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University of California, Davis Dr. Janine L.F. Wilson Department of Economics Fall 2009 Economics 151a Homework 3 – Answer Key Labor Market Equilibrium 1. Rapidzo Inc. fabricates toy race cars for the consumer market.  They have 10  craftspeople working for them before any government intervention.  The government has  decided that individuals in the world irrationally underestimate the need for disability  insurance coverage and that the government must choose to either provide disability  insurance coverage through a payroll tax or to mandate that all firms in the nation must  provide disability insurance coverage.  a. Draw an example of a labor market below where a tax of $2 per hour worked by  an employee of Rapidzo Inc. is taken by the government in order to provide  insurance coverage.  What will be the effect on employment (in words, not  numerically)?  Fall in E from E* to E T b. Draw the market for labor at Rapidzo Inc. if instead the government mandates  that Rapidzo Inc. provides disability insurance coverage when the cost of  providing disability insurance coverage is $1.50 per hour worked and, on  average, the employees value the benefit at $1 per hour that they work.  Compare, in words, the level of employment at Rapidzo Inc. to the situation  where the government is not involved at all (no tax, no mandated benefit).  $1.00 Wage seen by firm Wage seen by worker $2 E $ S D D’ E T S S $ S’
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University of California, Davis Dr. Janine L.F. Wilson Department of Economics Fall 2009 Fall in E from E* to E M c. Compare the level of employment under the payroll tax (part a) and mandated  benefit (part b). (in words).  E > E T   Employment will be greater under the mandated benefit.
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This note was uploaded on 12/24/2009 for the course ECON 151A taught by Professor Miller during the Fall '06 term at UC Davis.

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