hw1ans - Econ 100a Spring 2004 Prepared by Jeff Saret Page...

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Prepared by Jeff Saret Page 1 of 5 PS#1 Solutions 1) Use the Internet to determine the views of President Bush and at least two of the leading Democratic candidates for President about whether they want to raise or lower the minimum wage and why (you’ll probably only find a phrase or a sentence on their campaign Web sites). Give at least two reasons (someone benefits) for raising it and two reasons for leaving it alone or lowering it (someone is harmed). a) President Bush advocates raising the minimum wage by $1. http://www.whitehouse.gov/omb/legislative/sap/106-2/HR3846-h.html He argues that the “real” minimum wage (i.e. the minimum wage after adjusting for inflation) has fallen over the past twenty years and should be adjusted as such. b) Senator John Kerry advocates raising the minimum wage and index it to inflation. http://www.johnkerry.com/communities/african_americans/position.html He also claims that inflation has eroded the value of the minimum wage. c) Senator John Edwards advocates raising the minimum wage. http://www.johnedwards2004.com/page.asp?id=524 Senator Edwards wants to help “working families make ends meet.” d) Reverend Al Sharpton advocates raising the minimum wage to $7.15. http://www.ontheissues.org/2004/Al_Sharpton_Jobs.htm According to Sharpton, $5.15 per hour is not “realistic” in today’s America (whatever that means). e) It is safe to say that almost all the candidates for president advocating raising the minimum wage. The question is, how many of them are actually going to try and do something about it? Two reasons for raising the minimum wage: 1) People who keep their jobs earn higher wages. 2) Under certain circumstances, the wage bill may increase (see problem # 2). Two reasons against raising the minimum wage: 1) Raising the minimum wage may increase unemployment, particularly among minorities and teens. 2) Raising the minimum wage hurts businesses by increasing labor costs. 2) Show that an increase in the minimum wage may (but does not necessarily) cause the total wage bill, wL (where w is the wage and L is the hours worked by all employed workers) to rise. Under what conditions does it rise? You may show using graphs or math (calculus and/or elasticities). Math version: The wage bill is equal to w*L. Assume that w is determined exogenously by whomever determines the minimum wage, and that L is quantity of labor (in hours) demanded by employers for a given level of wage. In other words, L is a function of w, and we write this is as L(w). Then a change in the minimum wage leads to the following equation: + = + = = w L w L w w L w L w w L w bill wage w wL bill wage ) ( 1 ) ( ) ( ) ( ) ( Notice that L(w) – or the demand for labor – is always non-negative. Assume L(w) is positive (i.e. at least one person is employed). This implies that
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This note was uploaded on 02/04/2011 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at Berkeley.

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hw1ans - Econ 100a Spring 2004 Prepared by Jeff Saret Page...

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