Microeconomics Perspectives on Development

Bernardi Marta , PhD Candidate at the Chair of Economics esp. International

Economic Policy
TU Dresden
Winter Term 2023/2024

Exercise 2 - Discrimination

You should try to complete this homework on your own before the Exercise class
held on the 14th of November where we will go through the solutions. The goal is
to touch base on the fundamentals of applied discrimination theory in development
economics.

Exercise 2.1: Discrimination in the Labor markets

a)
What is statistical discrimination? Why do employers use group membership as an
indicator of a worker’s productivity?

b)
What is the impact of statistical discrimination on the wage of the affected workers?
Must statistical discrimination reduce the average wage of blacks or women?

Exercise 2.2 : Discrimination and Firm’s Profits

√
Suppose the firm’s production function is given by q = 10 Ew + Eb , where Ew and
Eb are the number of whites and blacks employed by the firm, respectively. It can
be shown that the marginal product of labor is then M PE = √Ew5+Eb . Suppose the
market wage for black workers is $10, the market wage for whites is $20, and the
price of each unit of output is $100.

a)
How many workers would a firm hire if it does not discriminate? How much profit
does this non-discriminatory firm earn if there are no other costs?

b)
Consider a firm that discriminates against blacks with a discrimination coefficient
of 0.25. How many workers does this firm hire? How much profit does it earn?

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c)
Finally, consider a firm that has a discrimination coefficient equal to 1.25. How
many workers does this firm hire? How much profit does it earn?

Exercise 2.3: Discrimination and Access to Agri-

cultural Inputs
In an agricultural economy, there are two groups of farmers, Group A and Group
B. Group A faces discrimination in accessing agricultural inputs, resulting in lower
levels of productivity√compared to Group B. The production
√ function for farmers
in Group A is YA = XA , and for Group B it is YB = XB , where XA and XB
represent the amount of agricultural inputs used by each group.

a)
Draw a graph illustrating the production functions for both Group A and Group B.
Label the curves appropriately.

b)
Incorporate the impact of discrimination on Group A’s access to agricultural in-
puts by shifting their production function downwards. Clearly indicate the new
production function for Group A on the same graph.

c)
Discuss the implications of discrimination on agricultural productivity and overall
economic outcomes, based on your graph.

Exercise 2.4: Ethnic Diversity and Agricultural

Productivity
In a study examining the relationship between ethnic diversity and agricultural pro-
ductivity in developing regions, researchers use a Difference-in-Differences (DiD)
approach to estimate causal effects. The study focuses on two groups of villages:
ethnically diverse villages (Treatment) and ethnically homogenous villages (Con-
trol).
Refer to the provided table below, which presents hypothetical data on agri-
cultural yields in both treatment and control villages before and after a specific
intervention aimed at improving agricultural practices.

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 Village Type Year Average Yield (Before) Average Yield (After)
Treatment 2010 800 900
Treatment 2015 850 950
Control 2010 820 830
Control 2015 830 840

a)
Write down the estimating equation for the Difference-in-Differences (DiD) analysis
in this context.

b)
Calculate the DiD estimate for the impact of the intervention on agricultural yields.
Show your calculations.

c)
Interpret the DiD estimate. What does it suggest about the effect of ethnic diversity
on agricultural productivity?