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ECON 481 Homework Assignment #2 Due Date: January 31, 2018, 1:30 p.m. Based on the material you have read in the textbook and the information transmitted in class, answer the following questions. All answers must be well written – in your own words – and any diagrams must be properly labeled and explained. Any outside source(s) of information must be properly cited and referenced. You must cite all sources so that the reader could find them easily and reproduce the results. Failure to cite outside sources properly will be grounds for academic dishonesty. Failure to write in your own words will be grounds for academic dishonesty. Text must be generated via word processing and double-spaced. Anything not doublespaced will not be read and earn a grade of zero. Any handwritten text will not be read and earn a grade of zero. Diagrams may be hand-drawn or generated electronically. You may not change fonts. Assignments are due by 1:30 p.m. on the due date. Homework assignments may be submitted in class or delivered to Dr. Fuess in person in his office. Assignments must be submitted in paper format – electronic submissions will not be accepted. Assignments, or any parts thereof submitted after 1:30 p.m. on the due date will be subject to a significant and substantial late submission deduction for the entire answer set. Homework will be graded on the following basis: 75% of homework score, content of answers; 25% of homework score, writing style.

1. LABOR DEMAND, PART 1 Suppose output, Q, is produced by labor, L, and capital, K, according to the following function: Q = K ½ L½.. Suppose the firm sells each unit of output in a competitive market for a price P = $100. Suppose the firm hires each unit of labor in a competitive market for a wage W = $25. Suppose the firm has to make do for now with a stock of capital K = 49; moreover, suppose each unit of capital costs R = $75.  A. How much labor will be demanded by the firm? Demonstrate and explain. B. At the “optimal” quantity of labor, what is the capital-to-labor ratio K/L? Demonstrate and explain. C. Utilizing the “optimal” quantity of labor, how much profit will the firm earn?

2. LABOR DEMAND, PART 2 Consider the circumstances of Problem #1, only now the firm is free to choose both labor L and capital K. A. What capital-to-labor K/L ratio will the firm choose? Demonstrate and explain. Compared to Problem #1 above, does the firm become more capital-intensive, more laborintensive, or does the K/L ratio remain unchanged? If any change occurs, explain why it occurs. B. Compared to Part A just above, suppose the cost of capital drops from R= $75 to R = $65. How does this development affect the demand for labor? Demonstrate and explain.

3. WORKING IN THE REAL WORLD On January 17, 2018 the Bureau of Labor Statistics (BLS) released a report on the usual weekly earnings of wage and salaried workers for the fourth quarter of calendar year 2017. Find this report and answer the following questions. A. Compared to men with high school diplomas, in late 2017 how did the earnings of college educated men (bachelor’s degree or higher) compare? Report the relevant statistical evidence and interpret. Did it pay for a male to be a college graduate? Demonstrate and explain. Compared to bachelor’s degree college graduates, does it pay for a male to earn an advanced degree? Demonstrate and explain. B. Compared to women with high school diplomas, in late 2017 how did the earnings of college educated women (bachelor’s degree or higher) compare? Report the relevant statistical evidence and interpret. Did it pay for a female to be a college graduate? Demonstrate and explain. Compared to bachelor’s degree college graduates, does it pay for a female to earn an advanced degree? Demonstrate and explain. C. In late 2017 did the “payoffs” to a college education seem to be similar for males and females in the U.S.? Demonstrate and explain. How would your answer change – if at all – if you focused only on white males and white females? Demonstrate and explain.