1 Economics 103 Your Name:__________________________________________ Professor Friedman Your TA:____________________________________________ Fall 2019 Your Section Time and...

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1 Economics 103 Your Name:__________________________________________ Professor Friedman Your TA:____________________________________________ Fall 2019 Your Section Time and Day:_____________________________ Problem Set 3 Due Date: December 13 at 5PM Hand in hard copy in your TA’s mailbox, 1st floor of Gordon Hall Do not submit answers on line through Moodle Note that there are two types of problems. You are encouraged to work with someone else in your TA section on the quantitative problems (1, 2, 3); hand in one set of answers to these problems with both your names. You should do the essay question (4) individually and append separate answers with each person’s name for these to your group answers to the quantitative problems. Type your answers; hand-written answers will be accepted only by special arrangement. Staple pages together. Be sure to keep a copy of your answers in case of problem. Total 20 points. 1) (5 points) Labor markets and wage determination Table 1. Chocolate chip cookie output and number of workers. Cookies sell for $2.00 each. Workers cookie output 1 30.0 2 58.5 3 85.5 4 111.0 5 135.0 6 157.5 7 178.5 8 198.0 9 216.0 10 232.5 a) (1 point) Nick Seaman (Black Sheep Bakery in Amherst) has estimated the number of brownies produced for different numbers of workers (see table 1). Why does output increase with more workers? Why does output increase at a diminishing rate? Would output increase at a diminishing rate if there were additional ovens and workspace? b) (1 point) Cookies sell for $2 each and each requires $0.75 in ingredients. (The Black Sheep uses quality chocolate!) Graph the demand for labor as a function of the wage using the data in table 1. What happens to the number of workers hired when wages go up? How many workers will be hired and how many cookies made at a wage of $22.50? 2 c) (2 points) Nick could buy a 2nd oven. He estimates that the 2nd oven would raise output for any given number of workers as indicated in table 2. When his workers form a union, they gain a wage increase from $22.50 to $24.38. What do you expect to happen to employment and output with one oven? (How many workers will be hired and how much produced at the new wage.) What would happen if Nick responds to the wage increase by buying a 2nd oven and then hiring workers at the wage $24.38? Would your answer change any if there is a limited market for chocolate chip cookies so that Nick would have to lower the price of cookies to sell more? Workers cookie output with 2 ovens 1 35.0 2 69.5 3 103.5 4 137.0 5 170.0 6 202.0 7 233.0 8 263.0 9 291.5 10 318.5 d) (1 point) Like many retail employers, Nick experiences high turnover among his workers which forces him to devote much time to hiring and training workers. By establishing systems for seniority promotion and pension and insurance benefits as well as higher wages, the union discourages turnover saving Nick money by making each worker more productive at higher wages. Now draw a hypothetical labor demand curve assuming higher wages are associated with higher productivity. 2) (4 points) Equilibrium discrimination and crowding. Suppose there are two occupations: teachers and janitors. a) (2 points) Draw hypothetical supply and demand graphs for native-born workers and immigrants to both assuming that some of each prefers each job. Now, assume that employers assume that immigrants are unqualified to be teachers so all immigrants find work as janitors. Show the effects of discrimination on your graph. b) (2 points) Who benefits and who loses from this discrimination? Show the effect of discrimination on wages and employment in both occupations and on total output in each. (Hint: have one graph for janitors and a separate for teachers.) 3 3) (5 points) Long-run competition. Because of regulatory requirements and the cost of opening a dedicated growing facility, it is very expensive to open retail pot establishments in Massachusetts. Once the growth facility and the store are opened, product flies off the shelves and more can be grown and sold relatively cheaply. a) (1 point) You have been hired by a prospective retailer to recommend pricing and marketing strategies for an Amherst facility. On one graph: Draw a hypothetical Average Total Cost (ATC) curve, the Marginal Cost curve, and a Demand (MU) curve for pot. (Hint: The point where Demand intersects MC should be below the ATC curve.) b) (1 point) Show the area of net profit (or loss) under perfect competition for the Amherst store as the difference between average total cost and the average revenue (or the price). (Note your profit is the amount sold times the average price price minus ATC.) c) (2 points) What will happen to the store if another retailer starts selling legal pot? What will happen when a large number of stores open? What happens to the industry and the number of companies under competitive conditions? If there are already stores in the Amherst area, would you necessarily recommend opening a new one? d) (1 point) Discuss at least three strategies your employer could follow to give it more monopoly power and allow it to raise prices even without collusion. 4) (6 points) Income insurance. Read Gerald Friedman, “Dog Walking and College Teaching: The Rise of the Gig Economy” Real World Micro (chapter 7.2). a) (1 point) Use diminishing marginal utility theory to explain why people would prefer stable income to receiving the same total income but with much more variation week to week. b) (2 points) What is the difference between traditional “jobs” and “gigs” including subcontracting work or temp jobs? Why might workers prefer one or the other? Why might employers? c) (1 point) What has happened to the share of American workers with steady jobs the 1970s? Who is responsible for the decline of “jobs”: does it reflect worker preferences or employer preferences? Why do you conclude this? d) (2 points) What might be done to make up for the decline in employer-provided income security? If workers employment and income has become more variable, would it be possible to provide some other form of income security (such as some form of 4 insurance)? Would it be desirable to provide workers with some other form of income security? Might there be costs to this in reduced work effort and lower productivity? Might there be compensating gains?