Prof. Bryan Caplan

bcaplan@gmu.edu

http://www3.gmu.edu/departments/economics/bcaplan

Econ 311

Fall, 1999

HW#2 (Please type all answers)

1. Write a table showing how many hours you would work per week at each of the following hourly real wages, assuming you will be able to earn no more than that real wage throughout your lifetime: $.10, $.50, $1, $3, $5, $10, $25, $50, $100. Graph your table.
2. Repeat problem #1, assuming this wage is only available to you for a single day.
3. By working an extra hour, a farmer can produce 3 additional bushels of wheat. If wheat sells for $10/bushel, what is the farmer's marginal product? What happens to his marginal product if he gets stronger? If the price of wheat falls?
4. Show what happens to Aggregate Labor Demand and Aggregate Labor Supply if:

1. A plague kills half of all workers?
2. The government increases subsidies to (non-productive) education.
3. The government repeals a law against secretly monitoring workers with video cameras.
4. A new vitamin raises workers' IQs.
5. The courts rule that unions are immune to prosecution for acts of vandalism committed during strikes.
6. Higher taxes on gasoline make commuting more expensive.

5. Suppose there are two equal quantities of kinds of labor: skilled and unskilled. Demand for skilled labor is much higher: the market wage of skilled workers is $20, the market wage of unskilled is $3. Diagram the effect of a $7 minimum wage on both markets.
6. In France, unemployment is higher but real wages are lower than in the U.S. Draw Aggregate Labor Demand and Aggregate Labor Supply for both countries showing how this is possible.
7. Provide a modernized example of one of the fallacies related to labor economics that Bastiat critiques. What would Bastiat say about it? (1 paragraph)

8. Show what happens in the market for loanable funds if:
1. An earthquake hits Los Angeles.
2. People learn that the world will end in 2010.
3. A new philosophy of patience sweeps the culture.
4. The government bans charging interest.
9. Draw a line representing your lifetime from birth to death. Shade the areas of the line where you expect to be a lender. Is this consistent with the permanent income hypothesis?
10. Calculate your PDV of going to college, using your best guesses for your income if you do and don't go to college. (To save time, just do your calculations for 15 years after high school graduation). Assume the interest rate is 5%. Does college attendance have a positive PDV?
11. Using your answer to #11, guess what the interest rate would have to be to reverse your answer. (You're guess doesn't need to be right, but it must go in the right direction). Then calculate the PDV using the new interest rate. Was your guess too high? Too low?
12. Comment on Caplan's argument that subsidies to education are a waste of money. State whether you agree or disagree, and explain your answer. (1 paragraph)
13. Go to the following webpage to create a personalized Excite webpage.

http://reg.excite.com/mps/new?pname=pfp&brand=xcit

Then personalize your Investments section by creating an imaginary portfolio with total value $10,000 for yourself. Your portfolio should have at least two components that you picked yourself. Once you've created your portfolio, print the page. What do you expect your $10,000 to have grown (or shrunk) to by the end of the semester. Remember your user ID and password.