Econ 150
If the interest (discount) rate is 10%, the Present Value of $1000 received each year, in perpetuity, starting next year is
$10,000
If school costs $20,000 in period 2, but provides benefits of $100,000 in period 3, and the discount rate is 10%, the formula for the present value of schooling is
$100,000 / 1.1^3 − $20,000 / 1.1^2
If the interest (discount) rate is 10%, the Present Value of $1000 received today is:
$1000
Suppose the probability of dying on the job each year in Safe Coal Mine is 1.2%, while the probability of dying on the job each year in Unsafe Coal Mine is 1.3%. Moreover, the average salary is $70,000 at Safe Coal Mine and is $72,000 at Unsafe Coal Mine. Given this information, what is the implied statistical value of a life of a miner?
$2,000,000
This month, after the pay increases announced above, a grocery worker could earn $400 more than usual. If the worker has an increased risk of death of 0.000011, what is the estimated value of a statistical life?
$36,363,636
Assume the interest rate is 10%. If your income will rise by $40,000 each year after completing college, forever (really assuming you live forever), the present value of this stream of income is equal to
$40,000/0.1
Consider just 3 time periods for this exercise. Juanita is a high school graduate, considering going to law school. If she does, she will spend $60,000 on tuition and books to get a college education (during the first time period--with an exponent of 1, to discount one period), $120,000 on tuition and books to get a law degree (during the second time period--with an exponent of 2, to discount two periods), and her law degree will earn her $1,000,000 more during the remainder of her work-life, relative to a high school graduate (during the third time period). Juanita's time preference for money is associated with a per-period interest rate of 20 percent. Approximately what is Juanita's present value of obtaining a law degree?
$445,370
Japanese jumpers were paid $5000 to help cool a nuclear reactor after the quake and tsunami. If the increase in odds of death after exposure is 0.1%, what is the estimated value of a life?
$5,000,000
What is the present value of $1000 received 10 years from now, if the interest rate is 5%?
$614
If the area between the Lorenz Curve and the diagonal equality line is equal to 0.1, then the Gini Coefficient is equal to
0.2
At a wage of $10 per hour, Home Depot wants to hire 300,000 associates. When the wage rises to $12 per hour, they decide to hire 285,000 associates. What is the elasticity of labor demand for Home Depot?
0.25
The Gini Coefficient is about _____ in the US, ______ in Mexico, and _____ in Sweden.
0.43, 0.48, 0.25
If the area between the Lorenz Curve and the diagonal equality line is .3, the Gini coefficient is
0.6
Indifference Curves
1. Indifference curves are downward sloping 2. Higher indifference curves indicate higher levels of utility 3. Indifference curves do not intercept 4. Indifference curves are convex to the origin.
The present value of $100 received one year from now, if the interest rate is 10% is
100/1.1
The Gini coefficient in a perfectly unequal society will have a Gini coefficient of _____ while a perfectly equal society will have a Gini coefficient equal to _____.
1; 0
In the United States, the wealthiest 10 percent of households earn approximately what share of total income?
30%
If a worker is willing to give up $5,000 in earnings each year to have a job that has .001 lower risk of death on the job, the value of a statistical life is
5,000,000
The unemployment rate for the US in March 2015 was
5.5%
In a city of 50,000 people age 16 or over, 20,000 are employed, and 5,000 are unemployed. Here, the unemployment rate is
5/25 = 20%
In a city of 50,000 people age 16 or over, 20,000 are employed, and 5,000 are unemployed. Here, the labor force participation rate is
50%
If the price of output is $5, and the marginal product of labor is MPE =200-2E, and the wage is $20 per hour, how many workers should the firm employ?
98
Regression Analysis
A method of predicting sales based on finding a relationship between past sales and one or more independent variables, such as population or income
Which of the following is true?
A tied stayer might choose to not move because their family is better off by not moving, even though the person would individually be better off by moving.
Why might people choose to go to college?
All of the other answers are correct.
People may not accept their first job offer if the wage offered does not meet or exceed their
Asking or Reservation wage
Budget Constraints
C ($ value of expenditure on goods) = wh (the sum of labor earnings) + V(non-labor income) C= w(T-L) + V C = (wT + V) - wL
Chipotle sells burritos for $7 each. The owner is trying to decide whether to hire more workers. The wage is $15 per hour. If he hires a 6th worker, he expects the franchise will produce and sell about 3 more burritos each hour. If he hires a 7th worker, he expects to sell 2 additional burritos each hour. Which of the following is true?
