Economy

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Problem Set 4

For graphs, it is often best to use Excel or draw your graph and attach the picture

 

Total 17 points.

 

  • (5 points) Labor markets and wage determination

Table 1. Chocolate chip cookie output and number of workers. Cookies sell for $2.50 each. Ingredients (butter, eggs, flour, nuts, sugar, vanilla how many workers will be hired and how many cookies made if the wage falls to $14) cost $0.50 for each cookie.

Workers output( brownies)
1 10
2 34
3 57
4 78
5 97
6 114
7 129
8 142
9 152
10 159
11 163
12 164
13 164
14 163
15 161
16 158
17 154
18 149
19 143
20 136

 

  1. (1 point) Coffee Cottages has estimated the number of brownies produced for different numbers of workers (see table 1). Why does output increase with more workers? Why does output increase at a diminishing rate?  Would output increase at a diminishing rate if there were additional ovens and workspace?

 

  1. (2 points) Cookies sell for $2.50 each and each requires $0.50 in ingredients. (Coffee Cottages uses quality chocolate!) Graph the demand for labor as a function of the wage using the data in table 1. What happens to the number of workers hired when wages go up? How many workers will be hired and how many cookies made at a wage of $26? How many workers will be hired and how many cookies made if the wage falls to $14 because of a surge in low-skill immigration?

 

  1. (1 point) Nick could buy a 2nd He estimates that the 2nd oven would raise output for any given number of workers as indicated in table 2. How many workers will be hired and how many cookies produced with two ovens at a wage of $26? Would your answer change any if there is a limited market for chocolate chip cookies so that Nick would have to lower the price of cookies to sell more?

 

  1. (1 point) Like many retail employers, Nick experiences high turnover among his workers which forces him to devote much time to hiring and training workers. He finds that paying higher wages discourages turnover saving money by making each worker more productive at higher wages. Now draw a hypothetical labor demand curve assuming higher wages are associated with higher productivity.

 

Table 2. Workers and output, two ovens

Workers output
1 40
2                         79
3                       117
4                       154
5 190
6 224
7 256
8 286
9 314
10 340
11 364
12 386
13 406
14 424
15 439
16 452
17 462
18 469
19 473
20 474

 

 

  • (3 points) Equilibrium discrimination and crowding. Suppose there are two occupations: accountants and receptionists.
    1. (2 points) Draw hypothetical supply and demand graphs for male and female workers to both occupations assuming that some of each prefers each job. Now, assume that managers assume that women are unqualified to be accountants so all women find work as receptionists. Show the effects of discrimination on your graph.
    2. (1 point) Who benefits and who loses from this discrimination?  Show the effect of discrimination on wages and employment in both occupations and on total output in each. (Hint: have one graph for receptionists and a separate one for accountants.)

 

  • (3 points) Efficiency Wages

 

  1. (1 point) Henry Ford achieved rapid productivity growth in building Model T’s by raising his workers’ wages. How was he able to pay these higher wages? How did higher pay contribute to greater productivity?
  2. (1 point) Since the early 1970s, wage growth productivity growth has slowed and wage growth has fallen. How might the slowdown in wage growth contribute to slower productivity growth?
  3. (1 points) What might be done to make up for the decline in employer-provided income security? If workers employment and income has become more variable, would it be possible to provide some other form of income security (such as some form of insurance)? Would it be desirable to provide workers with some other form of income security?

 

  • (3 points) Financial markets: efficient and other.

 

  1. (1 point) How are financial firms able to make profits? What has happened to the profitability of financial firms in the US economy in recent decades? Why have they been able to increase their profits? Is this a good thing for the US economy as a whole?

 

  1. (1 point) What is the “present value” of future returns and how does it relate to the “discount rate”? Who do you expect values future returns more: you or your 61-year-old professor? Why?

 

  1. (1 point) Explain the arguments in favor and against universal health insurance.

 

  • (2 points) Immigration
    1. (2 points) Explain the impact of a wave of low skill immigrants on wages in a particular industry (say manual labor). How is the industry wage affected? What is the impact on the Americans who already worked in those industries and in other related industries? What is the impact for consumers? Use graphs to illustrate.