# Economics Questions

## Question

1) President Obama has proposed increasing the minimum wage to \$10.10 by 2016. The Congressional Budget Office studied the proposal and came to the conclusion it would reduce overall employment by about 500,000 jobs. The White House disputes that finding, saying it is too high. The White House contends an increase in the minimum wage will cause fewer jobs to be lost, and that it is plausible no jobs will be lost at all.
Discuss the difference in opinion between the CBO and the White House. Why might they be reaching different conclusions? Under what scenarios is the White House more likely to be right? Under what scenario is the CBO more likely to be correct? How is it possible no jobs will be lost at all? Graphs will improve your answer.

2) Let’s now consider the effect of the proposed increase in the minimum wage on labor supply.
a. Draw the budget constraint for someone who earns \$7 per hour and has 12 hours per day to divide between labor and leisure.
b. Now suppose the wage increases to \$10 per hour. On the same graph, draw the new budget constraint. Using indifference curves, show the effect of the wage increase on labor supply.
c. Discuss the income and substitution effects of the wage increase. What impact does each one have on labor supply? In your answer to (b), which effect have you shown dominating?
d. Do you think it is more likely that low skilled workers will be willing to work more or less following a minimum wage increase?

3) Suppose the market for strawberries is perfectly competitive as is the labor market for farm workers. Using graphs, explain what will happen to the amount of labor demanded by a typical strawberry farm in the following scenarios:
a. New research shows eating strawberries daily is beneficial for your health.
b. The US government cracks down on illegal immigration (many farm workers are immigrants, some undocumented).

Now let’s consider the strawberry firm in the long run.
c. How will the firm decide how much capital to buy and how many workers to hire? What condition must be true?
d. Suppose in the long run, a new strawberry picking machine is developed. This makes capital much more productive than it used to be. How will the firm adjust its labor and capital used? Discuss the scale and substitution effects.

4) Your firm produces widgets. Suppose there are two types of workers: excellent and good.
a. First assume you can immediately identify which workers are good and which are excellent. Suppose an excellent workers produces 500 widgets per day and a good worker produces only 100 widgets per day. The price of a widget is \$1. You pay an excellent worker \$400 per day and you pay a good worker \$50 per day. Should you hire excellent workers or good workers?
b. Now suppose you cannot identify which workers are excellent and which are merely good. There is a widget making certificate which workers can obtain. It is costly for the excellent workers and cheaper for the low quality workers. Is this a good credential for you to use as a screening device?
c. How might you structure a job offer to encourage only the excellent workers to apply?

5) You advise organizations on their retention strategies. You currently have two clients: Starbucks and the Economics Department at the University of Iowa. Starbucks is worried about the turnover of their baristas and the Economics Department is worried about their newly hired tenure track faculty. Which organization do you advise to encourage turnover? And which do you advise to reduce turnover? Why? And what tips do you have for them to accomplish their respective ideal levels of turnover?

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1.
CBO expects that the minimum wage of \$10.10 in 2016 will be higher than the market wage rate, and therefore it creates excess supply for labor in the low-skill labor market. In another word, employers will hire less people because the cost is higher. On the other hand, Obama administration forecasts that the overall economy will improve by 2016 and the labor demand will be increased offsetting the negative impact of the higher labor cost on the employment....

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