NOTE: This test was set for a 50-minute timeslot. You can expect a longer midterm than this because you will be writing in a longer time slot.
University of North Carolina, Economics 190, Fall
Midterm
Exam 1, September
27, 2002
Each
of these questions has only one right answer.
Please circle the letter for the appropriate answer, or otherwise clearly
indicate your choice.
With
some questions it may help to draw a diagram for yourself.
1. The statement “a large benefit reduction rate reduces work incentives” is
a) a contrapositive statement.
b) a negative statement.
c) a normative statement.
d) a positive statement.
2. If 210 million people are in the working-age population, and the labor force participation rate is 67%, then
a) 140.7 million people are outside the labor force.
b) 140.7 million people are employed or are looking for work.
c) 140.7 million people are employed.
d) 3.2 million people are looking for work.
3. Abby and Jed are two people who are currently working the same (positive) number of hours. At the current choice, Abby has a steeper indifference curve than Jed. We can conclude that
a) both are earning the same hourly wage.
b) Abby is earning a higher hourly wage than Jed.
c) Jed is earning a higher hourly wage than Abby.
d) Jed has a higher reservation wage than Abby.
4. If Jack’s wage increases and he decides he would like to work fewer hours, then we know
a) his income effect is greater than his substitution effect.
b) his substitution effect is greater than his income effect.
c) his income and substitution effects are equal.
d) his income and substitution effects work in the same direction.
5. A wage
increase from below Joe’s reservation wage to above Joe’s reservation
wage will have
a) income and substitution effects that work in the same direction.
b) income and substitution effects that work in opposite directions.
c) only an income effect.
d) only a substitution effect.
6. Women’s labor supply responds more positively to wage changes because
a) working men behave fundamentally differently from working women.
b) women’s participation rates respond more strongly to wage changes.
c) men and women work in different jobs.
d) women have lower reservation wages.
7. The participation rate for men
a) is relatively constant over their working life.
b) increases throughout their working life.
c) decreases throughout their working life.
d) initially increases and then decreases over their working life.
8. Empirically, the labor force participation rate
a) and the unemployment rate are negatively correlated.
b) and the unemployment rate are positively correlated.
c) is independent of the unemployment rate.
d) is simply 1 minus the unemployment rate.
9. In our retirement model, a wage increase would make retirement
a) no more and no less attractive than before.
b) longer because income and substitution effects work in the same direction.
c) shorter because income and substitution effects work in the same direction.
d) longer or shorter because income and substitution effects work in opposite directions.
10. Suppose the wage rate is $12. In a small firm in this industry, the 20th worker-hour hired added 4 units to total output. The 21st worker hour added 3 units to total output. The firm’s output sells at a unit price of $3. We can conclude that
a) the firm would hire fewer than 20 worker-hours.
b) the firm would hire exactly 20 worker-hours.
a) the firm would hire exactly 21 worker-hours.
b) the firm would hire more than 21 worker-hours.
11. An industry’s demand for labor is
a) exactly as elastic as a firm’s demand for labor.
b) exactly as elastic as the industry’s supply of labor.
c) more elastic than a firm’s demand for labor.
d) less elastic than a firm’s demand for labor.
12. Other things equal, if demand for the industry’s output becomes more elastic, then
a) the elasticity of labor demand will become positive.
b) the elasticity of labor demand will turn to zero.
c) The demand for labor becomes more elastic.
d) The demand for labor becomes less elastic.
13. If the price of pizza ovens increases and, soon after, the demand for pizza bakers decreases, then we would conclude that
a) ovens and pizza bakers are substitutes in production.
b) ovens and pizza bakers are complements in production.
c) ovens and pizza bakers are inferior inputs.
d) pizza bakers are male.
14. Our simple supply and demand model predicts that an increase in the minimum wage leads to
a) fewer people looking for work.
b) a decrease in the quantity of labor demanded.
c) people leaving the labor force.
d) an increase in employment.
Part
B: “Problems” (32 points= 53% of test grade) Please answer all
questions.
1.) [11points] Assume for simplicity that everybody pays the same tax rate (the same fraction of their income is paid in taxes). Now suppose this tax rate is cut for all, from, say, t=0.4 to t=0.3.
a)
What would happen to an individual’s choice of hours of
work? Can we make a clear prediction?
b)
Illustrate your answer to (a) graphically.
c)
What would happen to the participation rate? Can we make a clear prediction?
2.) [10 points] Recall our model of retirement choice.
a) Depict the model graphically, and describe what the graph shows.
b) What will happen to the optimal choice when pension benefits are increased for all? Can we make a clear prediction?
c) Show what change would occur in your graph.
3.) [11 points] Consider a firm where output is produced with only two inputs- labor and capital- with input prices w and r, respectively. Initially the firm faces market prices w=9 and r=6. These input prices then increase to w=10 and r=8.
a) In which direction will the scale effect change the firm’s employment and capital stock? Explain.
b)
In which direction will the substitution effect change the
firm’s employment and capital stock?
Explain.
c) Can we say conclusively whether the firm will use more or less labor? Can we say conclusively whether the firm will use more or less capital?