In the face of stable (or declining) enrollments and increasing costs, many colleges and universities, both public and private, have found themselves in progressively tighter financial dilemmas. This has led to a basic reexamination of the pricing schemes used by institutions of higher learning. One proposal advocated by the Committee for Economic Development (CED) and others has been for the use of more nearly full-cost pricing of higher education, combined with the government provision of sufficient loan funds to students who would not otherwise have access to reasonable loan terms in private markets. Advocates of such proposals argue that the private of return to student investors is sufficiently high to stimulate socially optimal levels of demand for education, even with the higher tuition rates. Others have argued against the existence of significant external benefits to undergraduate education to warrant the current high levels of public support.
As with current university pricing schemes, proponents of full-cost pricing generally argue for a standard fee (albeit higher than at present) for all students. Standard-fee proposals ignore relative cost and demand differences among activities in the university.
a. Discuss several possible rationales for charging different prices for different courses of study.
b. What are the income-distribution effects of a pricing scheme that charges the same fee to all students?
c. If universities adopted a system of full-cost (or marginal cost) pricing for various courses, what would you expect the impact on the efficiency of resource allocations within the university to be?
d. Would you complain less about large lecture sections taught by graduate students if these were priced significantly lower than small seminars taught by outstanding scholars?
e. What problems could you see arising from a university that adopted such a pricing scheme?
Rationales for charging different prices for different courses of study are presented.
1. Suppose that a union's goal is to maximize the total wage income received by union workers, namely, the average union wage times the number of union workers employed. To achieve this goal, the union should: (Decrease the union wage rate if labor demand is inelastic and increase the wage rate if labor demand is elastic, Decrease the union wage rate, Increase the union wage rate if labor demand is inelastic and decrease the wage rate if labor demand is elastic or Increase the union wage rate)
2. Which of the following is NOT a technique employed by unions to raise wages for its members? (Shifting the firm's demand for union members to the right by training existing members to do their jobs better, Increasing substitute factor prices, Shifting the labor supply curve to the right by actively training new high school graduates to do complex tasks or Increasing demand for union-made products by appealing to consumers to "buy union")
3. Consider the housing construction industry. Assume that the industry is perfectly competitive in both input and output markets. Suppose a labor union forms and negotiates an industry-wide wage for various kinds of labor (electricians, plumbers, and so on). In particular, it succeeds in negotiating a wage increase for carpenters from $12 to $16.
What happens at the firm level as a result of the union negotiations.
Now consider the effects of this wage change on the entire industry. Use the calculator to answer the question below.
Wage Rate=12 Quantity Demand=45 Excess Demand=0 Quantity Supplied=45
What is the supply of the excess supply of labor that arises as a result of the union raising the wage from $12 to $16?
Consider the housing construction industry. Assume that the industry is perfectly competitive in both input and output markets. Suppose a labor union forms and negotiates an industry-wide wage for various kinds of labor (electricians, plumbers, and so on). In particular, it succeeds in negotiating a wage increase for carpenters from $12 to $16. All info stay as above.
Suppose the union in order to mitigate the unemployment caused by the wage increase, bolsters demand by rolling out a "Buy Union" advertising campaign. If the union spends $4 million on the campaign, what would the excess supply of labor be?
4. A monopsonist faces a ______ factor supply curve; therefore, its marginal factor supply (MFC) curve is ______ its factor supply curve. (Downward-sloping; below, Horizontal; the same as, Upward-sloping; the same as, or Upward-sloping; above)
5. Undershaft Industries is a monopsonist. The following graph shows the labor supply curve it faces (labeled "S"), its marginal revenue product curve (labeled "MRP"), and its marginal factor cost curve (labeled "MFC").
If Undershaft Industries' workforce is not unionized, Undershaft will hire ____ and pay them _____.
(30 workers; $10 per hour, 10 workers; $15 per hour, 20 workers; $12.50 per hour or 20 workers; $7.50 per hour)
Suppose Undershaft Industries' workforce is unionized. If it negotiated a wage rate of $15 per hour, how many workers would Undershaft employ?
Suppose Undershaft Industries' workforce is unionized. The union is trying to decide what wage to ask for. What wage will maximize the number of employees who will be hired (that is, the number of employees who will be offered a job and accept it)?
