Principles of Economics- Mankiw (5th) 422
1 Page

Principles of Economics- Mankiw (5th) 422

Course: ECON 120 120, Spring 2010

School: Mesa CC

Word Count: 494

Rating:

Document Preview

434 PA R T S I X THE ECONOMICS OF LABOR MARKETS largely attributable to natural ability, effort, and chance. N Some economists have suggested that more educated workers earn higher wages not because education raises productivity but because workers with high natural ability use education as a way to signal their high ability to employers. If this signaling theory were correct, then increasing the educational...

Unformatted Document Excerpt
Coursehero >> Arizona >> Mesa CC >> ECON 120 120

Course Hero has millions of student submitted documents similar to the one
below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

Course Hero has millions of student submitted documents similar to the one below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

R 434 PA T S I X THE ECONOMICS OF LABOR MARKETS largely attributable to natural ability, effort, and chance. N Some economists have suggested that more educated workers earn higher wages not because education raises productivity but because workers with high natural ability use education as a way to signal their high ability to employers. If this signaling theory were correct, then increasing the educational attainment of all workers would not raise the overall level of wages. Wages are sometimes pushed above the level that brings supply and demand into balance. Three reason for above-equilibrium wages are minimum-wage laws, unions, and efficiency wages. Some differences in earnings are attributable to discrimination on the basis of race, sex, or other factors. N Measuring the amount of discrimination is difficult, however, because one must correct for differences in human capital and job characteristics. Competitive markets tend to limit the impact of discrimination on wages. If the wages of a group of workers are lower than those of another group for reasons not related to marginal productivity, then nondiscriminatory firms will be more profitable than discriminatory firms. Profit-maximizing behavior, therefore, can act to reduce discriminatory wage differentials. Discrimination can persist in competitive markets if customers are willing to pay more to discriminatory firms or if the government passes laws requiring firms to discriminate. N N Key Concepts compensating differential, p. 419 human capital, p. 419 union, p. 425 strike, p. 425 efficiency p. wages, 425 discrimination, p. 426 comparable worth, p. 432 Questions for Review 1. 2. 3. 4. 5. Why do coal miners get paid more than other workers with similar amounts of education? In what sense is education a type of capital? How might education raise a workers wage without raising the workers productivity? What conditions lead to economic superstars? Would you expect to see superstars in dentistry? In music? Explain. Give three reasons why a workers wage might be above the level that balances supply and demand. 7. 6. What difficulties arise in deciding whether a group of workers has a lower wage because of discrimination? Do the forces of economic competition tend to exacerbate or ameliorate discrimination on the basis of race? Give an example of how discrimination might persist in a competitive market. 8. Problems and Applications 1. College students sometimes work as summer interns for private firms or the government. Many of these positions pay little or nothing. a. What is the opportunity cost of taking such a job? b. Explain why students are willing to take these jobs. c. If you were to compare the earnings later in life of workers who had worked as interns and those who had taken summer jobs that paid more, what would you expect to find? 2. As explained in Chapter 6, a minimum-wage law distorts the market for low-wage labor. To reduce this distortion, some economists advocate a two-tiered minimum-wage system, with a regular minimum wage for adult workers and a lower, sub-minimum wage CCebook http://www.ccebook.cn eBook

Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education.

Below is a small sample set of documents:

