Economics 174

Problem Set 3 -- Due Monday, May 24


1.. In order to attract candidates from liberal arts universities without formal accounting majors, the big six accounting firms run a special program in conjunction with New York University's Stern School of Business. Liberal arts majors who are hired must attend school during summers and at night for two years. The employee must pay for this schooling; assume that it costs $5,000. After they finish their courses, employees take the CPA exam. During they time they are going to school (and working), employees are paid $35,000/year.

Classes are composed entirely of new employees of big six accounting firms. Because they are in the midst of receiving exactly the same training, it is common for new employees to switch firms during their first two years. Effectively, each of these trainees always has the opportunity to switch to a different big six accounting firm and be paid $35,000/year.

During March of my senior year at school, my two most attractive offers were from a big six accounting firm and an economics consulting firm. The big six accounting firm's offer is described above. The economic consulting firm's offer was $25,000/year. Assume that the consulting firm has a policy of not hiring anyone who has ever worked at an accounting firm (it is extremely costly to retrain accountants to do good economic analysis). My next best opportunity was earning $22,000/year at a health care management firm in New York. This offer would stay open for the foreseeable future, and it would remain better than any other opportunity.

2.     Firms use various types of trailers when hauling goods by truck.  Two examples are "basic vans" and "grain bodies."  Basic vans are used to haul general freight: goods which are packaged in boxes and which are not temperature-sensitive.  (These are the familiar box-like trailers you see on the road.)  Grain bodies are trailers which have no top, but have sides which are reinforced by layers of steel that can withstand large amounts of pressure from inside.

Hubbard (1998) finds that nationwide, about 35% of hauls which use basic vans are completed by private fleets -- circumstances where manufacturers, distributors, retailers, etc., haul their own goods.  The rest are completed by for-hire trucking firms.  In contrast, 75% of hauls which use grain bodies are completed by private fleets; only 25% are completed by for-hire fleets. Further research indicates that 55% of hauls which use grain bodies in Iowa are completed by for-hire trucking firms, but 5% of hauls which use grain bodies in Oregon do.

3.   When one firm purchases another, it often justifies the purchase by claiming that there exist "synergies" -- that somehow the value of the merged firm is higher than the sum of the values of the two firm given separate ownership.

4.   Using efficiency wage theory, explain why the salary of a 60-year old executives might be higher than the salary of 45-year-old executives who are equally talented and knowledgeable and whose outside opportunities are exactly the same.