In general, unions face a tradeoff between higher wages and higher employment. Is that the case when the employer is a monopsony? (yes or no)
6. Consider a tropical island economy with two sectors, souvenir manufacturing and hospitality (hotels). Both sectors are perfectly competitive, and workers are equally able and willing to work in either industry. Only foreign tourists demand souvenirs and hotel stays, so changes in the domestic labor market do not affect the product demand curve in either sector. Suppose that workers in the souvenir manufacturing industry unionize. This shifts the supply of labor in the souvenir manufacturing sector to the left and shifts the supply of labor in the hospitality sector to the right. What would the effect of unionization in the souvenir manufacturing sector on the market for souvenirs.
What would the effect of unionization in the souvenir manufacturing sector on the hospitality industry.
As a result of the unionization, the price of souvenirs will _____ and the price of hotel stays will _____. (Hint: You may want to refer back to your previous answers.) (Increase; decrease, Increase; stay the same, Stay the same; decrease or Increase; increase)
7. In some industries, the labor productivity of union workers exceeds the labor productivity of nonunion workers. Which of the following explanations might help explain the higher productivity of union workers? (Because union wages exceed nonunion wages, union workers are less likely to quit, which leads to a more experienced work force, and the higher union wages may also encourage workers to work harder., All of these arguments provide reasons why productivity could be higher for union workers., Higher union wage rates allow companies to attract more highly skilled workers. Or Unions may provide information to companies about how to improve operations and eliminate problems in the work environment.)
8. The following table shows the approximate income distribution for Brazil in 1989 and for Russia and Hungary in 1993. In particular, it shows the income shares of each quintile of the income distribution.
Income Distribution by Population Quintile
(Percentage of total income)
Brazil 1989 Russia 1993 Hungary 1993
Lowest Quintile 2 6 10
Second Quintile 4 10 14
Third Quintile 8 12 18
Fourth Quintile 18 20 22
Highest Quintile 68 52 36
Which country had the most TOTAL income? (Brazil, Hungary, We cannot tell from this table. Or Russia)
Which economy has the greatest income inequality? (Hint: You may want to refer back to your previous answers.) (We cannot tell from this table., Brazil, Hungary, Russia)
9. Suppose France has a Gini coefficient of 0.4, and Germany has a Gini coefficient of 0.3. Which of the following conclusions are we able to make with this information? (We cannot tell any of these things from the Gini coefficients of the two countries., The ratio of the total income of the lowest quintile of the income distribution to the total income of the highest quintile of the income distribution is higher in France than in Germany., The lowest quintile of France's income distribution earns a lower percentage of the aggregate French income than the lowest quintile of Germany's income distribution does of aggregate German income., or The lowest quintile of France's income distribution is poorer in absolute terms than the lowest quintile of Germany's income distribution.)
10. The graph below shows the U.S. poverty thresholds for 2004 by size of family and number of related children under the age of 18. For example, a family with two adults and three children is considered poor (below the poverty line) if their family income in 2004 is below $22,543.
Elizabeth and George are married and have two children under the age of 18. George works full time and earns $14,000, while Elizabeth works part time and earns $6,000. So, in total, their family income is $20,000. Are George and Elizabeth considered poor (below the poverty line)? (yes or no)
Elizabeth and George are married and have two children under the age of 18. George works full time and earns $14,000, while Elizabeth works part time and earns $6,000. So, in total, their family income is $20,000. Now suppose George divorces Elizabeth and leaves his children without paying alimony or child support. Elizabeth must now support her two children alone, so she begins working full time and earns a total of $14,000. Is Elizabeth's family considered poor? (yes or no)
Again consider Elizabeth, a single mother with two children under the age of 18 who earns an annual income of $14,000. Suppose Elizabeth qualifies for a welfare program for single mothers that provides her with $500 cash for each child (a total of $1,000, since Elizabeth has two children). After receiving welfare, is Elizabeth's family considered poor? (yes or no)
An economics consulting firm is interviewing consultants. The firm hires Sanjay, a recent PhD graduate in economics, and pays him an annual wage of $75,000. It also hires Arun, a recent masters degree graduate in economics, and pays him an annual wage of $60,000. Sanjay and Arun attended the same university, so they went through the same graduate program. They are both Indian. Which of the following accounts for the wage disparity? (Difference in human capital, Discrimination, Risk taking or Luck)
11. Consider a firm that is the only buyer of labor (that is, a monopsonist) in a town. Its labor supply curve, MFC curve, and MRP curve are shown in the following graph.
