Problem Set 5 (PS5)
Principles of Macroeconomics (Eco 200-800) SUNY-Oswego
Solutions will be posted or distributed by Mon., March 27, 2000 Ranjit Dighe

I. BOOK IT (problems from Case & Fair, 5th edition)

A. Chapter 8: #11
B. Chapter 15: #3, 4, 5
C. Chapter 11: #1, 2, 3
(Note. Yes, all of those chapter numbers are correct. That's the order in which I'm covering those chapters in class.)

II. LOST MY JOB, NOW I GOTTA STEAL AND ROB

1. Classify the following individuals as employed, unemployed, or out of the labor force. In each case, give an explanation.
a. An accountant at Price Waterhouse
b. A homeless man who wants to work but has given up looking after ten straight months of unsuccessful job search
c. A full-time college student
d. A recent retiree who is checking the help-wanted ads every day in the hope of finding a new job
e. A street sweeper who works part time
f. A full-time househusband
g. A recent college graduate who has turned down a few job offers in the hope of landing the perfect job, for which she is still looking
h. A recent college graduate who is looking for a job and has received no offers
i. A college senior who is currently a full-time student but is looking for a job that starts next summer

2. Imagine yourself as unemployed. If you were in that situation, which form of unemployment -- cyclical, frictional, or structural -- do you think would be the hardest on you, and why? Which would be the easiest, and why?

III. THE LABOR MARKET FOR INVESTMENT BANKERS

"Why were we [Wall Street investment bankers] so well paid? A back-row person, who had just taken an M.B.A. from the University of Chicago, explained, 'It's supply and demand. My sister teaches kids with learning disabilities. She enjoys her work as much as I do, but earns much less. If nobody else wanted to teach, she'd make more money.' Say what you will about the analysis.... More than 6,000 people had applied for the 127 places in the program. Paychecks at Salomon Brothers spiraled higher in spite of the willingness of others who would, no doubt, do the same job for less. There was something fishy about the way supply met demand in an investment bank."
-- Michael Lewis, Liar's Poker, p. 49.

A. Explain why the "back-row person's" explanation does not make much sense.
B. Of the labor-market models presented in class -- the classical labor market, explicit contracts, implicit contracts, efficiency wages -- which seems to best explain the apparent anomaly of investment bankers' earning such high salaries when thousands of others would do the same job for less? Explain your reasoning.