laborexam3f03sol

laborexam3f03sol - Final Exam Solutions The following are...

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Economics 421 Fall 2003 Lich - Tyler Final Exam Solutions The following are one possible set of answers to the final. Other answers ( especially on the long - answer questions ) could also be correct. 1. List the four components of labor supply. ( Number of ) workers, hours ( per worker ) , skill, and effort. 2. A proposed policy gives a tax credit of $ 2,000 to each family, regardless of how much they earn. To fund this, the average income tax on labor earnings would be increased from 18 % to 23 % . How would this policy affect labor supply? There are three effects here: an income effect from the tax credit, an income effect because the government collects more money from each person, and a substitution effect from the change in the effective wage. The substitution effect is unambiguously negative. For the income effect, it depends whether $ 2,000 is more than the additional revenue collected. Families earning up to $ 40,000 are made wealthier overall, so the income effect reduces labor supply; the overall effect is to reduce labor supply. Families earning over $ 40,000 now pay more than they receive, so the income effect increases labor supply; the overall effect is ambiguous. 3. Explain how efficiency wages can lead to a greater supply of effort. When a firm pays its workers more than they could earn at another firm, workers face a real loss if they lose their job. This makes them work harder ( supply more effort ) in order to reduce the risk of getting fired. ( An equation would work, if you explain what the variables mean. ) 4. There are three job openings ( 1, 2, and 3 ) and three workers ( A, B, and C ) . Here are the workers’ rankings of firms, and the firms’ rankings of applicants: First choice Second choice Third choice Worker A Job 2 Job 1 Job 3 Worker B Job 1 Job 2 Job 3 Worker C Job 3 Job 2 Job 1 First choice Second choice Third choice Job 1 Worker B Worker A Worker C Job 2 Worker C Worker A Worker B Job 3 Worker B Worker A Worker C Find a stable match. Job 1 and Worker B are mutual first choices. After eliminating them, there are no mutual first picks. The rule is to match a first choice with a second choice. Either “C with 2, and A with 3” or “C with 3, and A with 2” does this.
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Econ. 421 Final, page 2 of 6 5. Name two ways that a worker and a firm become “married” to each other
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This note was uploaded on 03/19/2010 for the course ECON 480 taught by Professor Kinlaw during the Spring '08 term at UNC.

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laborexam3f03sol - Final Exam Solutions The following are...

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