Economics

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EC 419/519 FALL 2015

Homework 1. (Due November 24th, 2015)

True, False, and Explain (Explain why the statement is true or false)

1. Using data, economists believe that it is easy to predict Black unemployment. According

to economist, the rule of thumb is 𝜇𝐵 = 3 × 𝜇𝑊. (𝜇 𝑖𝑠 𝑡ℎ𝑒 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒)

2. Consider the regression equation: 𝑌𝑖 = 𝛼𝑋𝑖 + 𝛿𝐵𝑖 + 𝑖, where 𝐵𝑖 is a variable equal to one if the individual belongs to a minority group. The coefficient of interest (𝛿) measures how much Y differs due to just race for equally productive people.

3. Demand Side effects for persistent gaps in employment refers to individual’s actions, traits, characteristics, and behaviors that can increase the demand for an individual in the labor

market.

4. Economist have found the much of the earnings gap between Mexican Americans and Whites can be explained by differences in observable characteristics. Given this result,

Mexican Americans are not discriminated against.

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Multiple Choice

1. Which of the following is not a reason economists struggle with estimating how much discrimination exist in the labor market?

A) Inaccurate racial classification in survey data

B) Omitted variable bias

C) Distinctively Black names

D) Not enough minorities in survey data

2. Which of the following are reasons racial inequality exist is because I. Discrimination in the labor market

II. Discrimination in non-labor market activities that affect human capital III. Difference in actions of individuals that affect human capital

A) I and II B) I and III C) II D) I, II, III

3. The Black-White earnings gap for females decreased between 1960 and 1980 primarily due to _____________ but the earnings gap widened after 1980 because of __________.

A) The Civil Rights Movement, a decrease in labor force participation of White women in the 1970s

B) Improvements in educational attainment for Black women, an increase in the demand for college educated workers.

C) Changes in occupations for Black women, an increase in the demand for domestic workers

D) Improvement in educational attainment for Black women, the decrease in the returns to education

4. A reservation wage is A) the minimum wage a person will accept to leave their current job. B) the minimum wage that will make an individual indifferent between accepting a

job and not working.

C) the wage that makes a worker indifferent between working overtime or normal working hours.

D) an extra wage given to workers to increase productivity.

5. According to Bertrand and Mullainathan, which of the following names would be considered to be a distinctive Black name:

A) John Bound B) Charlie Brown C) Jamal Jones D) Mel Stephens

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Short Answer Questions

1. The Midterm Revisited: Suppose that a firm production function for Temoc plush toys is given by the following formula:

𝑄 = 12 √(𝐿𝑂 + 𝐿𝐺 ) 3

The Marginal Product for Labor is:

𝑀𝑃𝐿 = 4

√(𝐿𝑂 + 𝐿𝐺 ) 23

The wage for Orange workers is $8 and the wage for Green workers is $5. The price of Temoc

plush toy is $10.

a. Suppose that Donald Nerlings bought this firm from Victor E Vikings and also discriminates against green workers. Assume that he has a discrimination coefficient equal

to $2. How much profit does a firm under his direction earn? (Round the number employed

to the nearest whole number.)

b. Suppose Jay-Z buys this company from Donald Nerling and is non-discriminatory. How much profit will Jay-Z earn?

2. The previous question implied taste based discrimination as the reason for unexplained differences in earnings. What is another neoclassical theory that explains unexplained

differences in earnings by race? Explain the theory and the predictions? (Explain in detail)

3. Economists are always trying to measure discrimination in the labor market. What are the two approaches that economists primarily use to test for discrimination? What are the

shortcomings of these methodologies? (Explain in detail)