Answer & Explanation:Please note, it looks longer than it is. For many questions you only need to write about one.1. Unemployment: You are an economist
(or at least an aspiring one).
a. If I were to pin you down to a
number, what number would you give for the current Natural Rate of
Unemployment? Why?
b. Now suppose our economy is currently
functioning at that Natural Rate of Unemployment. CHOOSE ONLY ONE OF THE SECTIONS (i, ii, or
iii) BELOW AND ANSWER IT. Keep in mind
that a good answer will include an understanding of both incidence and duration
of unemployment, our stock-flow model of unemployment, and reasons grounded in
economic theory for changes in unemployment rates.
i.
Congress
passes, and funds, an act that pays for 6 months of retraining expenses for
anyone who has lost a job for demonstrably STRUCTURAL reasons. or
ii.
A
spike in oil prices moves the US macroeconomy into recession. Discuss both near term, and longer term
changes in unemployment, or
iii.
A
near collapse of the US banking system causes a severe tightening of credit in
US financial markets, moving the US macroeconomy into recession. Discuss both near term, and longer term
changes in unemployment.
2. One might state the Law of Demand as it applies to demand for labor as
follows. Other things remaining the
same, if the wage rate falls, the quantity of labor demanded rises.
a. In the Short Run, we say this Law of
Demand is due to the Scale Effect.
Please explain.
b. In the Long Run, we say this Law of
Demand is due to both the Scale Effect and the Substitution Effect. Please explain.
c. Would you expect the firms demand for labor to be more wage elastic in the Short Run, or in the
Long Run? Please explain.
d. Suppose a firm uses three kinds of
inputs to produce its product: Unskilled Labor, Skilled Labor, and
Capital. Suppose Unskilled Labor and Skilled
Labor are substitutes in production, Unskilled Labor and Capital are
substitutes in production, and Skilled Labor and Capital are complements in
production. Suppose technological change
leads to a significant drop in the price of Capital. Please answer the following questions.
i.
Predict
the firms Sho
rt Run changes in employment
of Unskilled Labor, Skilled Labor, and
Capital. Please explain.
ii.
Predict
the firms Long Run changes in employment of
Unskilled Labor, Skilled Labor, and Capital.
Please explain.
iii.
Be
sure to explain carefully why your Short Run answers differ from your Long Run
answers. Will Unskilled Labor employment
and Skilled Labor employment be affected similarly or differently in the Long
Run? Why?
3. Minimum
Wage.
a. The standard microeconomic model
tells us that if a minimum wage is effective, a rise in the minimum wage should
decrease employment, increase the wages of certain unskilled workers, possibly
decrease the wages of certain other unskilled workers, and have an ambiguous
effect on total earnings of unskilled workers.
Please explain.
Analysis of the potential effects of an increase in the effective
minimum wage is perhaps more complicated than the above statement
suggests. PLEASE CHOOSE ONLY ONE of the
options below and answer it.
b. Research by economists Card and
Krueger[1] in the mid 1990s came to an apparently
contradictory conclusion that a rise in the minimum wage received by fast-food
workers in New Jersey led to an increase in both wages and employment of
unskilled workers. How might this be
true? Summarize the possible reasons
found in economic theory that might help to explain these findings.
c. A rise in the effective minimum wage
can alter not only the total earnings of unskilled workers but the earnings of
other workers as well. Use what you know
about unskilled labor skilled labor substitutability, and about how an
increase in the wages of one tier of workers might affect the wages of another
tier of workers, to discuss potential impacts on the distribution of earnings
due to an increase in the minimum wage.
d. In many states recently legislated
minimum wage increases (and recently proposed ones) call for large increases in
the minimum wage (up to $15 per hour).
These are not unlike Living Wages that have been adopted in a number of
US cities, just on a larger scale. Use
what you know to discuss the possible impacts on employment and earnings of
such large increases in the minimum wage.