Part A: Multiple Choice Questions (45 points, 45 % of exam grade)

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c	b	b	d	b	c	b	c	d	b	a	c	a	d	b	c	b	a

Part B: “Problems” (55 points= 55% of exam grade)

1. [10 pts] Suppose a worker currently resides in Georgia and is deciding whether to remain there or move to California. There are three periods left in the life cycle. If the worker remains in Georgia, she will earn $30,000 per year in each of the three periods. If the worker moves to California she will earn $35,000 in each of the three periods. The worker’s rate of discount is 8 percent. What is the highest level of migration costs that this worker is willing to incur and still make the move?

PV_GA=[1+1/1.08 + 1/(1.08)²]*$30,000=$83,497.94

PV_CA==[1+1/1.08 + 1/(1.08)²]*$35,000=$97,414.27

The difference is $13,916.33, so migration costs can’t exceed this number.

2. Recent (1990s) research has found surprising evidence regarding the minimum wage.

a) [4 pts] What is this evidence?

The surprising evidence was the finding that employment in New Jersey fast-food establishments did not decline (in fact rose) after the increase in the state minimum wage. In fact, employment declined in neighboring Pennsylvania- the control group in this ‘natural experiment’.

b) [7 pts] How can we explain this? That is, what kind of model can “explain” the recent evidence? What type of employer does this require?

This requires a non-discriminating monopsony. For this kind of employer, an increase in the minimum wage can also raise the employment level- as long as the minimum wage is “too high”. [Graph]

3. People differ in abilities, and this ability is usually not observed. This creates a problem for researchers who want to investigate the return to education.

a) [5pts] Why is there a problem? What is the problem?

b) [6pts] How have researchers tried to overcome this problem?

See the answer in midterm 2

4. a) [5 pts] How has the U.S. wage distribution changed in the last 20 years?

Read up…

b) [6 pts] What are the most common (economic) explanations for these changes?

5. [6pts] “When unions enter the picture, some people always lose their job.”

a) If there is a model of employment determination behind this statement, what is this model? Please explain and illustrate.

The statement must refer to the monopoly union model, where the union sets the wage and the employer decides how many people to hire. [Graph]

b) [6 pts] The model you described in (a) has been found inadequate by some. Explain why and illustrate.