Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

ECON 151 Spring 2023

Final Exam

Rules and instructions:

1. You have 70 minutes to complete this in-class exam. There are 6 pages including this cover sheet and 46 points in total.

2. This is an open-book, open-note exam. Stand-alone calculators are allowed but not needed.

3. PROHIBITED: Texting and all communications. Laptops and electronic devices are fine as long as you use them only for examining the book or your notes. Internet use is fine.

4. Your work on this exam must be your own. Sign the Berkeley Honor Code below to affirm that you understand it and pledge to follow it by adhering to all rules:

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

__________________________

(your signature)

5. Write legibly. If we can’t read your answer, we can’t award credit. Confine your answers to the space provided (inside the box). Don’t fill the entire space with words. Less is more.

1. [28 points total] Recall the simple model of labor market monopsony, with linear demand and supply curves. In this setting, the marginal cost of hiring labor (called labor’s marginal expense ME_L by Ehrenbeg, Smith, and Hallock) is also linear, with twice the slope of labor supply. Recall that the competitive equilibrium occurs at the intersection of supply and demand.

In solving this problem, feel free to solve the algebraic system first, or graph them first. Complete the steps in the order that works best for you. Not all key numbers are integers.

To start, suppose these functions are given by:

Demand: w = 40 – 2 L

Supply: w = 2 L

ME_L: w = 4 L

where L measures employment in thousands and w measures an hourly wage. The statistics that emerge will be in the ballpark of what a medium-sized statewide system of Amazon warehouse workers might look like. (We take no particular view on Amazon’s hiring practices.)

(a) [4 points] Graph these three linear relationships on the axes below and label the values of w and L where they cross. (You may wish to work through the algebra first.)

(b) [2 points] Where is the competitive equilibrium located? State numbers. Show your work.

(c) [4 points] Set demand equal to the marginal expense of labor and solve for the monopsonist’s wage w^m and employment L^m. State numbers. Show your work.

Now suppose these functions are given by:

Demand: w = 40 – 2 L

Supply’: w = 10 + L

ME_L’: w = 10 + 2 L

(d) [4 points] Graph these three linear relationships on the axes below and label the values of w and L where they cross. (You may wish to work through the algebra first.)

(e) [2 points] Where is the competitive equilibrium located? State numbers. Show your work.

(f) [4 points] Set demand equal to the marginal expense of labor and solve for the monopsonist’s wage w^m’ and employment L^m’. State numbers. Show your work.

(g) [4 points] Discuss what you have found. In which case was labor supply more inelastic? How did the elasticity of labor supply affect the competitive equilibrium, if at all? Why? How did the elasticity of labor supply affect the monopsony equilibrium, if at all? Why? Refer to levels of wages and employment.

Borjas (2017) reports that U.S. immigrants in general and unauthorized immigrants in particular appear to supply labor more inelastically than U.S. native workers. This is consistent with the very simple model of labor supply that we saw in Problem Set 3.

(h) [4 points] Discuss the potential implications of immigration flows for monopsonistic labor markets, if we think immigration might affect the elasticity of domestic labor supply. (Assume that immigration does not shift labor supply outward.) Given that the empirical literature finds little to no evidence that immigration depresses wages, what might this indirectly imply about the aggregate degree of monopsony power in the U.S.?

2. [18 points total] Consider this simple two-country model of immigration utilized by Clemens (2011) and others. Assume that there is one pool of labor, consisting of 220 million workers, and it is split between two countries, the U.S. with L^USA = 160 million, and Mexico with L^MEX = 60 million. In each country there is a separate labor demand curve. These two curves are given by:

USA: w^USA = 72.50 – 0.25 L^USA

MEX: w^MEX = 40.00 – 0.50 L^MEX

where L is measured in millions of workers. For example, USA labor demand is such that if all 220 million workers were in the USA, the wage would be w^USA = 72.50 – 0.25 x 220 = $17.50.

(a) [2 points] Find the current wages in the USA and MEX when L^USA = 160 and L^MEX = 60. Show your work.

(b) [4 points] Graph the two labor demand curves on the axes below. Note that the MEX demand curve slopes downward starting at w^MEX = 40 and extending leftward. Plot a single vertical labor supply curve at L^USA = 160 (top number) and L^MEX = 60.

(c) [4 points] If migration between the USA and MEX were costless and unrestricted, and if workers did not care about anything but wages, what would the prevailing wage be in the USA? In MEX? What would L^USA and L^MEX become, if they change? Why? Show all work. (Hint: You can use the relationship L^USA + L^MEX = 220)

(d) [4 points] If labor relocates under these circumstances, how big of a change are we talking about? Express it as a percentage change in L^USA. With what percentage change in w^USA is it associated, if any? Roughly what is the elasticity of labor demand implied? Is that basically consistent or inconsistent with what we saw in ECON 151 Problem Set 1 and discussed in Ehrenberg, Smith, and Hallock Chapter 4?

(e) [4 points] If labor relocates under these circumstances, what would happen qualitatively to national income (GDP) in the USA? What would happen qualitatively to GDP in Mexico? Would there be a net gain, or would there only be redistribution? (You could in fact calculate changes in GDP and factor incomes, but let us leave that for another time.)