FRAMINGHAM STATE COLLEGE PRINCIPLES OF MICROECONOMICS PROBLEM SET NUMBER 13

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1 FRAMINGHAM STATE COLLEGE PRINCIPLES OF MICROECONOMICS PROBLEM SET NUMBER 13 My Name is? Using the material covered in CHAPTER On a graph for each of a, b, and c: show the effect of each of the following events on the market for labor in the computer manufacturing industry a. Congress buys personal computers for all U.S. college students. Figure 1 If Congress were to buy personal computers for all American college students, the demand for computers would increase, raising the price of computers and thus increasing the value of marginal product of workers who produce computers. This is shown in Figure 1 as a shift in the demand curve for labor from D 1 to D 2. The result is an increase in the wage from w 1 to w 2 and an increase in the quantity of labor from L 1 to L 2. b. More college students major in engineering and computer science. If more college students major in engineering and computer science, the supply of labor in the computer industry rises. This is shown in Figure 2 as a shift in the supply curve from S 1 to S 2. The result is a decrease in the wage from w 1 to w 2 and an increase in the quantity of labor from L 1 to L 2. Principles of Microeconomics 1 Problem Set Number 13

2 Figure 2 c. Computer firms build new manufacturing plants. Figure 3 c. If computer firms build new manufacturing plants, this increases the marginal product of labor and the value of the marginal product of labor for any given quantity of labor. This is shown in Figure 3 as a shift in the demand curve for labor from D 1 to D 2. The result is an increase in the wage from w 1 to w 2 and an increase in the quantity of labor from L 1 to L 2. Principles of Microeconomics 2 Problem Set Number 13

3 2. Your enterprising uncle opens a sandwich shop that employs 7 people. The employees are paid $6 per hour, and a sandwich sells for $3. If your uncle is maximizing his profit, what is the value of the marginal product of the last worker he hired? What is that worker's marginal product? Since your uncle is maximizing his profit, he must be hiring workers such that their wage equals the value of their marginal product. Since the wage is $6 per hour, their value of marginal product must be $6 per hour. Since the value of marginal product equals the marginal product times the price of the good, and since the price of a sandwich is $3, the marginal product of a worker must be 2 sandwiches per hour. 3. Suppose a freeze in Florida destroys part of the Florida orange crop. a. Explain what happens to the price of oranges and the marginal product of orange pickers as a result of the freeze. Can you say what happens to the demand for orange pickers? Why or why not? When a freeze destroys part of the Florida orange crop, the supply of oranges declines, so the price of oranges rises. Since there are fewer oranges in a given area of orange trees, the marginal product of orange pickers declines. But since the price of oranges rises, the value of the marginal product of orange pickers could rise or fall, depending on whether the marginal product falls more or less than the price rises. Thus you cannot say whether the demand for orange pickers will rise or fall. b. Suppose the price of oranges doubles and the marginal product falls by 30 percent. What happens to the equilibrium wage of orange pickers? If the price of oranges doubles and the marginal product of orange pickers falls by just 30 percent, then the value of marginal product for a particular quantity of orange pickers increases, shifting the demand for orange pickers to the right, and increasing the equilibrium wage of orange pickers. c. Suppose the price of oranges rises by 30 percent and the marginal product falls by 50 percent. What happens to the equilibrium wage of orange pickers? If the price of oranges rises by 30 percent and the marginal product of orange pickers falls by 50 percent, then the value of marginal product for a particular quantity of orange pickers decreases, shifting the demand for orange pickers to the left, and reducing the equilibrium wage of orange pickers. Using the material covered in CHAPTER College students sometimes work as summer interns for private firms or the government. Many of these positions pay little or nothing. a. What is the opportunity cost of taking such a job? The opportunity cost of taking a job as a summer intern that pays little or nothing is the wage that the student could earn at an alternative job. b. Explain why students are willing to take these jobs. Despite the low wages, students are willing to take internships because an internship might help them land a permanent job with the firm or the government later. Also, the internship enhances the student's resume. Finally, the student may gain valuable on-the-job training. Principles of Microeconomics 3 Problem Set Number 13

4 c. If you were to compare the earnings later in life of workers who had worked as interns and those who had taken summer jobs that paid more, what would you expect to find? You would expect that students who were interns make higher incomes later in life. 5. At some colleges and universities, economics professors receive higher salaries than professors in some other fields. a. Why might this be true? Economics professors may receive higher salaries than professors in some other fields because they have better opportunities outside academia. For example, they could find jobs in the private sector or the government. b. Some other colleges and universities have a policy of paying equal salaries to professors in all fields. At some of these schools, economics professors have lighter teaching loads than professors in some other fields. What role do the differences in teaching loads play? Differences in teaching loads can make up for lower pay. If professors in all fields are paid the same, the pay level is probably below what economics professors could earn elsewhere. To attract economics professors, the university would have to offer them some other compensation, such as a lower teaching load. Using the material covered in Chapter Consider two communities. In one community, ten families have incomes of $100,000 each and ten families have incomes of $20,000 each. In the other community, ten families have incomes of $200,000 each and ten families have incomes of $22,000 each. a. In which community is the distribution of income more unequal? In which community is the problem of poverty likely to be worse? Community 2 has more unequal income than community 1. In community 2 the rich have nearly ten times the income of the poor, while in community 1 the rich have only five times the income of the poor. However, the problem of poverty is likely to be slightly worse in community 1, since the poor have lower income. b. Which distribution of income would Rawls prefer? Explain. Rawls would prefer the distribution of income in community 2, since the worst-off family has more income than in community 1. c. Which distribution of income do you prefer? Explain. Most people will prefer the income distribution of community 2, since both rich and poor families are better off than their counterparts in community 1, even though inequality is greater. Principles of Microeconomics 4 Problem Set Number 13

5 8. The poverty rate would be substantially lower if the market value of in-kind transfers were added to family income. The government spends more money on Medicaid than on any other in-kind transfer, with expenditures per recipient family amounting to roughly $5,000 annually. a. If the government gave each recipient family a check for this amount instead of enrolling them in the Medicaid program, do you think that most of these families would spend that much to purchase health insurance? (Recall that the poverty line is below $15,000 for a family of four.) Why? If people received cash instead of Medicaid benefits, it is unlikely that they would spend as much on health care. Instead, they would purchase other things they desire. b. How does your answer to part (a) affect your view about whether we should determine the poverty rate by valuing in-kind transfers at the price the government pays for them? Explain. This suggests that we probably should not value in-kind transfers at the price the government pays for them. They may not be worth as much as their cost. c. How does your answer to part (a) affect your view about whether we should provide assistance to the poor in the form of cash transfers or in-kind transfers? Explain. Since the poor would prefer other things to Medicaid, it might be better to give them cash transfers instead. Principles of Microeconomics 5 Problem Set Number 13

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