{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

laborexam3f03sol

# laborexam3f03sol - Final Exam Solutions The following are...

This preview shows pages 1–3. Sign up to view the full content.

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.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Econ. 421 Final, page 2 of 6 5.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 6

laborexam3f03sol - Final Exam Solutions The following are...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online