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21 Cards in this Set

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Suppose an employer offers a base wage of $20/hour for the first 40 hours of work each week and overtime pay of $30 per hour for any hours beyond 40 hours/week; the employer allows workers to choose their own hours of work. Suppose employee A chooses to work 36 hours/week and employee B chooses to work 42 hours/week. Compute the average weekly earnings for employees A and B, and compute the "earnings gap" (in percentage terms) between them. In your view, does this observed earnings gap constitute discrimination? Justify your conclusion.

employee A: $720

employee B: $860

gap: 83.7% OR ~84%

earnings gap: the relative difference in earning between two groups/people/etc

discrimination: treating two people/groups/etc differently based on race/sex/etc

not discrimination, both employees free to work as long as they want.

however, if women were found to work less statistically and the policy was put in place because of that, it could count as discrimination

A recent British study found that married men earned more than unmarried men but only if their wives did not have full time paid employment. Suggest an explanation for this finding. (Hint: In which case is a man more likely to share in the household responsibilities, including child care).

If a man’s wife does not have full-time paid employment, she is the primary caretaker for the child because the opportunity cost of any other activity would be high. As such, he would take little, if any, time off in order to care for the child and/or home, leaving him more time to work, thus, netting him more money. if his wife did have full-time employment, both of their opportunity costs would be high, so they would share in more of the childcare responsibilities, work less, and make less money.

Women who own their own businesses earn net profits that are only half as large as the net profits earned by men who own their own businesses. First, consider why women would be willing to accept lower profits. Could this reflect poorer options for women as employees? Alternatively, could it reflect other attributes of self-employment that women might find more advantageous than men do? Then, think about why women earn lower profits. Is this evidence of discrimination? If so, by whom? If not, what else might account for the lower profits?

Yes, it does reflect poorer options for women. If all options were equal, they should make more than half of what male business owners made.

women who own their own businesses might do so for the flexibility (more leisure time for family), which could explain some of the discrepancy.

Another explanation for the discrepancy is the old boys club argument.

Some of the gap may also be due to inherent sexism where some of the men don’t believe in doing business with the women. Those two factors would certainly constitute discrimination.

Why do you think we have laws that prohibit discrimination in pay based on gender or race, but permit employers to discriminate in pay based on education or experience?

don’t discriminate based on gender/race becauce that cannot be changed

discriminate based on education/experience because it can be gained. also encourages more education/experience, which makes society better off

Are teenagers better off when a higher minimum wage enables some to earn higher wages but cause others to lose their jobs?


it depends. if the amount of teens that lose jobs are small compared to those that gain more pay, better off in aggregate.

if roles reversed, would be worse off because teens don’t have the skills/experience and need minimum wage jobs to gain them. that could be offset, however, by the gov’t instituting job training programs for those affected.

Are there methods other than higher minimum wage that could raise the incomes of low-wage workers without reducing employment among minority youngsters?


Refundable tax credit programs like the Earned Income Tax Credit already successfully raise incomes of low-wage workers without affecting employment. When minimum wage is raised, it reduces demand for labor. EITC is separate from labor market, so it doesn't distort demand.

Why do you think organized labor groups, such as unions, are supporters of a higher minimum wage, even though their members all earn much more than the minimum wage?

When minimum wage is increased, it reduces demand for labor due to its higher price. In this reduced pool of labor, firms prefer to hire candidates that are more skilled, so the demand for union members (who are generally skilled laborers) will go up. Thus, it makes sense that unions would want a higher minimum wage, as it increases their likelihood of getting hired.

Is it possible that a higher minimum wage could ever increase employment?


In general, minimum wage does not increase employment. It lowers demand for labor by firms, increasing unemployment. However, there is a special case of monopsony, where it is possible, but by no means certain for increase in minimum wage to increase employment. Also, in an environment of growth, it is also possible for minimum wage to increase employment.

Why do most modern societies try to reduce poverty? Why don't they do so by simply passing a law that requires that everyone have the same income?

poverty: the state of being extremely poor

poverty is bad, it is a detriment to those who live in it. it is also inequitable, which is a problem economics seeks to remedy.

no law of equal pay because there would be no new inventions and growth would halt. there would be perfect equity, but no efficiency. differing incomes are the incentives to make more money.

How do the "rules of the game" help determine who will be poor and who will not? (Hint: How did the Civil Rights Act of 1964 which forbade discrimination on the basis of race, likely affect the income of African Americans compared to the income of White Americans?) Explain your answer.

rules of the game: the institutions that make up an economy (laws/contracts/etc.)

the initial wealth of society is gathered by the ruling class, who then create the rules of the game in order to keep themselves rich and the poor poor. Civil Rights Act important because it changes the rules the of the game so racism cannot interfere with wages, making the wages of African Americans higher than they would have been had the rules of the game not been changed.

