1. Consider a guest worker program whereby Mexican citizens could work in the U.S. People in Mexico would be matched with a U.S. employer. The employer would have to demonstrate a need for workers and prove that U.S. citizens won't take the jobs.

The matched workers would get "guest worker" cards allowing them to stay in the US for three years. The cards would be renewable for three-year periods but not indefinitely.

a. Draw labor market demand and supply graphs showing the change in labor demand and/or labor supply in the U.S. and in Mexico resulting from this program. (So you want two labor supply curves: one for Mexico and one for the United States.) Explain your graphs.

Assuming that Mexican citizens currently face formidable barriers to working in the United States, what effect would you expect enactment of this program to have on equilibrium wages and employment in each country? (i.e. What happens in Mexico? What happens in the US?)

b. Such a program involves administrative costs. Suppose that after a year of operation, the U.S. government starts to recover these administrative costs by making employers with guest workers pay a tax equal to 10% of the wages paid to their guest workers. Draw labor market demand and supply graphs showing the change in labor demand and/or labor supply in the U.S. and in Mexico resulting from this policy for recovering administrative costs.

Explain your graphs. What effect would you expect enactment of this program to have on equilibrium wages and employment in each country?

2. In a particular industry the labor supply curve is W=10+2NS while the labor demand curve is W=40-ND, where NS is labor supply and ND is labor demand in employment terms.

a. What are the equilibrium wage and employment if the labor market is competitive? What is the unemployment rate in the competitive market?

b. Now suppose that the government sets a minimum hourly wage of 36. How many workers would lose their jobs? How many additional workers would want to work at this wage? What is the unemployment rate?

c. Return to the conditions in Part A (no minimum wage). Suppose the government imposes a payroll tax of 6 per unit of labor. The legal incidence of the tax is on the firm. Use supply and demand curves to show the effect of this payroll tax on employment and wage rates. What is the new employment level with the payroll tax?

What wage rate will workers receive? How much tax revenue does the government collect? d. Return to the conditions in Part A (no minimum wage).

Suppose the government imposes a payroll tax of 6 per unit of labor. The legal incidence of the tax is on the worker. Use supply and demand curves to show the effect of this payroll tax on employment and wage rates.

What is the new employment level with the payroll tax? What wage rate will workers receive, both before and after tax? How much tax revenue does the government collect?

e. (Just for your own thought and study - not part of the homework - what if there was a minimum wage in parts c and d. When would it be binding? What effect would it have?)

3. A firm is choosing how much labor and capital to use. Use the optimizing logic or the "doing my best means I can't reallocate and do better" logic to find the rule the firm should use. Write out every step in the logic. Guide in thinking about what to do. Consider reallocating from labor to capital: a. what do I lose? b. how much money do I save c. what can I buy with that money d. what is the extra worth? Then set loss = gain and interpret. (Rearrange the resulting equation to make it easier to interpret.)

4. Most college students face a situation where they can take a temporary (or seasonal) job in the summer at a fairly low wage or quit college and take a permanent job at a much higher wage. Why would the same person receive different wages for the two types of jobs? Using demand and supply curves (graphs), and assuming perfect competition, explain the differential in wages.

5. Suppose wage and health insurance are the only two job characteristics that workers care about. In an environment in which employers are not required to offer health insurance to their workers, describe the relationship between the wage level in a particular job and whether the job offers health insurance. What happens to the wage structure if the government requires all firms to offer a standard package of health insurance to their workers?

6. Consider a production process that uses both labor and capital. Assuming that these two factors are substitutes for each other in production, analyze and show graphically the effects of each of the following on an employer's long-run demand curve for labor: a. An increase in the wage rate. b. An increase in the cost of capital. c. A decrease in the cost of capital. d. An increase in both the wage rate and the cost of capital. e. An increase in the demand for the product

7. Briefly explain how the following programs would affect the elasticity of demand for domestic workers in the domestic steel industry, if at all. Assume that "domestic" means the United States. a. A law which requires each car sold in the US to have at least 80% of its steel content be from domestically produced steel. b. A decrease in the elasticity of the supply of materials which are substitutes in production for labor. c. Discovery of a less polluting way to make steel, which increases the demand for steel (relative to petroleum based products like plastics).