Econ 191 Spring 2009 Francis Lui Problem Set 5 Due: Tuesday, April 28, 2009, 12 noon. 1) Suppose that in Economy A, everybody has the same wage rate, which is determined by the average of the marginal productivities of the entire working population. In Economy B, the wage rates of the workers differ. Each is paid according to his personal marginal productivity. Assume that workers can freely choose to work in either place. What will happen to the quality and number of people in Economy A after a long period of time has elapsed? Now assume that Economy A can also offer some attractive feature, say, good restaurants, which are highly valued by people working there. How will the answer to the above question be affected? You may assume that in the beginning, the MPLs of the workers in A are not the same. 2) Imagine that the law-enforcement agency wants to design a deterrence system against crime. Consider two scenarios. In scenario1, a criminal who is not convicted has wealth equal to $1200. If successfully convicted, the penalty will be $1200. In
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