• Nazarbayev University

• ECON 328

ECON 328: LABOR ECONOMICS Problеm Sеt 1 – Answer Key 1. a. We need to set MRS=w and use budget constraint to solve this problem. MRS=w implies that 3C/5L=w. Substituting 15 for wage, we see that C=25L. The budget constraint is given by C=400+(168-L)*15, or C=2920-15L. Now we have 2 equations and 2 unknowns. Substituting C=60L into the budget constraint, we find L=73. This implies that C=400+(168-73)*15=$1,825. b. Reservation wage is the amount of wage a worker will be indifferent between working and not working. At L=168, C=400. Then, the reservation wage is given by 3*400/(5*168)=$1.43. 2. First, we need to determine what are the treatment and control groups. The treatment group women in Vermont. Then, we can take the women in New Hampshire as the control group. The change in the average wage in the treatment group is equal to 10- 8=$2. The change in the average wage for the control group is equal to 12-9=$3. The difference-in-difference estimate is then given by 2-3=-$1. Therefore, the evidence is in favor of the concern. EXTRA: We have not used men in our solution, then why are we given their statistics? The reason is the following: We know that Vermont and New Hampshire are neighbor states. However, is this good enough to conclude that they are really similar so that New Hampshire women can be considered as a good control group for Vermont women? To answer this question, we can use the information on men. If we realize very similar average wage patterns between Vermont men and New Hampshire men, we have additional evidence on the similarity between. In other words, we understand that if we compare Vermont and New Hampshire, we are comparing apples with apples (rather than apples with oranges). Therefore, we can trust our difference-in-difference estimates using New Hampshire as the control group. 3. A decrease in the payroll tax should increase equilibrium wages (more on this in Chapter 4). If wages increase, more people would be willing to work which would increase participation rates. In the int