Friday, April 10, 2009

Next Week (4/13 and 4/15)


We will not have class on Monday (4/13).

We will have a quiz followed by a guest lecture by Prof. Whitelaw on Wednesday (4/15).

The quiz will take approximately 30 minutes to complete. It will consist of a few fill in the blank or complete the figure type questions and a few "identify the core assumption" questions (like we've discussed in class). It will cover everything we've seen to date. This includes:

(1) Basic Micro-Theory (i.e., the stuff you learned in 311)

Core elements of micro -- agent, objectives, constraints, incentives/tradeoffs, equilibrium -- and associated tools -- utility function, indifference curves, budget constraints, supply and demand curves, etc.).

(2) Econometric/statistical intuition

In our class this largely boils down to understanding, interpreting, and evaluating statistical evidence. The key phrase to latch onto is, "correlation is not causation." Frequently, people present evidence of a correlation between two variables and interpret the relationship as causal (X causes Y). You should be skeptical of such claims.

Two major questions to consider when presented with evidence of a correlation between two variables:

(A) What else might explain this relationship?

(B) What sort of comparison would produce convincing estimates of any causal relationship? (Hint -- ideally convincing comparison should rule out the alternative explanations identified in (1) using randomized controls or some other quasi-experimental method.)

(3) Labor Supply

The core questions (hint -- a reasonable way to study would be to answer these questions):

(a) What decision(s) are we interested in examining? That is, what must agents choose?

(b) What are the benefits associated with the available choices?

(c) What constrains agents from infinitely pursuing all the available choices? That is, why can't agents consume as much as they would like of all the available options?

(d) For a given set of preferences, what defines the agent's optimal choice? [Stated differently -- Why is an agent's optimal choice defined where MRS = w?]

(e) How do agents respond to an increase in unearned income?

(f) How do agents respond to a change in the wage?

(g) How do you identify/calculate the substitution effect? How to you identify/calculate the income effect?

(4) Beginning of Labor Demand

The core questions we've considered so far:

(a) In a competitive market where firms take prices (for output and inputs) as given, why do firms hire workers up until the value of a worker's marginal product equals the wage?

(b) What causes firms to change the number of workers they hire?

(c) Why do labor demand curves typically slope downward?

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