Assignment:
Directions: Answer all of the following questions on your own paper and turn them in at the by 5 p.m. on Friday, Nov. 4th to my office (Miriam Hall 620) or my mailbox in Miriam Hall 510.You may discuss the questions with your classmates. However, you must turn in your own set of answers that reflect your own work.
1. The Affordable Care Act was designed, in part, to reduce the asymmetric information and adverse selection problem in health insurance markets.
(a) Briefly explain what the asymmetric information and adverse selection problems are in the health insurance market.
(b) Which specific component of the Affordable Care Act was designed to solve the adverse selection problem in the health insurance market?
(i) Briefly explain how this component of the law was intended to solve the adverse selection problem. And,
(ii) briefly discuss one major flaw that may exist regarding the law's ability to solve the adverse selection problem.
(c) The Congressional Budget Office currently predicts that the Affordable Care Act will reduce employment hours in the U.S. by 1-2% from 2017-2024. However, current empirical evidence does not yet show any substantial effects of the Affordable Care Act on employment.
(i) Offer one theoretical explanation behind why the Congressional Budget Office expects employment hours to decrease as a result of the law. And,
(ii) offer one explanation for why current empirical studies have yet to find evidence of significant effects of the law on labor markets.
2. Current U.S. payroll tax rates are split evenly between employees and employers (each party pays 6.2%, for a total payroll tax rate of 12.4%). Suppose a senator proposes decreasing the tax burden on working families by changing the payroll tax such that firms pay the entire 12.4%. Is this policy change likely to achieve the senator's goal of increasing after-tax earnings for workers? Briefly discuss why or why not.
3. Consider the economic policy issue of minimum wages.
(a) Briefly explain what a natural experiment is, and discuss its use in economic research to determine the labor market effects of minimum wages.
(b) Illustrate and briefly explain the theory behind why an increase in minimum wages might not lead to a change in the overall level of employment in a low-skilled labor market?
(c) Given empirical evidence and your understanding of economic theory, would you support a policy to increase the federal minimum wage from $7.25 to $9 per hour? Briefly justify your answer. Note that a complete answer should acknowledge both the pros and cons of the issue, and then explain why you think one side of the argument is more compelling than the other.
4. Suppose a firm's labor demand curve is given by the following equation where w is the wage rate and E is the quantity of labor.
Labor Demand: w = 45 - 0.25E
Suppose that the union's utility function is given by the fowlling equation, where again w is the wage and E is the quantity of labor.
Union's Utility Function: U = w ∗ (E - 20)
Based on these equations, the marginal utility of the wage (MUw) for the union is (E - 20), and the marginal utility of employment (MUE) for the union is w.
(a) What wage would a monopoly union demand from the firm?
(b) How many workers will be employed under this monopoly union contract?
(c) Illustrate and briefly explain a possible Pareto improvement from this monopoly union contract.
(d) Define the contract curve between the union and the firm.
(e) What additionally must be true at the highest wage possible along the contract curve? Briefly explain the economic intuition behind why this is the case.
(f) What additionally must be true at the lowest wage possible along the contract curve? Briefly explain the economic intuition behind why this is the case.