Economics 27 Professor Patricia M.

Anderson

Practice Problem Set 4

Pay & Productivity and Discrimination

Multiple Choice Questions

1. Deferred payment schemes are more likely to occur at larger, well-known firms because:
a) it is more difficult for smaller firms to monitor workers.
b) monitoring costs do not vary with firm size.
c) smaller firms are more likely to go bankrupt.
d) all of the above.

2. From the employer’s standpoint, the chief advantage of royalties and commissions is that this
policy:
a) promotes teamwork and cooperation.
b) increases turnover.
c) reduces shirking where work effort is costly to observe.
d) reduces income variability

3. If men in occupation A earn $20 per hour and women in occupation B earn $20 per hour,
then:
a) there is no discrimination
b) there is discrimination against women if their marginal revenue product in occupation
B is lower than the marginal revenue product of men in occupation A.
c) there is discrimination against women if their marginal revenue product in occupation
B is higher than the marginal revenue product of men in occupation A.
d) there is statistical discrimination against women.

4. In a taste model of discrimination, if employers have a taste for discrimination:

a) firms that discriminate will have lower costs than non-discriminating firms.
b) an increase in the supply of black workers will cause the black/white wage ratio to rise
c) the existence of competitive market forces will cause discrimination to diminish and
eventually disappear.
d) non-discriminating firms will be put at a competitive disadvantage because they
employ victims of discrimination.

5. According to the theory of statistical discrimination:

a) the process of competition should put discriminating employers at a competitive
disadvantage.
b) the discrimination coefficient is a measure of personal prejudice in the labor market.
c) a person is judged on the basis of the average characteristics of their demographic
group.
d) all of the above.
Short Answer Questions

1. Suppose you own a drive-in theater and need workers for the summer. Last year you hired
workers at a wage equal to their marginal product. Doing so again this year would mean paying
$6. However, last year many of your workers quit before the summer season was over, and you
found it difficult to replace them. This year, you would like to only hire workers that plan to
work for the entire summer. Describe a simple payment scheme that might help attract only
workers expecting to work all summer.

2. Consider the same setup as 1, but suppose now that there is a minimum wage of $6. How
does this affect your planned payment scheme?

3. Now suppose the drive-in is in Sunnydale, and both humans and demons are applying for the
job. Assume further that both groups actually have identical probabilities of working all
summer. You decide to try to use a personal interview to determine which applicants will stay
all summer. Based on a model of statistical discrimination why might this result in either more
humans being hired or demons being paid a lower wage?

Questions 4 to 6 refer to a situation in which one of the demons hires the law firm of Wolfram &
Hart to sue you for discrimination. The lawyer performs the following Oaxaca decomposition:

WH  WD  [bH ( X H  X D )]  [(a H  a D )  (bH  bD ) X D ] .

4. Assuming H refers to human and D to demon, and W is the wage, what does X represent?
What are the a’s and b’s, and how did the lawyer obtain them?

5. How is the first bracketed term interpreted? Why might it be an underestimate?

6. How is the second bracketed term interpreted? Why might it be an underestimate?