Some Study Questions for Prelim 3 S24 Question 1: Previously, you learned about a company that hires workers and sewing machines to manufacture dresses. Suppose you are appointed to be the HR manager of this company. You find that the factory has signed a multi-year contract with an American retailer to buy as many dresses as the factory can produce at a price of $9 per dress. At present, the factory employs professional workers who each use a computerized sewing machine. Using these machines, each professional worker can produce 14 dresses per 8-hour day; these workers are paid $48 per day. The computerized sewing machines can be rented for $17 per day each. The factory has space for 20 workers, each working with a sewing machine. A Cornell student who has learned about efficiency wages in a Labor Economics class comes to you with a brilliant new idea: let's consider paying higher wages to attract better quality workers. In particular, the student argues that the company should hire Cornell graduates and pay them $96 per day twice what professional workers are now being paid. You try this out and find that when the Cornell graduates work with computerized sewing machines, each Cornellian produces 50% more dresses than what each professional worker was able to produce. Should you stick with your current workers or replace them by an equal number of Cornellians? Show your calculations fully. Question 2: Companies sometimes make use of strategic budget constraints - that is, they design their compensation systems in such a way as to incentivize workers to behave the way they (the companies) want them to. Answer the following questions about strategic budget constraints: a) Safelite Glass is one company that redesigned its compensation system strategically. Explain what this company did to change its compensation system. b) Some workers responded to the redesigned compensation system by exerting more effort and producing more output than they had under the original system. Illustrate the effort supply decisions of such workers using indifference curves and budget constraints (note: the new compensation system can be any one of the new compensation systems Safelite implemented, as long as it is not the original one). c) Some workers did not change their effort and output levels when the new compensation system was put into effect. Illustrate the effort supply decisions of this second group of workers using indifference curves and budget constraints (note: the new compensation system can be any one of the new compensation systems Safelite implemented, as long as it is not the original one). d) A different compensation system is proposed: i) a worker who produces at least e* is paid a one-time bonus of $d in addition to the daily wage W ii) a worker who produces between e, and e* is paid just a daily wage W but no bonus; and iii) a worker who produces less than e, is fired. Draw the budget constraint for this new alternative and analyze the incentives for effort under this alternative. A graphical answer is required. Question 3: Answer one of the following questions: Question 3A: Write a short essay about discrimination in the labor market, explaining what you have learned from this course about the nature of this problem and what might be done to help remedy it. or Question 3B: a. What are the different kinds of unemployment distinguished in labor economics? b. What are different policy actions that might be taken to combat unemployment? c. Which policy action is most appropriate for which kind of unemployment? Briefly explain each of these matchups. Question 4: You are the manager of a training department in a small company employing ten people. The CEO has told you that you can do one training program as long as the program you choose is economically justified. To ease the calculations, suppose that people stay with your company for two periods: \"today\" and \"tomorrow.\" Events \"tomorrow\" get discounted at rate (1+r). Your finance department tells you that the discount rate to use is 10%. Interest rates on cash are assumed also to be 10%. A vendor offers your company two training programs that would cover all ten of your company's people. The \"basic, ordinary, plain vanilla\" training program would cost your company $100,000 today and would produce a return of $165,000 tomorrow. Alternatively, the \"deluxe, special, tailor-made for you\" training program would produce a return of $1,320,000 tomorrow at a cost of $1,000,000 today. In this company: 1. Would it be better to do the basic training program or nothing? 2. Would it be better to do the deluxe training program or nothing? 3. Which program produces the higher rate of return, the basic training program or the deluxe training program? 4. Which program produces the higher net present value, the basic training program or the deluxe training program? 5. Which training program contributes the most to the present discounted value of profits: the basic training program, the deluxe training program, or no training program