Mesa CC - ECON 120 - 120
CHAPTER 19E A R N I N G S A N D D I S C R I M I N AT I O N435for teenage workers. Give two reasons why a single minimum wage might distort the labor market for teenage workers more than it would the market for adult workers. 3. A basic finding of labor
Mesa CC - ECON 120 - 120
CCebook http:/www.ccebook.cneBook
Mesa CC - ECON 120 - 120
IN THIS CHAPTER YOU WILL . . .Examine the degree of economic inequality in our societyConsider some problems that arise when measuring economic inequalityINCOME ANDINEQUALITY POVERTYSee how political philosophers view the governments role in redistri
Mesa CC - ECON 120 - 120
438PA R T S I XTHE ECONOMICS OF LABOR MARKETSIn this chapter we discuss the distribution of income. As we shall see, this topic raises some fundamental questions about the role of economic policy. One of the Ten Principles of Economics in Chapter 1 is
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY439N NWhat problems arise in measuring the amount of inequality? How often do people move among income classes?These measurement questions are the natural starting point from which to discuss public policies aim
Mesa CC - ECON 120 - 120
440PA R T S I XTHE ECONOMICS OF LABOR MARKETSTa b l e 2 0 - 2I NCOME I NEQUALITY IN THE U NITED S TATES . This table shows the percent of total beforetax income received by families in each fifth of the income distribution and by those families in the
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY441As this example shows, there are social as well as economic determinants of the distribution of income. Moreover, the simplistic view that income inequality is bad can be misleading. Increasing the opportunitie
Mesa CC - ECON 120 - 120
442PA R T S I XTHE ECONOMICS OF LABOR MARKETSare ranked from the most equal to the most unequal. On the top of the list is Germany, where the richest fifth of the population has income only about 4 times that of the poorest fifth. On the bottom of the
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY443Ta b l e 2 0 - 4GROUP All persons White, not Hispanic Black Hispanic Asian, Pacific Islander Children (under age 18) Elderly (over age 64) Female household, no husband presentSource: U.S. Bureau of the Census
Mesa CC - ECON 120 - 120
444PA R T S I XTHE ECONOMICS OF LABOR MARKETSannual incomes. What people care about, however, is not their incomes but their ability to maintain a good standard of living. For various reasons, data on the income distribution and the poverty rate give a
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY445IN THE NEWSMeasuring PovertyHOW MANY PEOPLE LIVE IN POVERTY? THE answer is a topic of continuing debate.Devising New Math to Define PovertyBY LOUIS UCHITELLE The Census Bureau has begun to revise its defini
Mesa CC - ECON 120 - 120
446PA R T S I XTHE ECONOMICS OF LABOR MARKETSECONOMIC MOBILITYPeople sometimes speak of the rich and the poor as if these groups consisted of the same families year after year. In fact, this is not at all the case. Economic mobility, the movement of p
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY447because the governments role in redistributing income is central to so many debates over economic policy, here we digress from economic science to consider a bit of political philosophy.U T I L I TA R I A N I
Mesa CC - ECON 120 - 120
448PA R T S I XTHE ECONOMICS OF LABOR MARKETSto the other without cost, it would maximize total utility from water by equalizing the amount in the two places. But suppose that the government has only a leaky bucket. As it tries to move water from one p
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY449IN THE NEWSA Rawlsian BillionaireINVESTOR WARREN BUFFETTS $36 BILLION make him one of the worlds richest men. Here is how Buffett explained his personal philosophy to an audience of college students at the Un
Mesa CC - ECON 120 - 120
450PA R T S I XTHE ECONOMICS OF LABOR MARKETSbecause Rawlss philosophy puts weight on only the least fortunate members of society, it calls for more income redistribution than does utilitarianism. Rawlss views are controversial, but the thought experim
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY451now taking. Would you imagine yourself behind a veil of ignorance and choose a grade distribution without knowing the talents and efforts of each student? Or would you ensure that the process of assigning grade
Mesa CC - ECON 120 - 120
452PA R T S I XTHE ECONOMICS OF LABOR MARKETShigh minimum wage forces the wage above the level that balances supply and demand. It therefore raises the cost of labor to firms and reduces the quantity of labor that those firms demand. The result is high
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY453IN THE NEWS Should the Government Try to Help Poor Regions?MANY ANTIPOVERTY PROGRAMS ARE TARgeted at poor areas of the country. Economist Edward Glaeser presents the case against this geographic approach.Help
Mesa CC - ECON 120 - 120
454PA R T S I XTHE ECONOMICS OF LABOR MARKETSnegative income tax a tax system that collects revenue from high-income households and gives transfers to low-income householdsMany economists have advocated supplementing the income of the poor using a neg
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY455misfortune, they are in the best position to decide how to raise their own living standards. Rather than giving the poor in-kind transfers of goods and services that they may not want, it may be better to give
