S-HW1 - University of Illinois at Urbana-Champaign...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
University of Illinois at Urbana-Champaign Professor Ron Laschever, ECON 440, Spring 2010 1 Problem Set #1 Answer Key [I recommend reading it, even if you got full credit for a question] 1. Indicate whether each statement is true or false, and support your answer with a 1-3 sentence explanation. If part of a statement is false, then the whole statement is false. a. The unemployment rate will change if a worker, after being fired from his job, decides to stay at home with his children, paint the house, build model cars, and does not pursue any paid employment. [10 Pts] True. The worker ceases being employed but does not become classified as “unemployed” because he does not look for a new job. The unemployment rate is the ratio of the number of unemployed people to the number of people in the labor force; the labor force is the number of employed plus unemployed people. The number of people who are employed falls by one person when the guy loses his job, the labor force falls by one person, and the number of unemployed people does not change. Therefore, the unemployment rate rises. This is discussed in Chapter 2.1 in the Borjas textbook. b. The argument that women’s labor force participation may fall as their husbands’ wages rise during the early stages of economic development is an example of the substitution effect . [10 pts] False. This is an example of the income effect. You might want to read the discussion in page 54 of the textbook. c. An advantage of the Earned Income Tax Credit over other welfare programs is that it provides incentives for all recipients to increase their labor supply. By contrast, the AFDC program that existed prior to 1996 provided incentives for all recipients to reduce their labor supply. (Note: The EITC is discussed in Section 2.11 of your textbook.) [10 pts] False. The EITC unambiguously provides an incentive for people who are out of the labor force to enter the labor force. But there is an income effect for people who are already in the labor force, which gives them an incentive to work less. In addition, there is a substitution effect which may lead people already in the labor force to work more or work less, depending on which part of the EITC budget constraint they are on. (The second part of the question is true: The AFDC program provided incentives for people to
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/24/2010 for the course ECON 440 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

Page1 / 4

S-HW1 - University of Illinois at Urbana-Champaign...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online