University of North Carolina, Economics 190, Spring

Quiz 1, January 28, 2003

Page 1 (Multiple Choice)

1. Labor economists generally assume that firms maximize … profits.

2. If 210 million people are in the working-age population, and the labor force participation rate is 67%, then … 140.7 million people are employed or are looking for work.

3. If Jack gets a raise and then decides he would like to work more hours, then we know … his substitution effect is greater than his income effect.

4. A wage increase from below Jill’s reservation wage to above Jill’s reservation wage will have … only a substitution effect.

5. 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 … Abby is earning a higher hourly wage than Jed.

6. For men, labor supply … is fairly inelastic, with a labor supply elasticity close to 0.

Page 2 (Short Answers)

7. We usually assume that indifference curves are convex to the origin. [Put differently, we assume a diminishing “marginal rate of substitution” (MRS)]. What does that mean? That is, what is the interpretation of this assumption in terms of a person’s preferences?

As you get more of X, you are less willing to sacrifice Y to get even more X.

8. Suppose I have T hours of time per week available for work and leisure. My non-labor income is $V per week, and if I work I can earn $w per hour.

Draw the budget line, and carefully label it. What is the intercept? What is the slope?

Intercept: V+wT

Slope: -w

9. Now suppose I pay $t in taxes for every $1 earned (t is a fraction, like 0.2). Draw this budget line. How does this differ from the previous graph? Label the intercept and slope.

Here the budget line is flatter than in the previous question. The intercept is lower and the slope is “smaller” (in absolute value)

Intercept: V+wT(1-t)

Slope: -w(1-t)

10. Assume V increases. (a)Will I work more hours?

Assuming leisure is a normal good, I will work fewer hours.

(b) Will I be better off?

Yes. I can reach a higher indifference curve, regardless of whether I work more, less or the same.