Mesa CC - ECON 120 - 120
456PA R T S I XTHE ECONOMICS OF LABOR MARKETSIN THE NEWSWelfare ReformIN 1996 THE U.S. WELFARE SYSTEM UNDERwent a major reform, including the enactment of time limits on benefits. In the following opinion column, economist Gary Becker evaluates the c
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY457was opposed by many intellectuals. Some members of President Clintons team quit after the 1996 federal law, over what they considered a betrayal of the welfare state. They argued that most women forced off welf
Mesa CC - ECON 120 - 120
458PA R T S I XTHE ECONOMICS OF LABOR MARKETSSummaryN Data on the distribution of income show wide disparity in our society. The richest fifth of families earns about ten times as much income as the poorest fifth. Because in-kind transfers, the econom
Mesa CC - ECON 120 - 120
CHAPTER 20INCOME INEQUALITY AND POVERTY459different social programs have contributed to this phenomenon? (Hint: See Chapter 12.) 3. Economists often view life cycle variation in income as one form of transitory variation in income around peoples lifeti
Mesa CC - ECON 120 - 120
460PA R T S I XTHE ECONOMICS OF LABOR MARKETSlabor supply is quite inelastic. How do you suppose their views about income redistribution differ? 11. Do you agree or disagree with each of the following statements? What do your views imply for public pol
Mesa CC - ECON 120 - 120
IN THIS CHAPTER YOU WILL . . .See how a budget constraint represents the choices a consumer can af fordLearn how indif ference curves can be used to represent a consumers preferencesAnalyze how a consumers optimal choices are determinedTHETHEORYOFC
Mesa CC - ECON 120 - 120
464PA R T S E V E NA D VA N C E D T O P I Ca more complete understanding of demand, just as the theory of the competitive firm in Chapter 14 provides a more complete understanding of supply. One of the Ten Principles of Economics discussed in Chapter 1
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE465Ta b l e 2 1 - 1PINTS OF PEPSI 0 50 100 150 200 250 300 350 400 450 500OFNUMBER PIZZAS 100 90 80 70 60 50 40 30 20 10 0SPENDING ON PEPSI $ 0 100 200 300 400 500 600 700 800 900 1,000SPENDING ON PIZZA $1,00
Mesa CC - ECON 120 - 120
466PA R T S E V E NA D VA N C E D T O P I CThe slope of the budget constraint measures the rate at which the consumer can trade one good for the other. Recall from the appendix to Chapter 2 that the slope between two points is calculated as the change
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE467Figure 21-2Quantity of PepsiCBD 1 AMRSI2Indifference curve, I 1 Quantity of PizzaT HE C ONSUMER S P REFERENCES . The consumers preferences are represented with indifference curves, which show the combin
Mesa CC - ECON 120 - 120
468PA R T S E V E NA D VA N C E D T O P I CFOUR PROPERTIES OF INDIFFERENCE CURVESBecause indifference curves represent a consumers preferences, they have certain properties that reflect those preferences. Here we consider four properties that describe
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE469Figure 21-4Quantity of Pepsi 14MRS = 6A 184 3MRS = 11B Indifference curve 7 Quantity of Pizza0236B OWED I NDIFFERENCE C URVES . Indifference curves are usually bowed inward. This shape implies that
Mesa CC - ECON 120 - 120
470PA R T S E V E NA D VA N C E D T O P I C(a) Perfect Substitutes Nickels 6 Left Shoes(b) Perfect Complements4 7 5 2I2 I1I10 1I22I33 Dimes 0 5 7 Right ShoesFigure 21-5P ERFECT S UBSTITUTES AND P ERFECT C OMPLEMENTS . When two goods are easi
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE471We have used indifference curves to represent the consumers preferences. Another common way to represent preferences is with the concept of utility. Utility is an abstract measure of the satisfaction or happine
Mesa CC - ECON 120 - 120
472PA R T S E V E NA D VA N C E D T O P I CFigure 21-6T HE C ONSUMER S O PTIMUM . The consumer chooses the point on his budget constraint that lies on the highest indifference curve. At this point, called the optimum, the marginal rate of substitution
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE473Figure 21-7Quantity of Pepsi New budget constraint1. An increase in income shifts the budget constraint outward . . . New optimum 3. . . . and Pepsi consumption.A N I NCREASE IN I NCOME . When the consumers
Mesa CC - ECON 120 - 120
474PA R T S E V E NA D VA N C E D T O P I CFigure 21-8A N I NFERIOR G OOD . A good is an inferior good if the consumer buys less of it when his income rises. Here Pepsi is an inferior good: When the consumers income increases and the budget constraint
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE475Figure 21-9Quantity of Pepsi 1,000 D New budget constraintNew optimum 500 3. . . . and raising Pepsi consumption. Initial budget constraint 0 B 1. A fall in the price of Pepsi rotates the budget constraint ou
Mesa CC - ECON 120 - 120
476PA R T S E V E NA D VA N C E D T O P I Cincome and substitution effects work in opposite directions. This conclusion is summarized in Table 21-2. We can interpret the income and substitution effects using indifference curves. The income effect is th
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE477of Pepsi falls, the consumer moves from the initial optimum, point A, to the new optimum, point C. We can view this change as occurring in two steps. First, the consumer moves along the initial indifference cur