Chipotle should hire 6 workers, but definitely not 7 workers
The _______________ model explains that a skilled labor market will not adjust quickly to a new equilibrium after an increase in demand for skilled labor, because market conditions change while workers obtain necessary training.
Cobweb
Unions have changed over the past few decades by
Covering more public sector workers, and fewer private sector workers
During a recession, people who give up looking for work, who would still prefer to be working are
Discouraged workers who are out of the labor force
"Experience squared" enters into the Mincer Earnings function with a negative coefficient because
Earnings increase at a decreasing rate as experience rises.
To motivate workers, reduce turnover, and reduce shirking, employers who cannot easily monitor output, can pay
Efficiency wages.
If the equation of labor demand for engineers at Google is W = 100-5E, the equation of labor supply is W = 10 + 10E, and there is a competitive labor market
Equilibrium wage will be $70, and Google will hire 6 workers
Mary Daly from the San Francisco Fed reported that people born into the lowest quintile
Face an "equal chance" society if they obtain a college education.
When you finish college, you may experience unemployment while you search for a job that uses your college education. Unemployment that occurs when people move between jobs, or after they finish college while looking for a good job, is called
Frictional
Consider a graph with leisure on the horizontal axis, and consumption on the vertical axis. What is true about indifference curves drawn in this graph?
Higher indifference curves represent higher utility.
Many immigrants and many high school dropouts are less skilled workers. Based on a labor supply and labor demand model, what impact will low-skill immigrants have on the labor market opportunities of American-born high school dropouts?
Immigration of low-skilled workers is associated with lower wages paid to American-born high school dropouts.
Substitution Effect
Increase wage causes an increase in relative price of leisure - work more- increase labor supply
R-squared in a regression of earnings modeled as a function of education, and other individual characteristics is 0.17. This means that
Independent variables explain about 17% of the variation in earnings
Labor Force
LF = E + U Labor force participation rate: LF / P Labor Supply: depends on the fertility decisions made by earlier generations.
What is an example of specific job training?
Learning how to use one firm's payroll system.
What is an example of specific on the job training?
Learning the likes and dislikes of particular clients at a law firm.
The expansion of unions in the United States after the 1930's required
Legal changes that made it easier for workers to unite in their mission
For a non-discriminating monopsonist,
Marginal cost will be greater than the wage, because to hire more workers, the firm must raise the wage for all workers
If supply of labor is less elastic than demand for labor, the burden of a payroll tax imposed on employers will be borne
More by workers than employers.
The contract curve represents options for a union contract that are
More efficient than the union's preferred wage.
MP/W = MP/R
Not change the amount of labor relative to capital
If social surplus equals worker surplus plus employer surplus, a minimum wage will
Reduce social surplus, because number of workers employed falls
If a firm is producing the profit maximizing quantity of output, and the marginal product of labor relative to the wage is less than the marginal product of capital relative to the rental cost of capital, then the firm should
Reduce the amount of labor relative to capital.
Aid to Families with Dependent Children had all of the following characteristics except
Required work effort
Consider an economy with a particular distribution of income. Over the next 10 years, the income of all households increases by $20,000. How will the Gini coefficient change over those 10 years?
The Gini coefficient will decrease.
. On a labor-leisure diagram, when an individual's unearned income rises
The budget constraint shifts up parallel.
If the t-statistic for the coefficient on 'female' in an earnings regression is -5.6
The coefficient on female is statistically different from zero.
The discrimination coefficient 'd' measures
The employer's disutility from hiring a worker from a group disliked by the employer.
Which of the following describes a perfectly discriminating monopsonist?
The firm hires different workers at different wages to maximize employer surplus.
If the marginal product of labor (MPE) = 5/(Ew + Em), where Ew is the number of women hired and Em is the number of men hired, the price of output is $50, the men's market wage is $25/hour and the women's market wage is $10/hour, what is the profit maximizing level of employment of men and women at this firm?
The firm should hire only 25 women.
