Economic Analysis of Labor Markets and Public Goods: Steel Workers and SEPTA - Prof. R. St, Exams of Economics

Download Economic Analysis of Labor Markets and Public Goods: Steel Workers and SEPTA - Prof. R. St and more Exams Economics in PDF only on Docsity! Econ 001: Final Exam (Dr. Stein) Dec 12, 2008 Instructions: • This is a 120-minute examination. • Write all answers in the blue books provided. Show all work. Use diagrams where appropriate and label all diagrams carefully. • Write your name and your Recitation Instructor's name in every blue book that you use. • This exam is given under the rules of Penn's Honor system. • All blue books, blank or filled, must be handed in at the end of this exam. No blue books may be taken from the room. • The use of Programmable Calculators is in violation of Departmental rule. It is strictly forbidden! Check: The Exam has 2 parts. Part 1 consists of 14 multiple-choice questions. Please write you answers in blue book 1. Part 2 consists of 2 short answer questions. Please use one book for Q1 & Q2. Part 3 consists of 2 short answer questions. Please use one book for Q3 & Q4. Part I: Multiple Choice Questions (3 points each/42 points total): 1. Anya had two choices during the Thanksgiving break. She could have gone to New York City and her budget for that trip was $500. Alternatively, she could have stayed home for free and spend the time writing a novel. Since she enjoys writing so much, Anya would get a utility equaling to $500 from staying at home. We learn that Anya decided to go to New York over the break and that indeed she used her $500 budget. If Anya behaved rationally, which of the following is true? a. Anya expected a benefit of no more than $500 on this trip. b. Anya expected a benefit of at least $1000 on this trip. c. Anya expected a benefit of between $500 and $999on this trip. d. We cannot judge. 2. Suppose the USA was producing at point B in 1970 and that this point was allocatively efficient. Which of the following accurately describes the Marginal Benefit of cars, in terms of toys, at point A relative to point B? a. Assuming that the MB(cars) is downward sloping, MB(a) > MB(b) b. Assuming that the MB(cars) is downward sloping, MB(a) < MB(b) c. Assuming that the MB(cars) is downward sloping, MB(a) = MB(b) d. Even if we assume that the MB(cars) is downward sloping, there is not enough information to compare the MB(a) to MB(b). 3. Using the graph above. Suppose we know the country is producing at point A but consuming at a point between B & E then we can infer that: a. The country is importing Toys. b. The country is importing Cars. c. The country would prefer point B to point A. d. Both a and c are correct. e. Both b and c are correct. 4. Suppose there is only ONE worker in the society and he produces two goods. Which of the statement is true? a. The PPF has to be linear (a straight line). b. As there is scarcity in this society, the PPF must be concave (bowed). c. If the law of diminishing return applies, the PPF will be linear. d. None of the above. Cars Toys C A B D E F 13. Suppose a firm can distinguish between professors and students. The firm also knows that the quantity demanded by professors at any given price is higher. The marginal cost is 1 for any quantity. Which of the following is true? a. The DWL is smaller than if the firm could perfectly price discriminate b. The MR the firm gets from the last product bought by the students is 1, but the MR the firm gets from the last produce bought by professors is greater than 1. c. The firm would get more profit if it sets a single price for all consumers rather than setting different prices for professors and students. d. The profits from selling only to students must be smaller than the profits selling only to professors. 14. During the current recession we expect both high and low income to decrease but the effect will not be constant. Suppose that the Gini coefficient falls from .4 to .35. This implies that during the recession: a. Inequality increases. b. Inequality decreases. c. Inequality does not change. d. There was perfect equality both before and after the recession. Answers: 1. b 2. a 3. b 4.d 5.b 6.c 7.a 8.c 9.b 10. c 11.d 12.c 13.d 14.b Part II: Short Answer Questions 1&2. Please use one Blue Book to answer Q1 & Q2. Q1. (20 points) “The Nation’s employers cut 533,000 jobs in November, the Bureau of Labor statistics reported Friday.” (New York Times, Saturday, Dec 6th , 2008). This question asks you to analyze the causes of these job losses and their impact on unemployment and wages and future job losses. We will look at one specific labor market: that of steel workers. a. Start by drawing the supply & demand of labor with demand downward sloping & supply upward sloping. What is the equilibrium wage rate? Mark graphically. At this wage rate, mark graphically the level of employment & unemployment of steel workers. Answer: Typical S&D with w* & L* marked. No unemployment. Points:3 