Question 1 [15 marks]
Paul is deciding on whether to become an economist or a carpenter. He lives for two periods. If he becomes an economist, he must spend £20,000 getting a PhD in the first period and he will then earn £250,000 in the second period. If he becomes a carpenter, he will work as a trainee in the first period and get paid £40,000. In the second period, he will be a fully qualified carpenter and will earn £180,000. Suppose Paul’s rate of discount is 7%.
(i) Which career option will Paul choose? Why?
(ii) Suppose Mary faces the exact same potential earnings and education costs. However, unlike Paul, Mary chooses to become a carpenter. What can we say about Mary? How is she different to Paul?
Question 2 [15 marks]
(i) Suppose a firm purchases labor in a competitive labor market and sells its product in a competitive product market. Suppose the hourly wage decreases from €12 per hour to €10 per hour, and in response the firm increases it’s number of employees from 100 to 105. What is the firm’s elasticity of demand for labour? What will happen to the marginal productivity of the last worker hired by the firm following the reduction in wage?
(ii) Why might the elasticity of demand for labor in a competitive labor market be important when considering increasing the minimum wage?
Question 3 [15 marks]
Suppose data is available for two groups of people. People in Group 1 have, on average, 14 years of education and a yearly salary of £45,000. The people in Group 2 have, on average, 15 years of education and a yearly salary of £50,000. One of your colleagues tells you that they have uncovered conclusive evidence that the returns to education equal 11%, which they calculated by (50,000 – 45,000) / 45,000 = 11%. How would you respond to this claim by your colleague?
Question 4 [15 marks]
(i) There are two types of people: high-productivity and low-productivity. A diploma costs a high-productivity person £5,000 and a low-productivity person £10,000. A firm wants to use education as a signal for productivity. They will pay £15,000 to workers without the diploma. They will pay £X to workers with a diploma. In what range must X be to make this an effective screening device for productivity? Briefly explain your answer.
Note: you can assume that the £15,000 and £X amount to the present value of the workers lifetime earnings. (ii) A person going into an interview dresses in a nice suit to make a good impression on the employer. Is dressing well in an interview a credible signal of productivity / ability? Why / why not?
Question 5 [15 marks]
(i) Keith’s marginal utility of leisure is C – 20 and his marginal utility of consumption is L – 50. There are 110 hours in the week available to split between work and leisure. Keith receives £250 of welfare payments each week regardless of how much he works (assume he spends all of his welfare payments on consumption). What is Keith’s reservation wage?
(ii) Suppose Danny receives the same welfare payments each week as Keith and has the same number of available hours (110). However, Danny’s indifference curve is flatter than Keith’s. How would his reservation wage compare to Keith’s? Why?
1 Unless the student has officially applied for, and been granted, certification by the University for exceptional circumstances or has an ISSA.
Question 6 [25 marks]
Consider a perfectly competitive labour market. Total market demand for labour is represented by ED = 100 – 4w where ED is total employment and w is the hourly wage. Total labour supply is represented by ES = 8w – 80. (i) What is the market clearing wage?
(ii) Graph the labour supply curve, labour demand curve and indicate the market clearing wage on your graph.
(iii) Calculate the producer surplus and the worker surplus and indicate these on your graph from part (ii). (iv) Suppose a minimum wage of £20 per hour is introduced. What is the level of employment? What is the producer surplus?
(v) Suppose a minimum wage of £12 per hour is introduced. What is the level of employment? What is the producer surplus?
Question 1 [25 marks]
The labour demand for low-skilled workers in a country is given by w = 40 – 0.25E where E is the number of workers (in millions) and w is the hourly wage in pounds. There are 100 million native low-skilled workers who supply labour inelastically. If the country opens its borders to immigration, 20 million low-skill immigrants would enter the country and supply labor inelastically.
(i) What is the market-clearing wage if immigration is not allowed? What is the market-clearing wage when immigration is allowed?
(ii) When the country opens its borders to immigration, how much is the immigration surplus? How much surplus is transferred from native workers to native firms? What is the total wage that accrues to native workers? What is the total wage that accrues to immigrant workers?
(iii) Illustrate all of your answers from part (ii) graphically (i.e., on a graph, show the immigration surplus, the surplus transferred from native workers to native firms, the total wages accruing to native workers, and the total wages accruing to immigrant workers).
Question 2 [25 marks]
Briefly (maximum of 300 words), discuss the economic impacts of immigration.
Question 3 [25 marks]
A government minister is on their way to a meeting where the issue of the gender wage gap is likely to arise. The minister has no expertise in this area and has asked you to write a brief synopsis of the important issues relating to the gender wage gap. You are required to write a short (maximum 300 words) briefing note that the government minister can read before the meeting, summarizing the main issues.
Question 4 [25 marks]
Suppose you are interested in trying to explain the gender wage gap. You regress hourly wages on a person’s level of schooling. This is done separately for men and women. The results from the regressions are shown below, graphically, in Figure 1. Assume that the average level of schooling for men is 11 years, and for women is 12 years. What does this information tell us about the gender wage gap in this country, and can this information help us to explain the gender wage gap? (maximum 300 words).
Figure 1: Graphical results from regressing wages on schooling