The marginal product of labor (MPE) = 5/(Ew + Em), where Ew is the number of women hired and Em is the number of men hired, the price of output is $50, the men's market wage is $11/hour, the women's market wage is $10/hour, and the discrimination coefficient d = 0.25. How many workers will this discriminating firm employ?
The firm will hire about 22 men.
The marginal product of labor (MPE) = 5/(Ew + Em), where Ew is the number of women hired and Em is the number of men hired, the price of output is $50, the men's market wage is $25/hour, the women's market wage is $10/hour, and the discrimination coefficient d = 0.25. How many workers will this discriminating firm employ?
The firm will hire only 20 women.
Labor Demanded Curve
The relation between the price of labor and how many workers firms are willing to hire is summarized by the downward sloping LD Curve.
Which of the following statements is true?
The share of workers in public sector unions has grown over the past 50 years.
Why is it not typical for a firm to pay for general training?
The skills gained from general training are transferable to other firms.
Why is it that a firm will typically not pay for general training?
The skills gained from general training are transferable to other firms.
On a labor-leisure diagram
The slope of the budget constraint is determined by the individual's wage.
If the labor supply curve is upward sloping, this suggests that when wage rises
The substitution effect is larger than the income effect
What does it mean for the U.S. economy to have a positively skewed wage distribution?
The wage distribution has a long right tail.
If the equation of the budget constraint is C = 15h + 25, where C is consumption, and h is hours of labor,
The wage is $15.
On a labor-leisure diagram, when an individual's wage rises
Theoretically, there is an ambiguous effect on hours of leisure
If the minimum wage is set below equilibrium wage
There is no binding impact on the labor market, and wage will stay at market equilibrium
If a firm pays a very large salary to their CEO, causing many middle managers to all strive to be the next CEO, the firm is using a ______________ form of compensation.
Tournament
In a regression with earnings as the dependent variable, the coefficient on union is 3,944, and the t-statistic is 1.2, so
Unionized workers' earnings are not significantly different from non-union workers' earnings
Labor Supply Curve
Upward sloping because those who want more will tend to work harder. The higher the wage that is offered the larger the labor supplied.
When there is a decrease in the price of the output good
Value of marginal product falls, and demand for labor shifts left.
If the supply of labor decreases
Wage will rise, but equilibrium employment will fall
Which is the distinguishing feature of the standard cobweb model?
Wages and employment levels adjust slowly over time, because job training for skilled jobs takes time.
A discriminating monopsonist will pay
Wages equal to the worker's reservation wage, and hire the same number of workers hired in a competitive market
Based on human capital theory, to maximize return on investment, at what point should someone stop attending additional years of schooling?
When the rate of return to the last year of schooling equals the market rate of return on investments
For the in-class regression with earnings as the dependent variable, the coefficient on black is -9396, with a t-statistic, -4.13. White is the omitted racial group, so we can conclude
Whites generally earn $9,396 more than African Americans.
The Earned Income Tax Credit is an income support program
With a requirement that you have to work for income to receive the credit
The marginal product of labor (MPE) = 5/(Ew + Em), where Ew is the number of women hired and Em is the number of men hired, the price of output is $50, the men's market wage is $11/hour, the women's market wage is $10/hour, and the discrimination coefficient d = 0.25. At this firm, which of the following statements is true?
Women and men are equally productive.
The burden of a payroll tax imposed on employers will be felt by
Workers and employers, depending on elasticity of labor supply and labor demand
In 2005, for a family with 2 children, the EITC offered
a phase-in 40% wage subsidy, a constant subsidy, and a phase-out range where benefits are reduced 21.06% for each dollar earned.
Wage inequality increased in the United States since the 1960's for all of the following reasons except
a smaller share of the population is graduating from college now, relative to 1960.
If an employer hires a worker and offers job specific training during the first period, in the second period, the employer will pay the worker
a wage between the wage they would be paid at another firm, and the value of their marginal product.
Over the past 50 years, the female-male earnings ratio for full-time full-year workers has
adjusted so female earnings are closer to male earnings.
Estimates of the compensating wage differentials associated with particular job characteristics are valid only if
all other factors that influence worker's wages are held constant.
If non-labor income increases, and the budget constraint shifts out parallel, this creates
an income effect, where people want to buy more leisure and work less, if leisure is a normal good.
Immigration causes
an increase in social surplus because labor supply shifts right.
