Prof. Bryan Caplan

Econ 321

Fall, 2000


HW#4 (Please type all answers)

I.                     Using S&D diagrams, show what would happen to the labor market in the state of Virginia if each of the following happened.  In 1-2 sentences, explain your answer.  (Hint: There is a very high level of mobility between states!)

A.                The federal income tax rises.

B.                The Virginia state income tax rises.

C.                Virginia reduces welfare payments.

D.                Virginia imposes a "head tax" of $1000/person.

II.                   What would happen if the state of Virginia made the state income tax more progressive?  What if it made the state income tax regressive (tax rate falls as income rises)?  (3-4 sentences)

III.                  The federal marginal tax rate in the 1970's rose to about 70%.  How would you expect this to affect occupational choice and the proportions of wage and non-wage compensation?  Why?  (3-4 sentences)

IV.               Pick one real government redistributive program.  Which rationale would proponents most likely use to justify it - return on investment, insurance, or egalitarian?  How well does this rationale actually fit the facts about the program?  (3-4 sentences)

V.                 Propose a change in immigration policy that would admit more immigrants without - on net - hurting any Americans.  (Make a case that might persuade an "intelligent tribalist.")  Your policies may involve redistribution to anyone you like as long as you specify tax changes to pay for it. (1 paragraph)

VI.               Suppose you are a partner at a law firm, and are deciding whether to continue interviewing job candidates.  You value your time at $300/hour, and it takes an hour to interview a candidate.  If you find someone who is "good enough for the job" it is worth $3000.  Your searching abilities are as follows:

Total Time Spent


Chance of  Finding Someone Good Enough

Expected Marginal Benefit of Search
















A.                 Fill in the 3rd column of the table.  The "expected marginal benefit of search" is just the value of finding a "good enough" worker times the marginal increase in the probability of finding him.

B.                 Search theory says you will set the marginal cost of search equal to the expected marginal benefit of search.  If this is true, how long will you search for?

C.                Suppose you search until the marginal cost of search equals the expected marginal benefit, but you still haven't found a worker.  Should you search some more, or give up?  Why?

VII.              Use S&D diagrams to analyze the effects of abolishing tenure for university professors.  What happens to wages of "tenure-worthy" professors?  What effect does this ban have on total surplus in the labor market?  (3-4 sentences)

VIII.            (Answer each of the following in 1-2 sentences)

A.                Which class in college has given you the most job-related skills? 

B.                Which class in college has given you the least job-related skills? 

C.                What percent of the first class was "signaling" (as opposed to job-related training)?  What percent of the second class was "signaling"?

IX.               Carefully explain why Caplan thinks education is a better signal of conscientiousness than intelligence. (4-5 sentences)

X.                 Suppose there are seven workers.  The PDV of their lifetime labor is as follows:

Worker #
















Employers cannot tell how productive a worker is, but they CAN tell whether a worker has a college degree, and they know the AVERAGE value of workers with and without college degrees.  Competition forces them make worker pay equal their average PDV.

A.                What will the PDV of lifetime earnings be for workers with and without college educations be if...?  Fill in the following table.

Worker #'s w/ College Degrees

Without College PDV

With College PDV

College Premium





























B.                Suppose you are worker #4.  Workers #1-3 don't have college degrees; workers #5-7 do.  What is your PDV of earnings without a college degree?  With a college degree?

C.                What are the total earnings of the other workers if you (still worker #4) get a college degree?  If you don't?

D.                Suppose worker #4's college costs $500,000 total.  What is the net gain of college to worker #4?  The net gain to all seven workers?