LABOR ECONOMICS (ECON 620), SPRING 2020

Prof. Hugh Cassidy

Assignment #5

Due: Thursday, April 23^rd (on Canvas)

Name:                                                            Student ID:                                                                        

This assignment will be graded out of 30 points. Please show your work! Points are only awarded if your work is properly shown. Partial grades will be awarded, in case you aren’t able to answer each question fully. Use the space provided below the question to answer; if additional space is needed, please write on the back of the paper or attach another sheet and make a note on the assignment that you did so.

Question 1: (10 points)

Suppose the marginal revenue product of all workers is: 𝑀𝑅𝑃 = 40 − 2𝐿, where 𝐿 is the total number hired. There are only women in this market. The market wage is: 𝑊 = $8.

1. Draw the 𝑀𝑅𝑃 curve on the graph

1. How many women does this firm hire? How much profit does it earn? Indicate these

values on the graph below.

𝑀𝑅𝑃 = 40 − 2𝐿

L=(40- 𝑀𝑅𝑃)/2

1. Now suppose the firm is discriminatory and discounts the productivity of women by $6

each. How many women are hired? How much profit does the firm earn? How much

profit do they forego by being discriminatory? Indicate these values on the graph below.

MRP

Number of Female Workers (L)

Question 2: (10 points)

The government proposes a law that will force employers to pay men and women in the same occupation with the same level of experience and education the same wage. Briefly (2-3 sentences) describe why this law is unlikely to significantly affect the gender wage gap. (hint: think about the largest cause of the gap; advice 2: think about how big the wage gap is when controlling for observable characteristics)

It’s not going to affect since they have equal pay, and this will equilibrium the curve.

Question 3: (10 points)

Note: This question is similar to problem 12.3 in your textbook if you need assistance.

Consider a personal prejudice model of discrimination, where some employers discount the productivity of women relative to men, but where men and women are identically productive.

Assume that the labor supply curve of women is: 𝐿_𝑠 = 10𝑊, where 𝑊 is the relative wage of women versus men (i.e., 𝑊_𝑓/𝑊_𝑚). Non-discriminatory employers will hire up to 20 women, i.e., at the same salary as men. After 20 women, the labor demand curve is 𝐿_𝐷 = 30 − 10𝑊.

1. Draw this on the graph below, and solve for the relative wage of men versus women. Solve for the equilibrium relative wage, 𝑊^∗,  and equilibrium level of employment,  𝐿^∗. (hint: be careful to note what part of the labor demand curve the labor supply curve

intersects.)

• Now, assume the supply of women increases by 20 women, too: 𝐿^′ = 10𝑊 + 20. Draw the new supply c Solve for the new equilibrium relative wage, 𝑊^∗, and equilibrium level of employment, 𝐿^∗. (hint: again, note where labor supply and labor demand intersect.)

• Assume the supply of  women  remains  at:  𝐿^′  = 10𝑊 + 20,  but  now  the  number of women non-discriminatory firms will hire rises to 30 so that the new labor demand curve after 30 women hire is: 𝐿^′  = 40 − 10𝑊. Draw the new demand curve, and solve for the new equilibrium relative wage, 𝑊^∗, and equilibrium level of employment, 𝐿^∗.

Relative wage, 𝑊 (𝑊_𝑓/𝑊_𝑚)

Number of Employed Women, 𝐿