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10 Cards in this Set
- Front
- Back
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How do solve for s?
s + s/b= x+y |
s + s/b= x+y
gather like terms: s(1+1/b)=x+y Divide by (1+1/b) |
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Assume that Y_0, this worker’s non-wage income is the income earned by other people in that worker’s household. How is labor supply affected by whether an individual is married?
Conditional on being married, how is labor supply affected by the level of the spouse’s income? |
If this person is not married, they’ll have no non-wage income. Therefore, we might expect an unmarried person to work full time. A married person has more non-wage income, and may choose to only work part-time. The more their spouse earns, the more likely they are to choose not to work. |
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Consider the fact that many people meet their spouses while they are in the same graduate school program. Imagine there are 2 options for graduate school programs: a master’s degree in social work (which leads to low earnings) and a master’s degree in business administration (which leads to high earnings). Use these facts and your answer to part (f) to argue why the gender wage gap in hourly earnings should be larger for MBAs than for MSWs |
MSW couples both have relatively low earnings potential. Individuals with a preference for not working or working part time may not be able to afford to ex- press that preference because their spouse doesn’t earn enough. MBA couples both have relatively high earnings potential. In this group, individuals with a preference for not working or working part time can express that preference be- cause of their spouse’s income. Combine these facts with the argument from the Goldin paper that women have greater preferences for part-time work, and you get a bigger gender wage gap (and employment gap) with MBAs than MSWs. |
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You are considering job offers. Potential wage offers are either $9, $15 or $18. There is an equal probability (1/3) of each offer.
Now, you have “reference-dependent” preferences. All this means is that the way you value wage offers, w′, depends on how they relate to your current wage. Assume your current wage = w. If the offered wage is less than w, you valueitatλw′,withλ < 1. Ifw′ ≥ w,thenyouvalueitatw′. Assumethatyour current wage, w = 16. Again, calculate that expected value of a wage offer. |
Because the current wage is 16, you need to down-weight the value of offer of 15 and 9 by λ.
EV =Pr(9)∗9λ+Pr(15)∗15λ+Pr(18)∗18=3λ+5λ+6=8λ+6 |
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You are considering job offers. Potential wage offers are either $9, $15 or $18. There is an equal probability (1/3) of each offer.
Write down an inequality for λ such that you reject an offer of $15 (using reference-dependent valuations). |
You reject an offer of $15 if its value is less than the expected value of an offer.
Remember that the value of an offer of $15 is now $15λ. 15λ
15λλ+6 7λ<6 λ<6/7 |
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What would reference dependent preferences mean for the difference between the effects of introducing and repealing a minimum wage? |
As we learned in the Falk et al. paper, the effect of introducing the minimum wage is to raise the expectations of workers.
Removing the minimum wage, however, does not have the effect of lowering expectations. This is because the minimum wage creates a reference point for workers, as they had in this problem. |
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Imagine two pools of workers: guaranteed workers and uncertain workers.
If a firm hires a guaranteed worker, they earn $8 in profit.
Uncertain workers are either good or bad with equal probability. Firms don’t know which until after they are hired. If they hire a good worker, the firm earns $16. If they hire a bad worker, the firm earns $1.
If the firm hires an uncertain worker, what is the expected value of their profit? |
(probability of good)*(value of good) + (probability of bad)*(value of bad) = ½*$16 + ½*1 = $8.5 |
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Imagine two pools of workers: guaranteed workers and uncertain workers.
If a firm hires a guaranteed worker, they earn $8 in profit.
Uncertain workers are either good or bad with equal probability. Firms don’t know which until after they are hired. If they hire a good worker, the firm earns $16. If they hire a bad worker, the firm earns $1.
If the firm cares only about maximizing the expected value of their profit, does it hire the guaranteed worker or the uncertain worker? |
EV(profit hiring guaranteed) = $8 EV(profit hiring uncertain) = $8.5 Hire the uncertain worker |
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Imagine two pools of workers: guaranteed workers and uncertain workers.
If a firm hires a guaranteed worker, they earn $8 in profit.
Uncertain workers are either good or bad with equal probability. Firms don’t know which until after they are hired. If they hire a good worker, the firm earns $16. If they hire a bad worker, the firm earns $1.
If the firm cares about maximizing the expected value of the square root of profit, who does it hire? |
EV(square root of profits, guaranteed) = root($8) EV(square root of profits, uncertain) = (probability of good)*root(value of good) + (probability of bas)*root(value of bad) = ½*root(16) + ½*root(1) = ½*$4 + ½*$1 = $2 + $0.5 = $2.50 < root($8) Hire the guaranteed worker |
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Why might a firm care about maximizing the square root of profits? |
By changing the firm value from profit to square root of profit, they switched from preferring the uncertain worker to the guaranteed worker.
This is despite the fact that on average, the firm earns more money when they hire the uncertain worker.
Imagine a manager of a firm who perceives one group of potential employees as less risky than another.
Then, given certain types of firm preferences (in this case, maximizing the EV of the square root of profits), that firm will avoid the group they perceive as riskier even though that group is more valuable on average |
