Tuesday, May 05, 2009

Summary since last in-class quiz

Below are some of the major questions we've discussed since the last quiz:

The solutions to quiz 1 in class are available here.

As usual, I will be in the classroom before class (around 7:45ish) if you have questions you want to address in person.

Long-Run Labor Demand

How do firms select the quantity of labor to use at a given wage when all inputs are variable (e.g., they can select both capital and labor)?

When firms can select all inputs (e.g., capital and labor), how will a change in wage affect labor demand? Demand for other inputs?

Why is short run demand for labor typically less elastic than long run demand for labor?

Key terms: isoquant, isocost, marginal rate of technical substitution, elasticity of demand, elasticity of substitution, complements, substitutes, output (or scale) effect, substitution effect

Labor equilibrium
What determines equilibrium wage and quantity of labor in the market?

What causes movement along supply and demand curves (i.e., what changes the quantity or labor demanded or supplied)?

What causes supply and demand curves to shift in or out (i.e., what causes changes to demand or supply)?


Not all jobs and workers are the same.

What are the characteristics of a good job match?

What choices are available to firms and workers to increase the chances of ending up in a good job match?

How are labor markets similar to dating markets?
Compensating wage differential

If a job has particularly distasteful aspects (e.g., risk of death), what happens to the wage in that occupation? Why?

How do differences in workers' risk preferences affect the shape of their indifference curves? How do differences in to costs of mitigating risks affect the shape of firms isoprofit curves?

Key new terms: isoprofit curve, offer curve

Employee benefits
What are examples of employee benefits (or other non-wage compensation)?

Why might employees prefer some compensation in the form of benefits (instead of wages)?

Why might firms want to offer compensation in the form of benefits instead of wages?
Asymmetric Information

How does the lack of perfect information affect market outcomes? That is, if all parties to a transaction don't know all relevant information what happens?

Two major possibilities: Adverse selection, Moral Hazard.

How might adverse selection lead to market unraveling (that is, willing buyers not finding willing sellers or vice versa)?

When (and why) might agents use signals or screens to improve outcomes?

Does education serve primarily a signaling function? If so, are there more efficient ways to generate the same (or very similar) separating equilibrium?

What is moral hazard and how might it create problems in markets (particularly labor markets)?

How (and why) might principals use incentives to solve moral hazard problems?

Key new terms: asymmetric information, adverse selection, lemons problem, signaling, screening, separating equilibrium, pooling equilibrium, moral hazard, principal-agent problem

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