1. Give an example not in your book that would illustrate the concept of “compensating differential.” Less desirable places to live Low wage advancement opportunity = higher starting pay In text: Dangerous Night Shift (irregular hours) Professors vs. Professionals

2. What are four characteristics/factors that affect how much someone gets paid? Human Capital – the accumulation of investments in people, such as education and training Natural Ability – Major League baseball vs. Minor leagues Effort Chance Physical Beauty Superstar: everyone wants the services of “The Best” + It is possible to supply services to everyone Sports star vs. carpenter

3. What are two hypotheses about why the income gap has increased between skilled & unskilled workers? International Trade Unskilled labor is cheaper in foreign countries – US imports more goods produced with unskilled labor….So the US demand for skilled labor rises and increases wages……US demand for unskilled labor falls and decreases wages Technology New Technology raises demand for skilled labor to use it raises wages (computer programmers) and reduces demand for unskilled labor reduces wages (filing clerk)

4. A. Why is it hard to establish whether a group of workers is being discriminated against? Even if labor market were free of discrimination; different individual people have different wages. Human Capital and Compensating Differentials

4. B. How do firms tend to eliminate discriminatory wage differentials? Profit motive – If wages for “group A”(less desirable) are lower, more and more firms will want to hire “group A” Eventually, firms that hire “group B” (more desirable) are facing higher costs than their competitors Profit Motive outweighs discrimination (streetcar segregation)

5. Explain at least three facts about poverty shown in the data on pgs Poverty is correlated with race Correlated with age Correlated with Father-less households

6. If you earn more than your friend, and someone proposes taxing you in order to supplement your friend’s income; how would a utilitarian, a liberal & a libertarian evaluate the proposed tax? Utilitarianism- government should choose policy to maximize total utility of everyone in society (Jeremy Bentham and John Stuart Mill) Diminishing marginal utility of additional dollars More equal distribution of wealth Stop short of a goal of complete equality because they recognize the role of incentives and how it can hurt the “whole” society

Liberalism – govt. should choose policy deemed to be just, as evaluated by an impartial observer behind a veil of ignorance John Rawls – Theory of Justice Rawlsianism Aim to raise welfare of the worst off Maximize …Not the sum of everyone’s utility….but the minimum utility = Maximin Criterion Justifies policy aimed at EQUALIZING distribution of income Recognize incentives and allow for income differences More income re-distribution than utilitarian

Libertarianism- govt. should punish crimes and enforce voluntary agreements but NOT redistribute income Robert Nozick (Anarchy, State and Utopia) Denies the validity of the question…. “How much inequality (or equality) is desirable” Don’t evaluate economic outcomes….but rather evaluate the process by which these outcomes arise Nozick’s “Entitlement Theory” you are entitled to what you earn as long as the process was just. No need for redistribution of wealth. Focus on equality of opportunity by protecting individual rights

7. What are two ways to help solve problems of economic inequality within society? Minimum Wage Welfare In-Kind Transfers (Charity for food/shelter/clothing, Food Stamps, Medicaid)

8. Explain the Lorenz Curve. 9. What does the Gini Ratio measure?

LORENZ CURVE - Hypothetical line of perfect equality – the farther the Lorenz Curve Lies below the line of perfect equality, the more UNEQUAL the distribution of income. The distance between perfect equality and the Lorenz Curve is calculated by the “GINI RATIO (COEFFICIENT)” A / (A+B) : the closer it is to “ 0 “, the more equal the distribution the closer it is to “ 1 “, the more unequal the distribution

10. Explain the differences between a Progressive, Regressive & Proportional tax. Which one is the worst for low income families?

Proportional Regressive Progressive ???????