E202Solutions9.3

E202Solutions9.3 - Answer When the $100/hr is paid directly...

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Answer : When the $100/hr is paid directly to Sue, she accepts the job and enjoys an economic surplus of $100 - $10 = $90. b. Now suppose the library director announces that the earnings from the job will be divided equally among the 400 students who live in Sue’s dormitory. Will Sue still accept? Answer : If the $100 were divided equally among the 400 residents of Sue’s dorm, however, each resident’s share would be only 25 cents. Accepting the job would thus mean a negative surplus for Sue of $0.25 - $10 = -$9.75, so she will not accept the job. c. Explain how your answers to parts a and b illustrate one of the incentive problems inherent in income redistribution programs. Answer : The income sharing arrangement in b is income redistribution of the most extreme form. Such measures reduce the amount of income available by reducing Sue’s incentive to accept employment that would have generated an economic surplus. 8. Suppose the demand and supply curves for unskilled labor in the Corvallis labor market are
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