hw4 - University of Illinois at Urbana-Champaign Professor...

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University of Illinois at Urbana-Champaign Professor Ron Laschever, ECON 440, Spring 2010 1 REVISED POINT MAKEUP: In addition, your grade on compass reflects an extra 30 points, bringing it to 100 max possible. YOUR GRADE ON COMPASS, IS THE ACTUAL FINAL GRADE FOR THIS HW. Problem set #4 Answer Key 1. Answer problem 1 on page 483 in the Borjas textbook ( this is problem 11-1 on page 493 in the fifth edition ). ANSWER PROBLEM #1 NOT THE REVIEW QUESTION #1. [15 POINTS] Workers 1 through 34 will find it optimal to be paid the time-rate, while workers 36 through 100 will find it optimal to work for the piece-rate firm. Worker 35 is indifferent between the two. More productive workers will flock to the piece-rate firm. If the price of output is cut by half, then worker 1’s value of marginal product falls to 50 cents, worker 2’s to $1, etc. If the time-rate firm continues to pay $35 per hour, then workers 1 through 69 will choose to work there (and worker 70 is indifferent between the two firms). If, as is more likely, the time-rate firm reduces its wage rate to $17.50 per hour, then the sorting between the firms will not change. 2. Small firms are less likely than large firms to offer health insurance to their employees. One reason for this is that health insurance tends to cost more for small firms than for large firms. Explain why health insurance costs more for smaller insurance pools. [15 POINTS] Insurance is cheaper for larger groups of people for three primary reasons: a. Larger groups reduce the total risk, which lowers the cost of insurance. b. Larger groups reduce the possibility of adverse selection. c. Larger groups are able to spread out the fixed costs of providing insurance among more people. In addition, since health expenditures are more variable from year to year in small groups, insurance premiums are also more variable, especially when health insurance is experience rated. This variation in premiums dissuades many small firms from offering insurance, though it doesn’t necessarily make the insurance more expensive. 3. Companies are increasingly offering more “lifestyle” and non-traditional benefits, such as on- site fitness, medical, and dining facilities. For example, go to http://www.google.com/support/jobs/bin/static.py?page=benefits.html and check out the benefits that Google offers their U.S.-based employees (or, go to www.google.com and search for “Google U.S. Benefits”). Two motivations we discussed in class for why firms offer benefits
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