Instructions: Work with this file as a template, perhaps by File: Download: Microsoft Word. Other options are fine as long as they are legible. Name and SID at the top. Did you work with other students? Identify them below. Type your name to sign the Honor Code. Save as a PDF, upload to Gradescope, and click through to locate each question part before clicking Submit. Profit.

Problems based on Ehrenberg, Smith, and Hallock 14e (2021):

Topic                                                    Question        Points

Did you work with other students? List them below:

Please type your name as an affirmation of the Honor Code at the University of California, Berkeley.

“As a member of the UC Berkeley community, I act with honesty, integrity, and respect for others.”

Type your name:

1.RQ.8. [2 points] In discussing ways to reduce lung diseases caused by workplace hazards, one commentator said:

Gas masks are uncomfortable to wear, but economists argue that they are the socially preferred method for reducing the inhalation of toxic substances whenever they can be produced and distributed at less than it costs to alter a ventilation system.

Is this commentator completely foolish, only partially foolish, or not foolish at all? Take a stand  and explain, describing what you would need to know about ALL marginal things in order to say something about socially preferred (optimal) methods. [Hint: mention something that rhymes     with the phrase “cardinal when I fit” .]

1.P.2. [4 points]  Suppose that a least squares regression yields the following estimate:

wi  =    −  1   +  0. 3 ai                                                                       (1)

where w is the worker’s hourly wage rate (in dollars) and a is the worker’s age in years. A second regression from another group of workers yields the following estimate:

wi  =   3   +  0. 3 ai    −  0. 01 ai2                                              (2)

(a) [1 point] How much is a twenty-year-old predicted to earn according to the first estimate using equation (1)? Show your work.

(b) [1 point] How much is a twenty-year-old predicted to earn according to the second estimate using equation (2)? Show your work.

(c) [1 point] In equation (2), the wage function is a quadratic in age. Which way does the parabola open, up or down? Briefly explain why.

(d) [1 point] In equation (2), the wage function is a quadratic in age. At what age is the wage maximized or minimized? Does this seem realistic? Briefly discuss.

2.P.2. [5 points total] Suppose that supply and demand for school teachers are given by

LS  = 20,000   + 350 W

LD  = 100,000 – 150 W

where L = the number of teachers and W = the daily wage.

(a) [1 point] Solve for the equilibrium wage and employment levels in this market. Show or describe your work.

(b) [1 point] Now suppose that a boatload of skilled school teachers arrives, and at any given wage, 20,000 more workers are now willing to work as school teachers. Solve for the new equilibrium wage and employment levels in this market. Show or describe your work.

(c) [2 points] Create a graph showing the supply and demand curves and equilibrium. You can draw it by hand or use a spreadsheet or other program. Remember that W is the y-variable, so you will need to invert the supply and demand equations, or in other words, solve for W as functions of LS and LD. Show the old and the new supply curves   and both equilibria.

(d) [1 point] Why didn’t employment grow by 20,000? There were 20,000 more workers, after all. Discuss.

3.P.6 [8 points total] The following table shows the number of cakes that could be baked daily at a local bakery, as a function of the number of bakers. Assume that the bakery is a small buyer of baker labor with no market power.

(a) [2 points] Calculate the marginal product of baker labor (MPL) schedule. (Do not use calculus.)

(b) [2 point] Do you see diminishing returns here? Answer and briefly discuss.

(c) [2 points] Suppose each cake sells for $10. (Demand is infinitely elastic at that price, meaning the bakery has no market power but can sell all the cakes it produces at that price.) Calculate the marginal revenue product of labor (MRPL) schedule.

(d) [2 points] If the daily market wage for bakers is $80, how many bakers will the bakery employ? How many cakes will be baked each day?

3.P.8 [8 points total] Suppose that in a small town, the supply of and demand for gardeners are given by

GS  = 4 + 2 W

GD  = 19 – W

where G = the number of gardeners, and W = the hourly wage.

(a) [2 points] Find the equilibrium wage and gardeners employed in the small town.

(b) [2 points] Suppose the town government imposes a $2 per hour tax on all gardeners.    Calculate and describe the effects of the tax on the market for gardeners. [Hint: you can find the new equilibrium by shifting either labor supply up by $2, or by shifting labor demand down by $2, but not both, after you have inverted them to show the wage as a  function of labor. If you shift labor supply, remember to reduce the wage by the tax when figuring labor supplied.]

(c) [4 points] Graph the entire story thus far. Show the original demand and supply curves, the old labor market equilibrium, and the new labor market equilibrium. Show government revenue. Show the deadweight loss of taxation.

4.P.2 [8 points total] Professor Pessimist (“PP”) argues before Congress that reducing the size of the military will have grave consequences for the typical U.S. worker. PP argues that if a        million individuals were released from the military and were instead employed in the civilian labor market, average wages in the civilian labor market would fall dramatically. After all, we are talking about a million workers.

Assess this statement. Assume that the demand curve for civilian labor does not shift when workers are released from the military.

(a) [4 points] Using your knowledge of the definition of the own-wage elasticity of labor demand, a likely long-run magnitude of this elasticity for the economy as a whole, and the size of civilian employment in comparison with an exodus of a million workers from the military, estimate the magnitude of the reduction in wages for civilian workers as a whole if the mass exodus from the military occurred. Do you concur with Professor Pessimist?

[Hint: Use a ballpark statistic for total U.S. employment. You can Google it. The long-run labor demand elasticity is discussed at the bottom of p. 103, where EHS state that it is around – 1. Assume that labor is supplied inelastically.]

(b) [4 points] Draw a simple diagram depicting the effect of this influx of workers from the military.

5.P.5 [4 points total] “Teddy’s Treats,” a profit-maximizing monopsonist firm that produces dog

biscuits, sees the following labor supply curve:

(a) [2 points] Compute the total labor cost and the marginal expense of labor for each level of labor hired. (Do this discretely, do not use calculus.)

(b) [2 points] Draw labor supply and the marginal-expense-of-labor curve.

5.P.6 [4 points total] Teddy’s Treats sees the MRPL schedule below: