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# Sample Final Answers (Fall 2004) - ECON 3610 FINAL...

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ECON 3610 FINAL SOLUTIONS – DEC. 17, 2004 MULTIPLE CHOICE 1. A. 2. B. 3. D. 4. D. 5. D. 6. B. 7. C. 8. B. 9. B. 10. A. 11. C. 12. A. 13. D. 14. C. 15. D. 16. B. 17. D. 18. A. 19. D. 20. A. 1

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SHORT ANSWER QUESTIONS Question 1 a and b. Question 2. a. a=200; b=100; c=80; d=70 b. Demand = MRP N. If price is \$2 per widget, MRP N = \$400 at 1 worker, \$200 at 2 workers, \$160 at 3 workers, and \$140 at 4 workers 2
c. At \$140, the firm would hire 4 workers, since the profit maximizing rule is to hire where MC (i.e., wage) is equal to MRP. [Note, since hiring 3workers also results in the same profit, the answer of 3 workers is okay too]. d. The Labour demand curve would be to the left and would be steeper for a monopolist. It would be to the left since monopolists produce a smaller output of the product (i.e., a smaller derived demand) and it would be steeper (more inelastic) since with each additional workers in addition to marginal product of labour declining, marginal revenue falls (for perfectly competitive firms marginal revenue doesn’t fall since product price is constant). Question 3. COSTS = 50,000 per year BENEFITS = 55,000 – 40,000 per year = 15,000 per year Present Value of Costs = 50,000 + 50,000/(1.06) = 97,169.81 PV Benefits = 15000/(1.06) 2 + 15000/(1.06) 3 +15000/(1.06) 4 + 15000/(1.06) 5 +15000/(1.06) 6 +15000/(1.06) 7 + 15000/(1.06) 8 = 78,996.77 Since PV (COSTS) > PV (BENEFITS) don’t get an MBA Question 4. a. Compensating wage differentials refer to the extra pay received at a job that contains some “undesirable” attribute (relative to an identical job that does not possess that specific attribute). b. Four assumptions that are necessary for their existence are: 1. Everything else is held constant. For the compensating wage differential to exist, it must be that all other job characteristics and worker characteristics are held constant. (This is what statistical analysis does…all the variables included in the regression model are “controlled for”, or held constant) 2. Workers maximize utility not income (i.e., workers make tradeoffs between non- pecuniary job aspects and money) 3. Workers possess perfect information (workers have to know wages and job conditions at their own jobs and alternative jobs) 4. Mobility. There are alternative jobs that workers can go to. If there wasn’t mobility between jobs, then an employer wouldn’t have to pay extra to get workers to do undesirable jobs (no alternatives).

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