Risk-averse workers
are willing to accept large wage decreases in exchange for a safer work environment.
Mary Daly's video produced by the Federal Reserve Bank of San Francisco highlights that even though inequality has increased,
college education can act as a great equalizer, creating the opportunity for people born in the lowest income quintile to move into any income quintile.
Prison guards get paid more than campus security personnel because of
compensating wage differentials.
Customer discrimination occurs when
customers prefer to spend money at stores where they interact with a certain type of worker.
The Demand for Labor slopes
down, because employers want to hire more workers when wages are lower.
The Mincer Earnings function shows that
earnings increase at a decreasing rate as experience increases.
When modeling discrimination against black workers relative to white workers,
economists assume that black and white workers are equally productive.
The non-shirking constraint illustrates that
efficiency wages need to be set higher when the unemployment rate is low.
Henry Ford increased the productivity of his workers and reduced absenteeism by paying
efficiency wages.
Assuming a fixed labor supply allocated across union and non-union sectors, unions create deadweight loss because
employment at unionized firms is below the competitive level, while employment at non-union firms is above the competitive level.
With fixed capital, as number of workers rises, the slope of the total product curve
equals the marginal product of labor.
Yellow-dog contracts
give firms the right to require a worker to not join a union as a condition of employment.
Right to work laws
give workers the right to not join a union.
Workers with government jobs are less likely to be laid off than workers in private sector jobs, because of union rules and regulations that protect public sector workers. Assuming other job characteristics are similar, based on compensating wage differentials, we would expect
government workers to be paid less than private sector workers.
Between the Fall of 2018 and the Fall of 2019, employment in the United States
grew by about 1.5%.
Since median weekly earnings are $769, and mean weekly earnings are $959, we know that
half of all workers earn less than $769 a week.
The unemployment rate in California
has been higher than the US unemployment rate since 1990.
The Colbert Report's coverage of Occupy Wall Street
highlighted the challenge of creating societal changes without financial backing.
A profit-maximizing non-discriminating monopsonist
hires fewer workers and pays its workers less than it would if it were operating in a competitive labor market.
Theoretical analysis demonstrates that the EITC creates:
income and substitution effects over the phase-out range.
Income Effect
increase wage causes the worker to feel relatively rich, buy more of everything including leisure, work less.
The Cobweb model illustrates that
it can take years for quantity of labor supplied to respond to an increase in demand for highly skilled labor.
If the unemployment rate fell from 9% to 8%
it is uncertain how much employment grew.
The nation's unemployment rate in April 2013 was
lower than it was in Fall of 2009.
A non-discriminating monopsonist faces
marginal cost of employment that is greater than the wage paid.
The value of marginal product of labor is equal to the
marginal product of labor times the price of the output good.
Growth in California's population since 1970 has been fueled primarily by
migration to California from other countries.
Minimum wages typically reduce efficiency, except if the minimum wage is imposed on a
monopsony
In a regression where earnings are modeled as a function of education and other independent variables, the coefficient on college graduate is 38379, and it is statistically significant. "Less than high school" is the omitted reference category. This means that
on average, earnings are $38379 higher for college graduates than those with less than a high school education.
If ability is positively related to schooling, then estimating the returns to education by comparing individuals who choose high and low levels of schooling will likely
over-estimate the return to schooling.
Under TANF in California (also known as CalWORKS), families could receive a benefit of $600 a month, and be allowed to earn up to $225 without reducing their benefits, followed by a benefit reduction rate of 0.5. Relative to a budget constraint with no welfare program (the original budget constraint), this TANF program would cause the budget constraint to be:
parallel to the original budget constraint ($600 above) for the first $225 of earnings, and then flatten to half the slope until it hits the original budget constraint.
A discriminating monopsonist will
pay the last worker hired the market equilibrium wage.
It is difficult to measure the effectiveness of government training programs that strive to improve labor market outcomes for individuals because
people who self select into the training programs probably have more motivation than the average non-working person.
The Lifecycle Model predicts that
people work the most hours when their wage peaks, to maximize their lifetime earnings.
If the output of each worker is easy to monitor, an employer should consider paying
piece rates.
For the following questions, use a budget constraint-indifference curve diagram with leisure on the horizontal axis, and consumption (earnings) on the vertical axis. When wage rises, the budget constraint
pivots out, with the endpoint on the vertical consumption axis rising.
