Econ ex

Econ 419/519 Race & Ethnicity in the Economy Fall 2015

Professor Jamein P. Cunningham Final Examination

Date: Tuesday, December 1 st , 2015 Due: Monday, December 7

th , 2015 at 10:15am

Name: __________________________________

PSU ID: __________________________________

For grader use:

Part A ____________________

Part B ____________________

Part C ____________________

Part D ____________________

SPECIFIC INSTRUCTIONS:

 Please provide answers on a sheet of paper (do not write answers on exam). Please separate

write neatly and label your answers. Also provide answers in your OWN words.

 The exam is due by 10:15 A.M. in my mailbox in the Economics Department. The Economic Department is located on the 2

nd floor of Cramer Hall, Room 241. I will also

accept electronic copies of the exam via email. Late exams are subject to point reductions.

 Extra office hours will be held Monday December, 7 th

from 8:00am to 9:30am in Cramer

241-R.

 GOOD LUCK!

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Remark. The maximum number of points you can earn for this exam is 150.

Part A. 24 points total

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

evidence from class and/or readings to support your answer.)

1. The Crowding Out Hypothesis suggest that when there are two groups of people A and B with similar productive characteristics working in two occupations; if there is no

discrimination then the two groups would equally sort across both occupations but if

group A is unable to work in occupation 2 then the supply curve for occupation 2 will

shift to the right and the wages for group A will be higher than group B. [6 points]

2. Suppose the market for delivery truck drivers, Ls = – 45 + 5W and Ld = 180 – 10W; and the market for librarians, Ls = –15 + 5W and Ld = 190 – 10W. If the comparable worth

law was applied to these two markets, the equilibrium wage and employment level in

each occupation would be the same. [6 points]

3. Census data has shown that Asian Americans have higher median earnings than White Americans. Given this result it is safe to conclude that Asian Americans are not

discriminated against. [6 points]

4. The index of dissimilarity increase greatly between 1940 and 1970. During this time Blacks were migrating from the South to predominately Black urban areas in the

Midwest, Northeast, and West. This migration to predominately Black urban areas is

consistent with the neoclassical view point of decentralized racism as oppose to collective

action racism. [6 points]

Part B. 45 points total.

You have been hired as a research assistant by the Youth Mobilization and Cultural Metrics of

Beaverton (YMCMB). You are one of four new hires (Dwayne, Aubrey, and Onika) to study

racial inequality over the last 30 years in the United States. Your supervisor, Bryan Williams,

has never taken an economics course and has little understanding of how economists answer

questions. The YMCMB has collected survey data over the last 30 years and Byran wants you to

analyze the following regression model:

(I.) Yi = β0 + β1X1i + β2X2i + β3X3i + 𝛿Bi + εi

Where Yi = is the hourly wage of person “i”; X1i = the number of years of education person “i” has (i.e. 12 years equal high school graduate and 16 years equal college graduate); X2i = years of experience in the labor market; X3i = a measure of English proficiency measured between 0 and

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100 (0 = cannot speak English at all and 100 = ability to speak English fluently); and Bi is a binary variable of race (Bi = 1 if “i” is Black Bi = 0 if “i” is White). Suppose you obtain the following estimates from an OLS regression: (standard deviation are in parenthesis)

Ŷi = 4.5 + 3.5 X1t + 1.5 X2t + 0.004X3i − 1.18Bi (3.0) (1.7) (. 87) (0.001) (0.6)

a) Onika does not understand the meaning and the interpretation of the numerical value of 𝛿 in the above results. Explain this to her (for this particular example). [9 points]

b) Aubrey thinks the above results signify that Bi is not statistically significant. Onika believes the results indicate that Bi is statistically significant. Who is correct? Explain to them how to determine if the coefficient on Bi is statistically significant. [9 points]

c) Dwayne is concern that the estimate of Bi is incorrect. Explain to Dwayne some of the

key challenges with estimating 𝛿. [9 points]

Dwayne decides to relax the assumption that β is constant across racial groups and re-specify the above model as:

(II.) Yi 𝐵 = β0 + β1X1i

𝐵 + β2X2i 𝐵 + β3X3i

𝐵 + εi

Where:

All the variables remain the same except Yi which is now the log of hourly earnings. Suppose you obtain the following results in Table 1.

