Feb 12, 2020
Economics 428/528 Assignment 3 Answer Key
Note:
Write substantive answers, in whatever style you consider the most effective: do not try
to fill in space with aimless speculation. The grading function is symmetric and additively
separable over questions, and it is convex. You are expected to upload your answers as a
single file to Moodle.
Important:
Feel free to discuss questions with each other, but you are
NOT
allowed to solve
them together. Making same mistakes in a similar order will be judged as plagiarism that will
not be tolerated and be sanctioned according to the Student’s Code of Misconduct. You need
to write down your own original answers and submit them to Moodle as a single file
. You can
use a software (ex: Word or Latex) to type your answers or scan your handwritten answers
into a pdf file. In the latter case, you are responsible for the quality of scanning. Late
submissions are
NOT
accepted!
1.
True/False and Justify:
a.
"A worker originally plans to retire in a couple of years. The Central Bank
suddenly changes its inflation forecast such that inflation is now predicted to be
higher than it had been expected before. Learning about the inflation forecast, this
worker would alter his retirement plans and stay in the labor force for more than a
couple of years."
True.
People work partly because they want to accumulate enough savings for their
retirement. If inflation increases, real wages will go down so that one will need more
time to accumulate the required (or demanded) level of savings to retire.
b.
"If the wage rate for skilled workers is twice the wage for unskilled workers then a
cost-minimizing firm will use fewer skilled than unskilled workers to produce any
given output."
False.
Firm will set VMP
= w
separately where i denotes skilled or unskilled
i
i
workers. As VMP
depends on MP
, this question requires a comparison between MPs
i
i
of skilled and unskilled workers along with their wages. If MP of skilled workers is
high enough compared to the MP of unskilled workers, it is possible that firm will hire
more skilled worker than unskilled workers.
c.
“Labor d
