Question

State whether each of the following six propositions is true or false. In 2-3 sentences, explain why. Use diagrams if helpful.

a. Suppose the government passes a law requiring “profit-sharing”; every year, firms must give at least 50% of their profits to their workers.

T, F, and Explain: As long as wages are flexible, wages will fall, leaving workers’ well-being unchanged.

b. T, F, and Explain: With a volunteer army, wars are bad for taxpayers. With conscription, wars are bad for soldiers.

c. Suppose workers under-invest in education because of credit market imperfections.

T, F, and Explain: No-interest education loans are the most efficient government response.

d. Suppose native-born Americans and immigrants have exactly the same skills.

T, F, and Explain: Immigration will reduce Americans’ average standard of living.

e. T, F, and Explain: If wages can’t adjust, increasing the strictness of safety regulations will reduce employment.

f. The Internet makes it easier for people to learn about employers’ reputations.

T, F, and Explain: This makes firms less willing to temporarily overpay inexperienced workers.

g. IQ tests are a good predictor of job performance.

T, F, and Explain: If IQ tests were culturally biased against immigrants, immigrants would have lower job performance than natives with the same IQ.

Answer 1

a. False. With this workers will be worse off, as the profit-sharing regulation reduces disposable income which would affect the income insurance.

b. True. During wartime the demand for soldiers increases which would increase the demand for more salary from soldiers which would increase the tax burden for civilians. While with conscription soldiers are bound to join army which would not increase their salary.

c. False: The markets fail to equalize rates of return between education and investments. With No-interest loans would not guarantee the efficient investment. Here government can subsidize education loans to bring the return to education into line with the other areas of the economy.

d. False. With the same set of skills immigrants would work for lesser which would reduce the cost for Americans which would increase the national savings and investment which would increase the standard of living.

e. True. Strictness of safety regulations reduces the labor demand as the cost increases and the labor supply increases which would result in surplus labor and reduce employment.

f. True. With increased transparency firms would get qualitative labours which would reduce overpaying inexperience workers.

g.  False: IQ tests were culturally biased against immigrants, who would actually have higher job performance than natives with the same IQ.