1. How do economists find equilibrium in the market?
Answer: No way. Because it is not observable. Then are the economic models wrong? In some sense, all models are wrong. But they can be useful for explanation and prediction.
2. As of Aug 2018, from the BLS employment data, why is there a seemingly contradictory pattern observed in the U.S. labor market?
Unemployment Rate Labor Force Participation Rate Employment-Population Ratio
Answer: In Scott A. Wolla (2016), Making Sense of Unemployment Data, he argues: "The standard unemployment rate (U-3) is an important measure of the health of national labor market conditions. Recent unemployment data indicate that the U.S. economy is near full employment. However, many observers doubt that the unemployment rate fully reflects the reality of underemployed and discouraged workers—both of whom are not counted as unemployed. They often refer to the downward trend in the labor market participation rate as an indication of labor market weakness. However, taken in the context of the demographic shift, the current low unemployment rate is likely an indication of a strong labor market. "
3. What form of utility function will generate "normal good effect"? What form of utility function will generate "inferior good effect"?
4. An extension to "Affirmative Action and Production Costs" in Chapter 3, page 106.
Suppose the NBA is a "color-discriminatory" organization and it has a strong preference to hire more black players than white players, though paying the same level of market wage. Will the Affirmative Action lower the production cost in the league and improve market efficiency?
Suppose the NBA is a "color-blind" organization and it hires competitive players. Will the Affirmative Action lower the production cost in the league and improve market efficiency?
Would the outcomes be different if wages were paid higher for black players than white players?
5. In the schooling decision model, why the marginal cost of schooling is the discount rate? (Textbook Page 238)
Answer: Strictly speaking, the MC of schooling should be subjective rate of interest, or the subjective discount rate of future income. For any individual, the opportunity cost of schooling is the highest income he or she must necessarily forgone. If an individual values working more heavily than schooling, he will choose to work rather than schooling. By working, he can earn his income and finance his consumption immediately. If an individual values schooling greater than working, he will choose to go to school rather than working. By schooling, he gives up the option to work and finance his current consumption. However, the individual who chooses to work right now must suffer from lower future consumption compared with the same individual who chooses to go to school.
What then determines whether an individual's decision to work or go to school? Fisher's answer is the individual's impatience to consume. The more impatient an individual is to consume right now, the higher the interest (cost) he is willing to pay for this immediate consumption. This interest rate is his subjective rate of discount, discounting future income flows, which is also similar to the idea of marginal use value (utility). Driven by market competition, this amount of income or interest will converge to the market interest, which is the cost for borrowing and return to lending.
6. Why is the job market signaling model (Spence, 1973) wrong (Textbook Page 259) ? In practice, how can a firm screen the high-productivity workers out of the pool? [Hint: "quantity selection" and "price selection"]
Answer:
7. Can economists estimate the marginal return to schooling by computing the difference between the average earnings of the more-educated group and the average earnings of the less-educated group (the so-called "difference-in-mean estimator")? Why or why not?
Answer: