Page 590 - The Principle of Economics

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PART NINE THE REAL ECONOMY IN THE LONG RUN
c.
Do you think the growth of the Japanese auto industry increased or decreased the gap between the competitive wage and the wage chosen by the UAW? Explain.
arise? Would the firm’s pool of customers tend to become more or less healthy on average? Would the company’s profits necessarily increase?
13. (This problem is challenging.) Suppose that Congress passes a law requiring employers to provide employees some benefit (such as health care) that raises the cost of an employee by $4 per hour.
a. What effect does this employer mandate have on the demand for labor? (In answering this and the following questions, be quantitative when you can.)
b. If employees place a value on this benefit exactly equal to its cost, what effect does this employer mandate have on the supply of labor?
c. If the wage is free to balance supply and demand, how does this law affect the wage and the level of employment? Are employers better or worse off? Are employees better or worse off?
d. If a minimum-wage law prevents the wage from balancing supply and demand, how does the employer mandate affect the wage, the level of employment, and the level of unemployment? Are employers better or worse off? Are employees better or worse off?
e. Now suppose that workers do not value the mandated benefit at all. How does this alternative assumption change your answers to parts (b), (c), and (d) above?
10. Some workers in the economy are paid a flat salary and some are paid by commission. Which compensation scheme would require more monitoring by supervisors? In which case do firms have an incentive to pay more than the equilibrium level (as in the worker-effort variant of efficiency-wage theory)? What factors do you think determine the type of compensation firms choose?
11. Each of the following situations involves moral hazard. In each case, identify the principal and the agent, and explain why there is asymmetric information. How does the action described reduce the problem of moral hazard?
a. Landlords require tenants to pay security deposits.
b. Firms compensate top executives with options to buy company stock at a given price in the future.
c. Car insurance companies offer discounts to customers who install antitheft devices in their cars.
12. Suppose that the Live-Long-and-Prosper Health Insurance Company charges $5,000 annually for a family insurance policy. The company’s president suggests that the company raise the annual price to $6,000 in order to increase its profits. If the firm followed this suggestion, what economic problem might