firms introduced containerization. (Hint: Containerization is a technological change in which capital is a gross substitute for labor-containerization makes loading and unloading ships very easy compared to the labor intensive methods of using union labor.)

(2) Why did the unions oppose containerization?

*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.