S&D:1 W* & L*:1 no unemployment:1 b. With the freeze in credit, construction work has been reduced significantly and thus the demand for steel has contracted. How will this affect the demand for steel workers? Show graphically. Answer: The decrease in demand for steel will bring a lower price of steel- the output of the steel workers. We therefore should expect a rotation in of the labor demand. Points:2 Decrease demand for labor: 1 Rotation of demand for labor: 1 c. Many steel workers are unionized and their wages are fixed through long term contract. Under this assumption what will happen to employment & unemployment of steel workers? Show graphically. Answer: Q2. (10 points) If you did not bring a calculator show your work for full credit. The city of Philadelphia has a competitive labor market. The labor demand and labor supply in the city for the year 2008 were given by the equations: w = 100 – 2L w = 2L where, like usual w refers to the wage rate and L to labor. a. What is the equilibrium wage and employment in 2008? What is the total wage income earned by Philadelphia’s workers? Answer: In Equilibrium 100-2L=2L or L*=25 & w*50. Total wage income is L*W*=25*50=1250 Points: 2 L* =25 & W*=50:1 L*W*=1250: 1 Michael Nutter, the mayor of Philadelphia, has two years left in office: 2009 and 2010. His goal is to increase the wage income earned by Philadelphia’s workers in the years 2009 and 2010. He is considering between two projects only one of which can be implemented. These projects are Project I: Build the Comcast Center Project II: Build 10 new schools in West and North Philadelphia. Each of these projects would have a different impact on the labor market. Labor demand equation under Project I is given by w = 100 – L/2 b. What would be the equilibrium wage and employment in Philadelphia in the years 2009 and 2010 if Project I is undertaken? Calculate the total wage income of Philadelphia workers in 2009 (which is the same as in 2010) under Project I. Answer: 100-L/2=2L or LI=40 & WI=80 so that LI*WI=3200 Points: 2 LI =40 & WI=80:1 L*W=3200: 1 Project II would have no impact on the labor market in the year 2009 so that the labor demand would be the same as in 2008. However Project II will result in an increase in the marginal product of labor in 2010 so that labor demand in 2010 is given by w = 220 – 2L c. What would be the equilibrium wage and employment in Philadelphia in 2010 if Project II is undertaken? Calculate the total wage income of Philadelphia workers in 2010 under Project II. Answer: 220-2L=2L or LII=55 & WII=110 so that LI*WI=6500 Points: 1 LII =55 & WII=110:.5 L*W=6050: .5 d. Based on what you have learnt in class what criterion would you suggest Mr. Nutter should use in deciding between the two projects. Answer: He should compare the present value of each project and choose the one with the highest PV. Points: 1 Use the criterion that you suggested above to answer the following questions. e. Suppose the interest rate is 20% which project would Mr. Nutter choose? Answer: The following table summarizes the information we found above Wage Income 2009 Wage Income 2010 Project I 3200 3200 Project II 1250 6050 So PV(I)=3200/(1.2)+3200/(1.2)^2=4889 PV(II)=1250/(1.2)+6050/(1.2)^2=5243 Points:2 1 for each PV. f. How does the mayor’s relative evaluation of the two projects change as the interest rate increases? Answer: Note that in project II we sacrifice lower wages in the short term (2009)for higher wages in the long term (2010). The lower the interest rate the more likely is this sacrifice to be worth while. So a lower interest will encourage going for project II and a high interest rate for project I. Points: 2 for logic. Part III: Short Answer Questions 3&4. Please use one Blue Book to answer Q3 & Q4. Q3. (20 points) SEPTA is an example of a regulated natural monopoly. There are large fixed costs to run the system of trains & busses, but the marginal cost of having an additional customer use the system is low and constant. This question asks you to analyze how the government should regulate SEPTA and some consequences of such regulations. a. Start by graphing the cost curves for SEPTA. Assume the marginal cost of each additional passenger is constant and equal to $1. Draw the MC curve. Add an Average Total Cost curve that is consistent with SEPTA having large fixed costs and with the MC curve you drew. Add a downward sloping demand Answer: See midterm 2. Points:2 b. If SEPTA were an unregulated monopoly how many riders would use it? What price would they be charged? What is the dead weight loss due to this pricing? Show all graphically. Answer: See midterm 2. Points:3 QM, PM, DWL: 1 point each. c. What price would lead to efficient use of SEPTA? What would happen if the government regulated SEPTA to charge this price? Answer: See midterm 2. Points: 2 P=MC: 1 point, exit:1 point d. What is the break even or zero profit price (show graphically)? Answer: See midterm 2. Points:1 P=ATC: 1 point