1. Suppose that the government mandates that firms provide their employees with coffee every morning when they get into work. Suppose that the value of the coffee to each worker is $1 and suppose that the cost to the firm of providing the coffee to each worker is $1.

a. Using a supply and demand graph illustrate the effect of this government mandate on the equilibrium wage and employment level.

b. Are workers made better off or worse off as a result of this program? Explain.

c. Are firms made better off or worse off as a result of this program? Explain.

2. The government has imposed a minimum wage law in the industry in which you work. The labor market in this industry is perfectly competitive. The proposed minimum wage is higher than your current wage. What is your reaction to this proposal? How does your reaction change depending on the elasticity of labor demand? Clearly explain your reasoning.

3. During the period 1994-2001, the minimum wage in Western Australia increased multiple times. In the same period the minimum wage in all other Australian states remained constant. Suppose that you are interested in estimating the effects of the minimum wage on employment. Knowing about the influential study by Card and Krueger (1994) you decide to use the minimum wage changes in Western Australia as a natural experiment for a "differences-in-differences" estimation. Thus, you collect information on the employmentto-population-ratio in Western Australia and in the other states ("Rest of Australia"). This information is summarized in the table below.

a. For each minimum wage increase, calculate the difference-in-difference estimate of the effect of the minimum wage on employment (that is, fill out with numbers the blank spaces "_" in the table).

b. Show how to obtain the difference in difference estimator on a graph having employment on the y-axis and time around the minimum wage change on the x-axis. Show a separate graph for each minimum wage increase.

c. Did the increases of the minimum wage in Western Australia appear to have increased or decreased employment?

d. What is the main threat to the difference-in-difference estimation strategy in this setting?

e. How would you estimate the difference in difference effects of the minimum wage using a regression? Write down the equation of the regression that you would estimate, making sure to explain each term in this equation and how the regression allows to measure the effects of the minimum wage on employment. For this question please refer to the 1995 wage rise only

Western Difference in Australia Rest of Australia Difference September 1995 wage rise Before 0.555 0.452 After 0.632 0.556 Difference December 1998 wage rise Before 0.524 0.498 After 0.451 0.454 Difference March 2000 wage rise Before 0.635 0.610 After 0.606 0.592 Difference March 2001 wage rise Before 0.560 0.507 After 0.5 0.487 Difference