Which of the following possible in-kind transfers do you think raises the true income of recipients the most: free golf lessons, free transportation on public buses, or free food? Why?

in-kind transfer: one that is non-monetary

it depends. rich don’t need free food, won’t raise true income. public busses good for people who are on bus route or who don't have cars. rich like free golf lessons, but doesn’t benefit any others. true income is a function of preferences of the individual

Consider three alternative ways of helping poor people get better housing: government-subsidized housing that costs $6,000, a housing voucher worth $6,000 per year rent on an apartment or a house, or $6,000 per year in cash. Which would you prefer if you were poor? On what grounds might you make your decision?

cash over in-kind because in-kind distorts preferences.

housing distorts supply, making everyone better off, but not focused

vouchers distort demand, raising prices, making everyone worse off because housing market inflates

cash distorts demand, but less than vouchers because you may not spend it all on housing

What is the real meaning of development?

Development is a multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of poverty.

What can be learned from the historical record of economic progress in the now developed world? Are the initial conditions similar or different for contemporary developing countries from what the developed countries faced on the eve of their industrialization? [8]

very little can be learned, every place is unique.

initial conditions: what do you need?

capital accumulation

technological advancement

kuznets 6 characteristics

high rates of growth of PCI and population

high rates of increase in total factor productivity

high rates of structural transformation of the economy

high rates of social and ideological transformation

propensity of developed nations to reach out for their markets and raw materials

limited spread of development to only a third of world’s population

What are economic institutions, and how do they shape problems of under development and prospects for successful development?

economic institutions: “Humanly devised” constraints that shape interactions (or “rules of the game”) in an economy, including formal rules embodied in constitutions, laws, contracts, and market regulations, plus informal rules reflected in norms of behavior and conduct, values, customs, and generally accepted ways of doing things.

economic institutions matter for economic growth because they shape the incentives of key economic actors in society. if the institutions are poor, they create conditions less conducive to growth, leading to underdevelopment. for example, if the economic institutions favor extractors of wealth and have poor property rights, it opens up the country for expropriation by foreign investors, limiting growth.

How can the extremes between rich and poor be so very great?

The extremes between the rich and poor are due to divergence.

divergence: a tendency for per capita income (or output) to grow faster in higher-income countries than in lower-income countries so that the income gap widens across countries over time (as was seen in the two centuries after industrialization began).

What are the sources of national and international economic growth? Who benefits from such growth and why? Why do some countries make rapid progress toward development while many others remain poor?

sources of growth:

capital accumulation (human and/or physical)

economic institutions

who benefits? why?

it depends on institutions. if they’re geared to rich, they benefit most. if they’re geared towards all, all benefit. good institutions vs. bad instittutions

Why is economics central to an understanding of the problems of development?

economics is concerned with incentives, allocations, and efficiencies. to have effective development, a country needs to create the right incentives for growth, allocate its resources effectively, and operate in as efficient a manner as possible.

without an understanding of economics, one cannot begin to understand why development in a particular nation is lagging, and thus will be unable to come up with adequate solutions to solve the problems of development

Why is an understanding of development crucial to policy formulation in developing nations? Do you think it is possible for a nation to agree on a rough definition of development and orient its strategies accordingly?

economics is concerned with incentives, allocations, and efficiencies. to have effective development, a country needs to create the right incentives for growth, allocate its resources effectively, and operate in as efficient a manner as possible.

it is possible for a nation to agree on a rough idea of development, but that idea may be different depending on what stage of development a country is in. once that idea is agreed upon, strategies to reach it can be formulated. for example, South Asia has high levels of illiteracy and low school attendance. They would see development as an improvement of their education systems. This differs from somewhere like sub-Saharan Africa, where rates of diseases like malaria, tuberculosis, and AIDS are high. They would see development as an improvement in their health systems.

Explain the distinction between low levels of living and low per capita incomes. Can low levels of living exist simultaneously with high levels of per capita income? Explain and give some examples.

level of living includes happiness, opportunity, self-esteem, sustenance, etc., not just PCI

yes. other factors may not be in line. could be PCI skewed (high income inequality), high income in totalitarian regime, so fundamentally sad, etc.

Do you think that there is a strong relationship among health, labor productivity, and income levels? Explain your answer


health: in the context of human capital includes things like well-being, rates of infectious diseases, etc.

labor productivity: output per unit capital.

absent health, no labor productivity. absent labor productivity, there is no way to gain more income. all factors rely on each other to increase.