Economics 211

3. Consider a labor market that is initially in equili brium at a wage of $8 an hour and an employment level of 400 hours per day. Suppose that a union organizes and raises the wage to $12 an hour. Illustrate what happens to the level of employment in a graph of the labor market. Is there any unemployment? Explain and illustrate.

4. What are the four main reasons why sex and race differentials in earnings exist?

5. How might immigration influence wage rates? Consider both demand and supply effects.

6. If large numbers of immigrants leave a country where wages are relatively low and enter a country where wages are relatively high, what will most likely happen to wages in the two countries? Why? Illustrate your argument with the appropriate graph of the labor market in each country.

7. Some economists argue that discrimination based on race and sex cannot lead to persistant wage differentials. What is their argument?

8. How is statistical discrimination dif ferent from a prejudiced-based theory of discrimination?

9. Suppose a city pays its building inspectors $12 an hour and its public health nurses $8 an hour. Assume that building inspectors are all male, that the nurses are all female, and that the wages paid to each occupation reflect the forces of supply and demand (which themselves may reflect discrimination in the labor market at large). Suppose that the city council passes a comparable worth law that in effect requires the wages of public health nurses to be equal to the wages of building inspectors. Evaluate the assertion that this comparable worth policy would primarily benefit high-quality nurses and low-quality building inspectors.

12. If people are rational, how can public choice result in government actions with benefits that are less than the costs?

14. Art, Bob, and Charlie own a lake in Michigan that they use for recreational purposes. A mosquito abatement program will benefit all. Art place a value of $1, Bob places a value of $19, and Charlie places a value of $100 on a mosquito-free environment. A firm will spray the lake and charge each owner $35.
a) What decision would be reached under majority rule? Would the result be efficient?
b) What decision would be reached if Art, Bob, and Charlie could engage in costless negotiations? Could unanimity be achieved?

16. Suppose there are two classes made up of very similar students and students can choose which class they sign up for. In one class, each student receives the grade made on each test. In the other class, each student receives the class average as his or her grade. These policies are known by all. In what class would you expect the higher average grade? Explain.

17. An environmentalist argues that all pollution must be eliminated. How would you try to convince her that her position is both unreasonable and impractical?

18. Factory A produces 1000 tons of sulfuric acid at a cost of $10,000. For the people in the community, the production of 1000 tons of sulfuric acid causes an increase of $5000 in medical payments, a loss of $4000 in wages by being sick, and an increase of $1000 in dry-cleaning bills. What are the private and social costs of the 1000 tons of sulfuric acid? Show your work.

19. Take a monopolistic firm that produces a product that imposes external costs on the surrounding the community. Is this firm producing too much or too little?

20. Airport noise is certainly a negative externality. Why would people choose to live near airports?

21. A factory's production process creates sludge that pours into a river. This sludge makes it difficult to fish in the river, increasing the costs of the local fishermen by $4000. The factory can install a water filter system for $3500, and the fishermen can utilize a weighted fishing net system (to get under the sludge) for $2750. Both systems would remedy the sludge damage to the fishermen.
a) Suppose transactions costs are zero. If the factory is not liable and can continue to produce sludge, what outcome do you predict and why?
b) Suppose transactions costs are zero. If the factory is assigned liability for sludge damage, what outcome do you predict and why?
c) Now suppose transactions costs preclude the possibility of private bargaining between the factory and fishermen. If a pollution tax is levied on the factory with the proceeds given to the fishermen, then what outcome do you predict and why?
d) Discuss the results of parts (a), (b), and (c) in terms of the Coase Theorem.

22. Fishermen who use nets to catch tuna also sometimes net dolphins, which, because they are mammals, drown before they can be released. Currently, the price and quantity of tuna determined by the market does not take into account the cost to society of killing the dolphins (marginal external cost). Listed below are market demand and supply schedules for tuna as well as the marginal external social costs associated with dolphins killed in the process of catching tuna. All costs and values are listed in terms of dollars per pound of tuna.

Quantity of tuna (1000s)	Consumer's valuation of tuna	Marginal private cost of tuna	Marginal external cost of dolphins
1000	$5.50	$1.75	$2.05
2000	5.00	2.00	2.15
3000	4.50	2.25	2.25
4000	4.00	2.50	2.35
5000	3.50	2.75	2.45
6000	3.00	3.00	2.55
7000	2.50	4.50	2.65
8000	2.00	4.70	2.75

a) What output and price would the free market generate? Why?
b) What is the socially optimal output and price? Why?
c) In order to obtain the socially optimal equilibrium, what would the appropriate per-pound tax on suppliers need to be? Of this tax, how much would consumers end up paying?

25. President Clinton wants stronger tax incentives to encourage more people to go to college and to remain in college longer. What are the economic arguments in favor of such a change in incentives? What are the arguments against it? Where do you come out on this issue and why?