Mesa CC - ECON 120 - 120
478PA R T S E V E NA D VA N C E D T O P I C(a) The Consumers Optimum Quantity of Pepsi Price of Pepsi(b) The Demand Curve for PepsiNew budget constraint150B$2AI2B A 50 1 DemandI10 Quantity of Pizza 0 50 150 Quantity of PepsiInitial budget co
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE479Figure 21-12Quantity of Potatoes BInitial budget constraintD 2. . . . which increases potato consumption if potatoes are a Giffen good. 0 EOptimum with high price of potatoes Optimum with low price of potat
Mesa CC - ECON 120 - 120
480PA R T S E V E NA D VA N C E D T O P I CFigure 21-13T HE W ORK -L EISURE D ECISION . This figure shows Sallys budget constraint for deciding how much to work, her indifference curves for consumption and leisure, and her optimum.Consumption$5,000
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE481(a) For a person with these preferences . . . Consumption Wage. . . the labor supply curve slopes upward.Labor supply 1. When the wage rises . . .BC1 BC2 I 2 I10 2. . . . hours of leisure decrease . . . Hou
Mesa CC - ECON 120 - 120
482PA R T S E V E NA D VA N C E D T O P I Cconsumption rises. Yet the response of leisure to the change in the wage is different in the two cases. In panel (a), Sally responds to the higher wage by enjoying less leisure. In panel (b), Sally responds by
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE483in the lottery see large increases in their incomes and, as a result, large outward shifts in their budget constraints. Because the winners wages have not changed, however, the slopes of their budget constraint
Mesa CC - ECON 120 - 120
484PA R T S E V E NA D VA N C E D T O P I CFigure 21-15T HE C ONSUMPTION -S AVING D ECISION . This figure shows the budget constraint for a person deciding how much to consume in the two periods of his life, the indifference curves representing his pr
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE485(a) Higher Interest Rate Raises Saving Consumption when Old Consumption when Old(b) Higher Interest Rate Lowers SavingBC 21. A higher interest rate rotates the budget constraint outward . . .BC 21. A highe
Mesa CC - ECON 120 - 120
486PA R T S E V E NA D VA N C E D T O P I C(a) The Constraint Is Not Binding Cash Transfer Food Food In-Kind TransferBC 2 (with $1,000 cash)BC 2 (with $1,000 food stamps)BC 1BBC 1BI2$1,000 A $1,000 AI2 I1I10Nonfood Consumption0Nonfood Con
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE487between food and nonfood consumption however he pleases. By contrast, if the government gives Paul an in-kind transfer of food, then his new budget constraint is more complicated. The budget constraint has agai
Mesa CC - ECON 120 - 120
488PA R T S E V E NA D VA N C E D T O P I Cthrough the explicit optimization envisioned in the theory. Yet consumers are aware that their choices are constrained by their financial resources. And, given those constraints, they do the best they can to a
Mesa CC - ECON 120 - 120
CHAPTER 21THE THEORY OF CONSUMER CHOICE4892.Draw a consumers indifference curves for wine and cheese. Describe and explain four properties of these indifference curves. Pick a point on an indifference curve for wine and cheese and show the marginal ra
Mesa CC - ECON 120 - 120
490PA R T S E V E NA D VA N C E D T O P I Cplausible? Discuss. (Hint: Think about income and substitution effects.) 8. Suppose you take a job that pays $30,000 and set some of this income aside in a savings account that pays an annual interest rate of
Mesa CC - ECON 120 - 120
IN THIS CHAPTER YOU WILL . . .Consider why an economys total income equals its total expenditureLearn how gross domestic product (GDP) is defined and calculatedSee the breakdown of GDP into its four major componentsMEASURINGAN AT I O N SINCOMEWhen
Mesa CC - ECON 120 - 120
494PA R T E I G H TT H E D ATA O F M A C R O E C O N O M I C Smicroeconomics the study of how households and firms make decisions and how they interact in markets macroeconomics the study of economy-wide phenomena, including inflation, unemployment, an
Mesa CC - ECON 120 - 120
CHAPTER 22M E A S U R I N G A N AT I O N S I N C O M E495Figure 22-1T HE C IRCULAR -F LOW D IAGRAM . Households buy goods and services from firms, and firms use their revenue from sales to pay wages to workers, rent to landowners, and profit to firm o
Mesa CC - ECON 120 - 120
496PA R T E I G H TT H E D ATA O F M A C R O E C O N O M I C Sgoods and services produced in the economy. Some goods and services are bought by governments, and some are bought by firms that plan to use them in the future to produce their own output. Y
Mesa CC - ECON 120 - 120
CHAPTER 22M E A S U R I N G A N AT I O N S I N C O M E497drugs. It also excludes most items that are produced and consumed at home and, therefore, never enter the marketplace. Vegetables you buy at the grocery store are part of GDP; vegetables you grow
Mesa CC - ECON 120 - 120
498PA R T E I G H TT H E D ATA O F M A C R O E C O N O M I C SFYIOther Measures of IncomeWhen the U.S. Department of Commerce computes the nations GDP every three months, it also computes various other measures of income to get a more complete pictur
Mesa CC - ECON 120 - 120
CHAPTER 22M E A S U R I N G A N AT I O N S I N C O M E499condition of the economy, economists and policymakers often want to look beyond these regular seasonal changes. Therefore, government statisticians adjust the quarterly data to take out the seaso