ECON 115  Labor Economics
Drake University, Spring 2017
William M. Boal


EXAM 3 ANSWER KEY
Version A
I. Multiple choice
(1)d. (2)b. (3)b. (4)b.
(5)error in questioncorrect answer is 0.4.
(6)a. (7)b. (8)a. (9)c. (10)b.
(11)d.
II. Problems
(1) [Measuring inequality: 15 pts]

Tercile  Annual wage 
Share of earnings  Cumulative share 
Lowest  $10 thousand 
5 percent  5 percent 
Middle  $50 thousand 
25 percent  30 percent 
Highest  $140 thousand 
70 percent  100 percent 
 Lorenz curve passes through (33,5) and (67,30).
 Gini = 0.433.
 9010 wage gap = 1300 percent.
 9050 wage gap = 180 percent.
 5010 wage gap = 400 percent.
(2) [Shifts in relative supply and demand: 10 pts]
 decrease.
 increase.
 increase.
 decrease.
 decrease.
 increase.
 decrease.
 increase.
 decrease.
 increase.
(3) [Joint migration decision: 6 pts]
 Net gain from migration = $320,000, positive, so they will move.
 Penny's individual net gain is also positive, so she is neither a tied stayer nor a tied mover.
 Leonard's individual net gain is negative.
If single he would NOT move, so he is a tied mover.
(4) [Roy model: 6 pts]
 Workers move if the net gain from migration is positivethat is,
if w_{A} < w_{B}  moving cost .
Substituting and solving for S gives S < 30.
 Negatively selected, since workers from the low end of the distribution of S will move.
(5) [Immigration surplus: 8 pts]
 $13.
 $9.
 Immigration surplus = area of triangle = $80 million.
 Transfer from domestic workers to employers = $480 million.
(6) [Oaxaca decomposition: 6 pts]
 Raw log wage differential is found by substituting each group's average schooling into its own wage equation, to give 3.4  2.2 = 1.2.
 The log wage differential due to schooling equals the coefficient of schooling for green workers (who are not subject to discrimination) times the difference in average schooling = 0.15 (1613) = 0.45.
 The log wage differential due to discrimination is given by the difference in intercepts, plus the difference in slopes times blue workers' average schooling, or (1.00.9) + (0.150.10)13 = 0.75. Alternatively, the differential due to discrimination may be computed as the raw log wage differential minus the differential due to schooling.
(7) [Employer preference discrimination: 18 pts]
 The firm that does not discriminate hires only blue workers because they are cheaper. Set VMP = price × MP_{E} = $10 and solve to get E_{B} = 36. Substitute into production function to get q = 180 units. Compute profit as total revenue minus labor cost to get $360.
 This firm hires only green workers because it perceives blue workers' wage as 10 (1+0.6) = $16, more expensive than green workers. Set VMP = price × MP_{E} = $15 and solve to get E_{G} = 16. Substitute into production function to get q = 120 units. Compute profit as total revenue minus labor cost to get $240.
 This firm hires only blue workers because it perceives their wage as 10 (1+0.2) = $12, still cheaper than green workers. Set VMP = price × MP_{E} = $12 and solve to get E_{B} = 25. Substitute into production function to get q = 150 units. Compute profit as total revenue minus (true) labor cost to get $350.
(8) [Monopsony wage discrimination: 12 pts]
This is similar to problem (2) on Exam 2, but with two groups of workers.
 MLC_{G} = 6 + (2 E_{G} / 10).
MLC_{B} = 2 + (2 E_{G} / 5).
 For each group, set VMP equal to MLC and solve for E.
This gives E_{G} = 70 and E_{B} = 45.
 Substitute into supply equations to get w_{G} = $13 and w_{B} = $11.
 Substitute the minimum wage into the supply equation for each group to get E_{G} = 90 and E_{B} = 65.
III. Critical thinking
 Autor, Katz and Kearney showed that both employment and average earnings in middleskilled jobs decreased. Only a leftward shift in demand is compatible with both a decrease in employment and a decrease in average earnings.
 Graph should show demand and supply for middleskilled jobs.
Graph should show a leftward shift in demand curve, while supply curve remains fixed. Result should be an decrease in equilibrium wage and a decrease in equilibrium employment of workers in middleskilled jobs.
 If computers increasingly can perform the routine tasks of middleskilled jobs, then advancing computer technology caused this shift in demand.
Version B
p>I. Multiple choice
(1)a. (2)c. (3)c. (4)a.
(5)error in questioncorrect answer is 0.4.
(6)b. (7)c. (8)d. (9)c. (10)d.
(11)a.
II. Problems
(1) [Measuring inequality: 15 pts]

