# midterm_2_answer_key - Name: _ Economics 151A Summer...

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Name: ___________________________ Economics 151A Summer Session II 2009 Dr. Janine L.F. Wilson Midterm #2 Labor Market Equilibrium and Labor Unions You will be given one hour and twenty minutes to complete this exam. Show all work. Credit will be given to correct answers only if there is back-up work. Part I: Problems 1. In the new healthcare plan proposed by the Obama Administration there is a “play or pay” provision for those firms with greater than \$400,000 in payroll costs. They will need to either pay 8% in payroll taxes or pay at least 72.5% of their employee’s health care premiums. For simplicity, we will assume that all employer based health care premiums cost \$4,700 annually for an individual worker. Basket Inc., a firm making decorative basket, has a total payroll of \$500,000 and does not provide health benefits for their employees. Basket Inc. is looking into the future to decide how best to act if the government’s new plan were to pass. Each worker at their firm makes \$50,000 per year and values health benefits at \$2,000 annually. The labor supply curve is upward sloping, labor demand is downward sloping and you can assume that their slopes have the same absolute value. (36 points) a. What would be Basket Inc.’s minimum cost per worker annually if they chose to pay the payroll tax? Using this number as the total cost of healthcare for the firm for an individual worker, graph the impact on employment and wages of this payroll tax. Label the wage seen by workers, the wage paid by the firm and the amount collected by the government. Would employment rise or fall? ( just show graphically, you need not calculate numerical values) (8 points) 8% * \$50,000 = \$4,000 per worker is “tax paid” 1 \$4,000 D 1 Wage seen by firm Wage seen by worker E 1 E 0 D 0 S E W

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Name: ___________________________ Economics 151A Summer Session II 2009 Dr. Janine L.F. Wilson b. What would be Basket Inc.’s minimum cost per worker annually if they chose to provide healthcare for their workers? Graph the impact of the mandated benefit on wages and unemployment. Show the total compensation seen by workers, the total compensation paid by the firm and the impact on the level of employment (graphically not numerically). (8 points)
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## This note was uploaded on 11/02/2009 for the course ECON 151A taught by Professor Miller during the Summer '06 term at UC Davis.

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midterm_2_answer_key - Name: _ Economics 151A Summer...

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