# Define the concept of reservation wage and illustrate it on the consumption-leisure diagram.

1) a) Define the concept of reservation wage and illustrate it on the consumption-leisure diagram.
b) Suppose a person=s non labour income goes up (V in the notation used in class). Will that increase, decrease or leave unchanged the reservation wage? Explain and illustrate.

2）For this question, you have to take position, whether or not you agree with this statement: “In Canada, chief executive officers (CEOs) of large companies are paid too much and the government should legislate to reduce their remunerations”. 3 Start by stating your position. Whatever the position you take, present both sides of the argument and explain why, on balance, your point of view should prevail. (You will be graded on the quality of your presentation, not on the position that you take)

3） Assume that there are two types of workers in the economy: the low ability workers with marginal product=1, and the high ability workers with marginal product=2. Ability is innate and does not depend on education. Present a model showing how education can be used as a signal of ability in such an economy. Discuss the implications of that model making sure that you explain clearly the assumptions that are made.

4） How would you evaluate the extent to which acquiring a university education is a sound investment economically? Be precise in the information you would require and exactly what you would do with it.

5） Based on what we know about the economics of labor market discrimination, discuss the following statement: “Male-female wage differentials for equally productive workers will not persist in the long run because the forces of competition would remove these differences. In essence, market forces are a woman’s best friends.”

6） With data from the Census, the following wage regressions were estimated separately for non-visible minority and visible minority individuals:
Non-visible minority: ln wage N = 8.697 + 0.0992 schooling N + 0.0176 experience N
Visible minority: ln wage V = 8.973 + 0.0748 schooling V + 0.0119 experience V
Where the subscripts N and V stand for non-visible and visible minority respectively.
a) Interpret economically the coefficients of those two regressions;

b) You are given the following information on the mean values of the independent variables:

Calculate the following and interpret your results:
i) the mean value of log wage of the non-visible minority individuals
ii) the mean value of log wage of the visible minority individuals
iii) the mean value of log wage of visible minority individuals if they were paid according to the function of the non-visible minority individuals

c) Using the results of the above calculations, decompose the total log earnings differential into a part due to differences in coefficients and a part due to differences in mean characteristics. Interpret your results. What can be said about labor market discrimination against visible minorities?

7） Consider a welfare program and a negative income tax program that give the same level of guaranteed income. Illustrate a situation where an individual who was not working with the welfare program is encouraged to work when he (she) is offered a negative income tax. What can be said and relative merits of these two programs?

8） There been a long run decline in fertility over time, even though incomes have risen? Can we conclude that children are inferior goods? Explain.

9） a) Consider a firm, Toy Inc. that can hire workers in Canada or abroad to produce toys. Those two types of workers are pretty close substitutes in production. Suppose that, for some reasons, workers abroad can be hired at a lower wage than before (for example, U.S. workers are replaced by Mexican workers). Using a diagram that shows substitution and scale effects, discuss the impact of that change on the number of Canadian workers. Explain what you do.

b) Now consider another firm, Bridge Inc., a Canadian engineering firm specialized in building bridges at home and abroad. Canadian workers and foreign workers are close complements in production, because Canadian workers tend to be managers or engineers, while foreign workers tend to be construction workers. Suppose again a decline in the wage of foreign workers (for example, because the Canadian firm now has the opportunity to build bridges in China). On another diagram and using again the concepts of substitution and scale effects, discuss the impact of that change on the number of Canadian workers. Explain what you do and compare with the previous case.

10）Explain with a diagram how an employer who is in a monopsony situation may decide to increase employment when forced to pay a minimum wage which is higher than the wage that would have been paid otherwise.

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