The in-class regression explaining earnings as a function of education and other variables
probably had omitted variable bias, by omitting occupation and college major, and other factors that impact earnings.
Employment Rates
rates of men have gone down and women have gone up. Women: 32% - 1960 and 61% - 2010 PG 24,25
The Social Security Earnings Test, over the range where Social Security benefits are reduced, would tend to
reduce labor supplied by older workers because of the substitution effect, but the income effect may lead them to work more.
An increase in the marginal cost of searching for a job will tend to
reduce the asking (reservation) wage and shorten the duration of unemployment.
As number of workers rises, with fixed capital, the average product of labor
rises if marginal product is greater than average product, but falls if marginal product is less than average product.
A hedonic wage function, specifying wage as a function of probability of injury,
shows that wages are higher for jobs with greater probability of injury on the job.
At equilibrium in a competitive labor market,
social surplus is maximized at w*, E*.
High wages paid to Alaskan fishermen (and women) don't lead to a surplus of labor in Alaska because
some workers prefer risky jobs with high wages, but others prefer safer jobs with lower wages.
The Supreme Court's Janus v. AFSCME ruling in 2018
struck down state laws that allowed public sector unions to charge dues to non-members for the costs of bargaining and job protections
Empirical research on the EITC shows that
the EITC has a positive, significant impact on labor force participation.
During the recession between 2006 and 2010,
the Sacramento Region lost about 100,000 jobs.
A perfectly discriminating monopsonist pays each worker his or her reservation wage. This results in
the firm receiving all of the surplus
Pension reform is important for local governments in California because
the generosity of most local pension plans was expanded in 1999, but now the costs of the pensions are consuming local government budgets.
It is useful to estimate the value of a statistical life because
the government can use these values to help determine whether environmental regulations are worthwhile, or too expensive relative to the benefits for human health.
Paying an efficiency wage is efficient for some employers because
the high efficiency wage encourages work effort and reduces shirking.
Utility is maximized whenever
the marginal utility from leisure divided by the marginal utility from consumption equals the wage.
To maximize utility, the individual chooses
the point where the budget constraint is tangent to the highest indifference curve.
Present value calculations allow one to determine
the present-day costs and benefits of various options.
According to the Roy model, positive selection of immigrants into the US would occur if
the return to skills in the US is higher than the return to skills in the source country.
If wage increases
the substitution effect will encourage people to work more, while the income effect tends to encourage people to work less.
Ordinary Least Squares regression chooses a 'best fit line' by minimizing
the sum of the squared distance from each point to the line.
The Phillips Curve illustrates
the tradeoff between inflation and unemployment.
Human capital is
the unique set of abilities and skills embedded in workers.
The relationship between wages and the probability of encountering a fatal injury while on the job can be used to calculate
the value of life.
A firm should continue to hire more workers as long as
the value of marginal product of labor > wage
Unemployed workers are most likely to find work
the week when their unemployment benefits run out.
An employer who offers general training during the first period of employment will pay a wage equal to
the worker's value of marginal product minus the cost of training during the first period.
If people who are born into the top income quintile don't get a college education,
they have about an equal chance of moving to any income quintile as adults.
To help solve the principal-agent problem for high level executives, or to encourage athletes to put forward their best effort, an organization will likely pay workers based on
tournaments.
The Labor Supply curve slopes
up, because more people want to work when wages are higher.
Researchers found that after a hurricane directly hits a county in Florida,
wages in that county rise, but wages in neighboring counties fall.
Relative to most countries in western Europe, US unemployment rates
were higher in the 1960s, but were generally lower between 1990 and 2008.
A firm has the choice of offering "dirty" jobs that are likely to cause severe health problems for its workers or of offering "clean" jobs by installing safety equipment at a cost of $5 per hour per employee that will substantially reduce the chances of health problems. If the firm only cares about maximizing profits, the firm will
willingly install the safety equipment if workers are willing to be paid $6 per hour less in a clean job than in a dirty job.
Thinking about the concept of compensating wage differentials, if the U.S. system of unemployment insurance didn't exist, one would predict that
workers in jobs with high risk of unemployment would be paid higher wages.
Migration across regions that have wage differences should cause
workers to leave the low wage areas to move to areas with higher wages.