Table 1

Hourly Earnings Regressions

Whites Blacks Asians

Variables

Intercept 0.918 0.861 0.872

(0.023) (0.054) (0.062)

Experience 0.332 0.209 0.268

(0.001) (0.003) (0.002)

Education 0.058 0.064 0.053

(0.001) (0.004) (0.003)

English 0.15 0.15 0.183

(0.09) (0.09) (0.12)

Mean of Variables

Experience 16.56 18.94 16.04

Education 12.89 11.47 13.89

English 0.998 0.998 0.852

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d) Dwayne wants to know what part of the wage gap is attributed to the unexplained

differences in the returns to observed characteristics. [9 points]

e) Dwayne believes that the race specific regression analysis is the best way to measure

discrimination; however Onika and Aubrey believe that this methodology also has some

complications. Explain to Dwayne the drawbacks and complications from using race

specific regressions. [9 points]

Part C. 45 points total.

Suppose that Jamein Lillard has the following preferences:

𝑈(𝑀, 𝑃) = 20 × 𝑀 − 7√100 × 𝑃

where M represents the monetary gain from committing burglary and P is the probability of

being caught by the police. Assume that the monetary gain from committing a burglary is given

by

𝑀 = 10 + 25 × 𝑃.

a) Lillard is deciding to burglarize a house with little security such that P = 0.16 or one that is more risky with P = 0.64. Which house does Steve burglarize? [9 points]

b) Now suppose Lillard is older and has a job with an annual salary of $169,000. His utility function has changed to:

𝑈(𝐼) = √. 001(𝐼), where I = Income

However, Lillard is really good at burglarizing homes. There is a home with over

$272,000 in consumable goods but if Steve is caught he keeps his current annual salary

and the goods stolen but loses future earnings from the job. The probability of being

caught is P = 0.60. The net present value of job displacement is $392,000. Does Lillard

commit this crime? [9 points]

c) What is the probability of being caught (P*) that will make Lillard indifferent between the committing the crime and not committing the crime? (Round answer for P* to 2

decimal places) [9 points]

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d) Although crime rates have been decreasing over the last 20 years, incarceration rates have finally just started to decline. Incarceration rates have always been disproportionately

high for Blacks and Hispanics in the United States. Many argue that this may be due to

statistical discrimination. Explain how statistical discrimination creates

disproportionately high incarceration rates for Blacks and Latino populations. [9 points]

e) Others argue that the disproportionate number of Blacks and Latinos incarcerated cannot be explained by statistical discrimination alone. Explain how statistical discrimination

fails to explain racial inequality as it relates to mass incarceration and provide other

possible explanations for mass incarceration of Blacks and Latinos. [9 points]

Part D. 36 points total.

So far we have seen instances where the firm is better off discriminating against a group of

workers. Now consider the same problem where we have the following production function for

Hotline Bling plush toys:

𝑄 = 24 √(𝐿𝑂 + 𝐿𝐺 3

)

The Marginal Product for Labor is:

𝑀𝑃𝐿 = 8

√(𝐿𝑂 + 𝐿𝐺 ) 23

The wage for Orange workers is $8 and the wage for Green workers is $4. The price of Hotline

Bling plush toy is $25.

a) How much profit does a non-discriminatory firm earn? (Round the number employed to the nearest whole number. Round profit to the second decimal place.) [8 Points]

b) Assume that the firm discriminates against Green workers and has a discrimination coefficient equal to $5. How much profit does a discriminatory firm earn? (Round the

number employed to the nearest whole number. Round profit to the second decimal

place.) [8 Points]

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c) Assume that the firm has a new owner that discriminates against Green workers and has a discrimination coefficient equal to $3. How much profit does a discriminatory firm earn?

(Round the number employed to the nearest whole number. Round profit to the second

decimal place.) [8 Points]

d) According to the neoclassical model, discrimination will disappear in the long-run. However there exists evidence that some firms still discriminate against women and

minority workers. If discriminating employers are less profitable, how do they survive in

the long-run? [6 Points]

e) Many would agree that discrimination has decreased over the last 50 years but unexplained differences in economic outcomes still persist. Briefly, explain why these

differences still exist and provide policy recommendations to deal with persistent

inequality. [6 Points]