Labor Economics Professor Blank Senior Final Examination 1 A) Vp = $153,726 -- Work Vp=Eo

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Vp=10,000+30,000/(1+.10)+50,000/(1+.10)+100,000/(1+.10) Vp=10,000+272.727+4,322.314+75,131.48= $153,726.514 B) $25,000 vs. $153,726 C) The rate of discount that equates the present value of future costs and benefits an investment is profitable if its internal rate of return exceeds the marginal opportunity. D) Would be less $878,995 = $10,000+27,272.72+$41,322.314. E) Vp = $10,000+$30,000/(1+.05)+$50,000/(1+.05)+$100,000/(1+.05) Vp=$10,000+28571.429+45,351.474+86,383.76=170,306.66 2 Some external benefits of a college education are that more educated workers have lower unemployment rates than less educated workers, political participation and the quality of political decisions might improve. There will also be intergenerational benefits; the children of better educated parents may grow up in a more desirable home environment and receive better care, guidance, and informal preschool education. External cost of obtaining a college education is that people will be faced with ever-higher costs of tuition and fees. After graduation, people will be in debt from student loans and will have to pay off those bills along with other bills. This will decrease their power to spend.

Specific training increases the workers productivity only in the firm providing that training. The ability to perform an assembly procedure unique to a firms product exemplifies specific training. Specific training is not transferable which means that it wont allow the worker to obtain a higher wage rate as the consequence of labor market competition for his or her services. A firm will find specific training more profitable than general training.

In the post-training period, the employer realizes a return from specific training by paying a wage that is less than each workers contribution to the firms total revenue. The total amount of revenue derived from the discrepancy will vary directly with the length of the time the worker remains employed by the firm. In short, the employer has a financial interest in lowering the turnover or quit rates of workers with specific training.

The screening hypothesis suggests that education affects earnings, not primarily by altering the labor market productivity of students but by grading and labeling students in such a way as to determine their job placement and thereby their earnings. A college degree or other credential thus signals trainability and competence and becomes a ticket of admission to higher-level, higher paying jobs where opportunities for further training and promotion, are good. It complicates estimation because firms do screen young workers on the basis of education, but that employers learn quickly about worker productivity. If education is a screening device, workers who are to be screened in the process of job acquisition will be prone to purchase more schooling than those workers who are not screened.

Units of Labor Marginal Product 1 2 3 4 4 3 2 1

Price of Product W Rate Labor $10 $10 $10 $10 $40 $30 $20 $10 0 1 2 3

B. This firm is a profit-maximizing firm that is a perfectly competitive employer. The firm employs units of labor up to the point at which marginal revenue product equals the wage rate which is $40. As wage rate decreases, the firm will be able to hire one more unit of labor. 7 The monopsonists marginal wage cost exceeds the wage rate because it must

pay a higher wage to attract more workers, and it must pay the higher wage for all workers. Marginal wage cost lies above and rises more rapidly because the higher wage rate paid to attract an additional worker must also be paid to all workers already employed. 8 The marginal revenue product equals the marginal product multiplied by the

marginal revenue. The curve will slope downward because the marginal product will decline because of diminishing return. Also, the marginal revenue will decline more rapidly than price as more workers are hired. 9 Principal-agent problem occurs when agents pursue some of their own

objectives in conflict with achieving the goals of the principals. Firms desire to maximize profits and workers wish to maximize utility. It is a source of inefficiency in the way large businesses and governments are operated that occurs because those making decisions (agents) have different goals than those affected by the decisions (principals). In example,

the implementation of legislation (such as laws and executive directives) is open to bureaucratic interpretation, which creates opportunities and incentives for the bureaucratas-agent to deviate from the intentions or preferences of the legislators. Variance in the intensity of legislative oversight also serves to increase principalagent problems in implementing legislative preferences. 10 Piece-rate payment is compensation paid in proportion to the number of

units of personal output. The compensation often is found in situations where workers control the pace of work and firms find it expensive to monitor worker effort. Workers can artificially boost the piece rate by agreeing among themselves to make the job seem difficult and time-consuming than is actually the case. To attract workers to piece-rate jobs, firms may have to pay wage premiums to compensate workers for this risk of earnings variation. Group bonuses are payments beyond the annual salary based on some factor such as group or firm performance. As the size of the group increases, the effect of each workers efforts on achieving the goals of the firm diminishes. If there is a large group, individual workers will be tempted to shirk and still get a bonus. It is possible that workers may eventually develop a strategy of cooperation, all agreeing to work hard and all monitoring each other to realize the optimal bonuses for all. Equity compensation is payments in stock; a pay scheme where part of the workers compensation is invested in the firms stock. Workers with stock options can make a profit if the market price rises above the grant price. They can purchase stocks at grant price and sell at market price.