Question 1

Illustrate graphically and explain the income and substitution effects of a wage decrease on hours of labor supply for the case in which the individual's labor supply curve is backward bending.Graphically derive the individual's labor supply curve.

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Question 2

Cash advance stores offer to lend money to an individual who,after a brief credit check,gives the store a post dated check for a certain amount and they receive a lesser amount.For example,the customer,who has no other options for loans given his or her poor credit,writes a check dated two weeks from today for $100 and the store remits to him $80,an annualized rate of interest of about 650%.Some states have outlawed cash advance stores as described here.Using what you've learned in this chapter,and assuming the rate of default on these loans is 20%,defend this practice.

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Question 3

When might a compensating wage differential go the "wrong way"? Explain with a graph.

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Question 4

How can the presence of a union in a labor market be beneficial?

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Question 5

Which of the following does not explain differences in specific interest rates in equilibrium?

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The economy's productive capacity does not directly affect specific interest rates in equilibrium. The other choices are all factors that can influence differences in specific interest rates.

Question 6

What are the sources of variation in wages across individuals?

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Question 7

Why do interest rates for specific assets such as bonds,mortgages,credit card loans,and bank loans differ even in long-run equilibrium?

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Question 8

How do firms decide if an investment is feasible? In other words,how are investment projects valuated?

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Question 9

Using an indifference curve and budget line,explain the effect of a wage increase on the income and leisure choices of an individual who considers leisure a normal good.

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Question 10

How does the rate of return earned on capital in various industries equalize over time? Do the wages earned by labor in different industries and the interest rates for different assets also equalize in the long-run? Why?

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Question 11

Using a graph,explain the welfare effects of an effectively organized union in the labor market.

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Question 12

In some professions,a few people earn enormously high salaries,with the vast majority earning significantly less.This "superstar phenomenon" is often seen in the entertainment industry.For example,the movie star Brad Pitt earns millions of dollars per film and the baseball player Barry Bonds earns millions of dollars per season,while most actors and non-Major League baseball players do not even approach that level.In other words,the difference between the highest paid and least paid actors and baseball players is much greater than the same difference for carpenters or surgeons.Can you explain this phenomenon?

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Quiz 17: Wages, Rent, Interest, and Profit