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Unformatted text preview: Name: é: é! Economics 1518
Winter 2010
Dr. Janine L.F. Wilson Economics 1518
Winter 2010
Midterm 1
Education and Earnings Labor Market Discrimination 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 backup work. Problems: 1. In 2005, the job market for individuals with economics degrees was extremely hot. There were
many jobs available at ﬁnancial ﬁrms in need of those who had majored in economics. Expected
earnings were $80,000 per year until the end of their career. In 2009, as a result of a global
ﬁnancial crisis, a recent graduate holding a degree in economics had trouble ﬁnding a job in
his/her ﬁeld. Firms were not hiring at the same rate because they were not growing. As a
result, expected earnings for a recent graduate fell to $60,000 per year. Assume that Bill
graduated in 2005 and Mike graduated in 2009. Both Bill and Mike have ﬁve years to either
work or go to graduate school upon graduating with an economics degree and they both have a
discount rate of 7%. a. If a one year masters degree would cost $5,000 per year and increase annual earnings to
$100,000 per year, would Bill go on to get his masters? (6 points) Wm, = 391999 + £21992 a $029.0 . $2.292; . $0.000 ., 5‘50ﬁ%.‘i
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%\\\ ~3\\\ och :1? W3 MOMS dcgret b. Colleges were underfunded in 2009 relative to 2005 so the cost of a one year master’s
degree rose to $6,000 per year. if a one year masters degree increased annual earnings
to $80,000 per year, would Mike go on to get his masters? (6 points) (00,000 + loo 000 + @9999, be 000 \00 003 x
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Winter 2010
Dr. Janine LF. Wilson work they had 44 years to go to school and work how would your answer possibly c. If we assumed that instead of Mike and Bill havitﬁve years to go to school and/or
change? Why? (in theory, do not calculate it) (4 ints) \rxl’lth ’(‘rt \ooaer lam horiaon 5906‘, C06\' 08v sdooo\ \J\\\ be, 0 much smo\\er ?YOF°‘“°“
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BEDS mi 233% woo\A 4&6 ox «\qu s éﬁrcc W' d. What if instead Bill and Mike had a discount rate of 15%, how would your answer
possibly change? Why? (in theory, do not calculate it) (4 points) /\\(\C \I’X dlacomt ch‘vc indicates
WEE; name, is $031K on WNW; Name: Economics 1518
Winter 2010
Dr. Janine L.F. Wilson 2. Suppose that Abbey (a low productivity worker) and Brenda (a high productivity worker) are
both deciding whether to complete college. The present value of Abbey's lifetime earnings is
$200,000, while the present value of Brenda’s lifetime earnings is $400,000. Even though Abbey
and Brenda are attending the same college, Abbey has higher ”emotional costs” associated with each year attended. In particular, suppose that Abbey’ 5 cost of college attendance is given by:
CAM(S)= 60,0005 and Brenda's cost of college attendance is given by
Carenda(S)=30,000S where 5 represents years spent in college. a. Abbey and Brenda will eventually be employed at the same ﬁrm, which cannot observe
productivity. Suppose that this ﬁrm offered everyone, regardless of schooling, earnings
equal to $300,000 (in present value). How many years of college will Abbey choose to
get? How many years of college will Brenda decide to get? Is this a pooling or
separating equilibrium? Explain. (Be sure to show your work, or to describe how you gmwmmfﬁzchg. m We 0... 000.03% .5 ID b. Now suppose that this ﬁrm offers employees with at least 4 years of college (524)
earnings equal to $400,000 (in present value) and employees with less than 4 years of
college (S<4) earnings equal to $200,000 (in present value). How many years of college
will Abbey choose to get? How many years of college will Brenda decide to get? Is this
a pooling or separating equilibrium? Explain. (Be sure to show your work, or to describe how you arrive at your conclusion.) (6 points)
Ms Lam 0:000:00 “—oomoo {HQ 030
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Winter 2010
Dr. Janine L.F. Wilson 3. Jack and Jill are both looking at theirjob opportunities in the market to decide how much
schooling they should choose. Jack sees that, on average, men make a weekly wage of $200 if
they graduate from high school only, $400 if they have 4 years of tertiary schooling and $500 if
they have 6 years of tertiary schooling. Jill sees that, on average, women make a weekly wage
of $150 if they graduate from high school only, $250 if they have 4 years of tertiary schooling
and $300 if they have 6 years of tertiary schooling. Women have, on average 4 years of tertiary schooling and men have, on average 6 years of tertiary schooling. Suppose that schooling is the
only variable that affects wages. ‘ a. What is the average malefemale wage difference in this labor market? (show your
work) (6 points) A name w‘xth €§=Ll earns MSG/wk
A mom w‘vt‘h 5‘40 eame $500/wk b. Using the Oaxaca composition, calculate how much of the wage discrepancies are a
result of discrimination? (show your work) (8 points) T0?» Nag Qnohooe are ”in my.
