Labor Economics

J. Ragan Name:______________________

Exam 1

October 5, 1999 Student No.:_________________

Part I (6 points each)

Directions: Answer any 4 of the following 5 questions. Place a large X below the question you do not want graded.

1. Define discouraged workers. What is the discouraged-worker hypothesis?

2. In the context of labor union, explain threat effects and spillover effects. How does each affect wages?

3. Explain the intertemporal substitution hypothesis.

4. Provide two reasons why regional wage differentials might narrow over time and two reasons why regional wage equality likely will never be realized.

Part II (16 points each)

Directions: answer both of the following questions.

1. Madison receives $8 per hour at her job and $250 per week from investment income. She has 50 hours per week available for work or leisure.

1. Draw Madison=s budget constraint.

2. Madison maximizes utility by working 28 hours per week. Draw an indifference curve to illustrate her utility maximization.

3. Given utility maximization, what is her marginal rate of substitution?

4. Assume that Madison=s wage doubles. Draw and label her new budget constraint.

5. Assuming that the income effect is stronger than the substitution effect, draw an indifference curve to illustrate the new equilibrium.

6. Show the income effect on your diagram.

2. Classic Oak receives $200 for each and every table it sells. The following production function depicts the relationship between workers employed and number of tables produced:

Employees Tables/week

0 0

1 3

2 9

3 14

4 18

5 21

6 23

1. What is the value of marginal product of the second worker? Show your work.

2. How many workers should Classic Oak hire when the wage is $970 per week. (Assume profit maximization.) Show your work.

3. How many workers should Classic Oak hire if the wage falls to $810. Again, show your work.

4. What is the highest wage the company would be willing to pay to hire five employees?

5. Now assume that the price of tables rises to $300. What is the value of marginal product for the second worker. Indicate how you obtained this answer.

Part III ( 3 points each)

Directions: Read each question carefully and then select the single best answer. Fill in the corresponding column on the computer card.

1. Over the past half dozen years, the U.S. unemployment rate:

1. has generally trended lower.

2. has generally increased.

3. has shown no tendency to rise or fall.

4. first declined but has been rising in recent months.

2. If the cross-elasticity of factor demand is positive:

1. the two inputs are substitutes.

2. the two inputs are complements.

3. the labor demand curve is upward sloping.

4. the isoquant is upward sloping.

3. All of a payroll tax tends to be passed on to consumers when the elasticity of labor supply is:

1. zero.

2. infinite.

3. one.

4. two.

4. Unions tend to:

1. narrow the dispersion of wages within a company.

2. lead to higher wages but lower fringe benefits.

3. lead to a more efficient allocation of labor in the economy.

4. raise wages for white workers but not for African Americans.

5. Available evidence suggests that, in general, capital is a substitute for:

1. skilled labor.

2. unskilled labor.

3. both skilled and unskilled labor.

4. neither skilled nor unskilled labor.

6. Over time, labor force participation has generally increased for:

1. male workers only.

2. female workers only.

3. both male and female workers.

4. neither male nor female workers.

7. As explained by Marshall=s rules of derived demand, labor demand is more elastic when:

1. the elasticity of substitution is low.

2. the elasticity of product demand is low.

3. labor=s share of production costs is high.

4. the supply elasticity of other inputs is low.

8. Which of the following corresponds to the economist=s concept of Aderived demand@?

1. a student wanting to take Labor Economics because it was offered at a time that did not conflict with his/her other courses or with soap operas

2. consumers= demand for goods

3. a firm=s demand for labor

4. a worker=s demand for paid time off from work

9. A town whose (working-age) population is 1,000 has 50 people unemployed. If the town=s unemployment rate is 10%, what is the labor force participation rate?

1. 50%

2. 40%

3. 45%

4. 90%

10. Suppose a worker=s distaste for work intensified. This would cause:

1. the budget constraint to become steeper.

2. the budget constraint to become flatter.

3. the indifference curve to become steeper.

4. the indifference curve to become flatter.

11. The percentage of the U.S. workforce belonging to unions has:

1. increased throughout this century.

2. decreased throughout the century.

3. decreased over the past four decades but increased earlier this century.

4. increased for workers in the private sector while declining for government workers.

12. Assume that a perfectly competitive product market becomes monopolized (e.g., if the largest firm buys out the other companies). If the firm buys its labor in competitive markets, what is the predicted consequence of its monopolizing the product market?

1. Employment in the industry falls.

2. The wage falls.

3. Both of the above occur.

4. None of the above occurs.

13. According to economic theory, which of the following may occur following an increase in the minimum wage?

1. Poverty may rise or fall.

2. In monopsonistic markets, employment may increase or decrease.

3. The wage paid in the uncovered sector (where workers are exempt form minimum wage legislation) may rise or fall.

4. Each of the above is possible.

14. Assume that capital is measured on the vertical axis and employment on the horizontal axis. If w is the price of labor, r the price of capital, and c is the expenditure on inputs, what is the slope of the isocost line?

1. -w/r

2. -r/w

3. -c/r

4. -c/w

15. Based on the Social Security earnings test, a worker 67 years of age has an earnings exemption of $16,500 and faces an implicit tax rate of 33.3 percent. If the worker would receive $12,000 per year in the absence of working, how much can the worker earn in wage income before Social Security benefits are eliminated for the year?

1. $35,000

2. $49,500

3. $52,500

4. $85,500