Tercile  Annual wage 
Share of earnings  Cumulative share 
Lowest  $20 thousand 
10 percent  10 percent 
Middle  $60 thousand 
30 percent  40 percent 
Highest  $120 thousand 
60 percent  100 percent 
 Lorenz curve passes through (33,10) and (67,40).
 Gini = 0.333.
 9010 wage gap = 500 percent.
 9050 wage gap = 100 percent.
 5010 wage gap = 200 percent.
(2) [Shifts in relative supply and demand: 10 pts]
 increase.
 decrease.
 remain constant.
 remain constant.
 increase.
 increase.
 decrease.
 increase.
 decrease.
 increase.
(3) [Joint migration decision: 6 pts]
 Net gain from migration = $20,000, negative, so they will NOT move.
 Penny's individual net gain is positive.
If single, she would move, so is a tied stayer.
 Leonard's individual net gain is negative, so he is neither a tied mover nor a tied stayer.
(4) [Roy model: 6 pts]
 Workers move if the net gain from migration is positivethat is,
if w_{A} < w_{B}  moving cost .
Substituting and solving for S gives S > 80.
 Positively selected, since workers from the high end of the distribution of S will move.
(5) [Immigration surplus: 8 pts]
 $15.
 $13.
 Immigration surplus = area of triangle = $20 million.
 Transfer from domestic workers to employers = $200 million.
(6) [Oaxaca decomposition: 6 pts]
 Raw log wage differential is found by substituting each group's average schooling into its own wage equation, to give 2.8  2.3 = 0.5.
 The log wage differential due to schooling equals the coefficient of schooling for green workers (who are not subject to discrimination) times the difference in average schooling = 0.12 (1514) = 0.12.
 The log wage differential due to discrimination is given by the difference in intercepts, plus the difference in slopes times blue workers' average schooling, or (1.00.9) + (0.120.10)14 = 0.38. Alternatively, the differential due to discrimination may be computed as the raw log wage differential minus the differential due to schooling.
(7) [Employer preference discrimination: 18 pts]
 The firm that does not discriminate hires only blue workers because they are cheaper. Set VMP = price × MP_{E} = $10 and solve to get E_{B} = 36. Substitute into production function to get q = 180 units. Compute profit as total revenue minus labor cost to get $360.
 This firm hires only blue workers because it perceives their wage as 10 (1+0.5) = $15, still cheaper than green workers. Set VMP = price × MP_{E} = $15 and solve to get E_{B} = 16. Substitute into production function to get q = 120 units. Compute profit as total revenue minus (true) labor cost to get $320.
 This firm hires only green workers because it perceives blue workers' wage as 10 (1+1.6) = $25, more expensive than green workers. Set VMP = price × MP_{E} = $20 and solve to get E_{G} = 9. Substitute into production function to get q = 90 units. Compute profit as total revenue minus labor cost to get $180.
(8) [Monopsony wage discrimination: 12 pts]
This is similar to problem (2) on Exam 2, but with two groups of workers.
 MLC_{G} = 8 + (2 E_{G} / 20).
MLC_{B} = 4 + (2 E_{G} / 10).
 For each group, set VMP equal to MLC and solve for E.
This gives E_{G} = 120 and E_{B} = 80.
 Substitute into supply equations to get w_{G} = $14 and w_{B} = $12.
 Substitute the minimum wage into the supply equation for each group to get E_{G} = 140 and E_{B} = 110.
III. Critical thinking
Same as Version A.
[end of answer key]