“'9’“? +3833; indgwm=dm+$m3m
mugging \n Jokes 3
w; = J*"l'sm gas (ma Wm: $933+ 50. ~ \. “nestled “a"
Dwﬁ‘gngl c,‘ or ”woo 3350 C couhbls ’gor 53 c. What are the drawbacks in the real world of using the Oaxaca co
discrimination? (list and describe two) (6 points) , Cannot contrfd gov (ABM? or agar)“ ”Do not ace gadmkeéeedrs or YIN)
(ﬁacﬁmi ncx‘cion Con \md to \tss m5 Name: Economics 1518
Winter 2010
Dr. Janine LF. Wilson 4. A government position is sometimes given to an individual because they are a relative or friend
of an existing politician instead of to an individual because he/she is the most qualiﬁed.
”Nepotism”, as this practice is called, can be represented using the following wage function
where ws is the wage of a stranger and w, is the wage function of a family member or friend: wf= w,(1+d)
where d<0 Assume that all government agencies produce the same goods, face the same proﬁt function as
private ﬁrms and that there are many government agencies with various levels of ”d” ranging from 0 to 56.4
a. If ws= $25 per hourtshow on a g a h below examples of employment levels for
agencies with—dgél abel carefully) (6 points)
Wage b. What would the profit function of all of the agencies look like (with d on the x axis and
proﬁt on the y axis? (remember/[Fe values of d range from O to ‘6) (6 points)
‘ a TM at , —\ ‘00b .alq “0‘1 c. Under competition between the various government agencies do we expect nepotism
to continue? Why or why not? (6 points) No, time grins M me, No Jioomcm
\NOf‘G—QXS N\\\ N35? ‘98 as {1% 9
WM compeéﬁﬁm “B W“ \ccwe the
NWVC‘} ‘ 5 Name: Economics 1513
Winter 2010
Dr. Janine L.F. Wilson Short Answer 1. Jaeger and Page (1996) ﬁnd that there is evidence of the signaling model in the US. labor
market. What is the main difference between Jaeger and Page’s study of sheepskin effects and
previous studies? (as discussed in section) (6 points) 2. What is a natural experiment? Please describe an example of a natural experiment that we
discussed in class. Why are they so important to labor economics and economics in general? (6
points) \N‘Oﬁﬂ as a (6,50% 0‘} on «now a amoral”
\nén’VOHoﬁ ov QWWX on Cdodﬂd C\l <\\No (we: mews: 50 “W“ “‘ earmﬁsmﬁ Mom \mOW‘I%“\D\C mmgl’lcyimi N6 \S—Qr Meow“ 0W ecomwc 3?“
CDch¢\’<l(\€ 5mm ma 0W6 Name: Economics 1518
Winter 2010
Dr. Janine L.F. Wilson 3. Suppose that an employer sets the wages of individual female and male workers (WI and w,”, respectively) using the weighted averages: _
wiF = 0.4 TF+ 0.6TiF
W!” = 0.3 W + 0.7T,M a. Is the test associated with T a better predictor of productivity for men or women? How
do you know? (6 points) 04 S‘or o—Q‘emcne Nod—er \s 010 c>< Sbro make wocclfrcisce} (encil
‘ = ' ﬁrehhm "\\l\ 00» $60 , bk) mm wig: $23k waded («>4 \5 highchwe 0% ycodxdriviiy ﬁx me“ b. If you assume that both men and women have the same average test score and a man
named Bob and a woman named Glenda score below that average, who will earn more, Bob or Glenda? (6 points) 4 o
; HS \\nC
NLF
0.4 l
l l 0,3 \
am w"\\\ mm more, T
Vgob w'\\\ eoxn \css c. What is a way that this type of discrimination can be reduced or eliminated in the labor
market? (6 points) ...
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 Winter '10
 WILSON

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