1. a. Would the sole act of building a hydroelectric dam be a Pareto improvement? Why or why not?
b. Could the project satisfy the Kaldor Hicks criterion? Explain
2. Using what you know about the compensated (Hicksian) demand curve, explain why it is the superior estimator of changes in consumer welfare (what does it do/have that the ordinary (Marshallian) curve doesn't)?
3. With a Leontief utility function over heart medication h and diabetes medication d that is u(h,d) = min[2h, d], solve for the following:
a. Ordinary demand function of h if the consumer has $12,000 and the price of d = $1,000. (*hint: an optimality condition is 2h=d).
b. Compensated demand function for h.
c. Starting at a price of h of $500, graphically show the change in consumer surplus as the price of h increases to $1,000. Show this both for ordinary and compensated demand.
4. Suppose the mayor of Champaign is considering a local public works project. He assumes that the local market for unskilled labor is in disequilibrium because the wage cannot fall below the New York state minimum wage of $7.25 per hour. A U of I labor economist estimates that at the wage of $7.25 per hour, there is an excess supply of 5,000 workers, i.e. 5,000 people who are willing to work for $7.25/hour but are currently unable to find work so they are unemployed. The mayor proposes a project that will employ 6,000 unskilled workers to repair Ithaca's crumbling infrastructure. To be sure to help the unemployed, hiring priority will be given to people who can prove they were unemployed before the project.
Use an appropriate graph to analyze the impact of the proposed project on the Ithaca market for unskilled labor. Show and explain the areas that measure the costs of hiring 6,000 workers for the project. Compare it to the budgetary costs that Ithaca will have to pay to hire the 6,000 workers.
5. The unemployment rate has been decreasing but it is always an important topic, particularly in a recession. Answer the following questions related to unemployment and the labor market in general.
a. Give an explanation for when and why the market for labor may be in disequilibrium at certain times.
b. Assume the free market wage (if there was no minimum wage laws) would be $7. Given a minimum wage of $10, show what the equilibrium quantity allocation at that $10 level.
c. Show (on your graph) the opportunity costs of hiring additional workers. You may assume that unemployed workers with the next lowest opportunity costs receive the jobs (and that this was the case for those who were previously employed).