Suppose a firm offers two contracts that have the same present value of
earnings: the first pays a constant wage over the working life, while the
second pays a low initial wage that grows over the working life up to age
65.
How might the hours worked differ over the working life between workers
under the first versus the second contract if leisure is a normal good?
Under what circumstances would a firm prefer one contract-type over
the other and why.
The Age Discrimination in Employment Act repealed mandatory retirement
for workers who are age 65. How might this Act affect a firm’s ability
to offer the two contracts? What types of firms are likely to be adversely
affected?
What are the implications of the discouraged- and added-worker effect for
the slope of the supply of labor to an economy? Based on the empirical evidence
regarding the two effects, sketch what the labor supply economy might look
like and explain why.
A consistent empirical finding that is robust across countries and cultures
is that the average number of children in the family decline with increases
in per capita income: traditional economic theory, thus, concludes that children
are an inferior good (i.e., income and the quantity consumed are inversely
related).
Use the fertility model developed by Gary Becker to explain how this
observed relationship between the number of children and per capita income
could occur even when children are a normal good.
How might your explanation in (A) change if you allow the quality and
the quantity of children to affect family welfare?