According to proponents of the marginal productivity normative standard of income distribution: (Workers are being paid too much in this labor market, and government intervention is warranted., Workers are being paid the appropriate amount in this labor market., Workers are being paid too little in this labor market, and the income distribution could be improved through unionization. Or Workers are being paid too little in this labor market, and the best way to rectify this is to train them to be more productive.)
12. Suppose Peter has more money than Paul. Proponents of the Absolute Income Equality Normative Standard believe that Peter and Paul's combined total utility is maximized when income is distributed evenly. This argument depends on which of the following assumptions being true? I. Utility from income exhibits diminishing marginal returns.
II. Everyone derives the same utility from a given amount of income.
III. The size of the income pie depends on how productive members of the economy choose to be.
13. Read No Evil (RNE) is a firm specializing in the destruction of sensitive documents. An industrial paper shredder costs $10,000. If bought, it would raise RNE's revenues by an additional $1,000 per year. The machine will last forever and never require maintenance. Which of the following statements is true? (RNE should not buy the machine, because its marginal revenue is $1,000 while its marginal cost is $10,000., RNE should buy the machine if the interest rate is less than 10%., RNE should buy the machine, because it will last forever and, since it generates an extra $1,000 per year, it will pay for itself in 10 years. Or RNE should buy the machine if the interest rate is greater than 10%.)
14. Consider an agricultural economy in which tractors are the only kind of capital. Using supply and demand graphs, show the effects of each of the following changes on the market for loanable funds.
The price of tractors increases.
The price of agricultural products increases.
The government increases taxes on interest income, reducing the return to saving.
15. The concept of present value gives the equivalent in dollars available immediately to a payment that is made at some point in the future. What amount of money today is equivalent to $1,100 one year from now, if banks are paying an interest rate r = 10% per year? In other words, what is the present value of $1,100 received one year from now, when interest rates are 10%? ($900, $1,210, $1,110 or $1,000)
16. You win a lottery. You have the choice of two ways to be paid. If you pick Payout Scheme X, you get $2,750 today. If you pick Payout Scheme Y, you get three payments: $1,000 today, $1,000 one year from today, and $1,000 two years from today.
Which choice has the greater present value if all banks pay 10% interest per year now and in the future? (Payout Scheme X has the greater present value., Payout Scheme Y has the greater present value. Or Payout Scheme X and Payout Scheme Y have equal present value.)
Which choice has the greater present value if all banks pay 5% interest now and into the future? (Payout Scheme X has the greater present value., Payout Scheme Y has the greater present value. Or Payout Scheme X and Payout Scheme Y have equal present value.)
Years after your lottery win, a friend in another country calls to ask your advice. By wild coincidence, she has just won a lottery with the same payout schemes. She must make a quick decision about whether to collect her money under Payout Scheme X or Payout Scheme Y. Your best advice to your friend is: (None of these answers is good advice., Payout Scheme Y is always better., It will depend on the interest rate; advise her to get a calculator. Or Payout Scheme X is always better.)
17. Suppose that a relative agrees to loan you $1,000 today, with the promise that you will repay the loan with interest after one year. If you pay $1,120 at the end of the year, what is the interest rate for this simple loan?
18. True or False: A dollar paid to you tomorrow is worth more than a dollar paid to you today if the interest rate is high rather than low.
19. Consider the market for private beaches on an island in the Caribbean. There is a fixed supply of beaches, determined by geography, and the government has decided that the land may only be used as private beaches -- no other use is permitted.
The following diagram shows the supply (straight up and down at 5,10) and demand for beaches on the island (diagonal at 10,10). What would be the shaded the area of the diagram that represents economic rent.
The economic rent in this market is _______ because opportunity costs are _______. (Pure economic rent; rising, Normal (not pure) economic rent; rising, Normal (not pure) economic rent; zero or Pure economic rent; zero)
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