Econ 305
Sample Exam 2 Questions: Due Monday at 1:00 under my office door. If you need to mail or fax
them to me, then e-mail me for the address/fax number. Note: This is just a guide and is not all
inclusive.
1. a. What is a quasi-fixed cost? How do such costs affect hiring policies in relation to increased or
decreased overtime pay and mandated health care payments. What would be the likely effect of such
legislation.
b. Use the labor/leisure model to analyze the effect on hours of work of a law requiring employers to pay
time and a half for hours worked over 40 hours per week. Assume that an individual has 128 hours a
week in which to work or leisure. First draw a budget constraint for someone earning $8 per hour who
receives $100 a week in nonlabor income. What now happens to the budget constraint with the time and
a half requriment?
c. Given your answer to (b), draw an indifference curve so that on the original budget constraint the
person is working 40 hours per week. What now happens to hours of work given the new budget
constraint? (Assume the substitution effect is greater than the income effect). Draw an indifference curve
to show this. Have hours of work increased or decreased as a result of the law? Why?
d. In words, define the income and substitution effects. Then, on a separate graph illustrate graphically
the movements due to the substitution and income effects for the new overtime law.
2. a. Suppose that in the state of North Dakota, Susie is eligible for up to $500 a month in TANF
payments. She can earn $100 a month before any earnings are taxed, but earnings in excess of this amount
are taxed at a rate of 66%. What is her break even point if the wage rate she is eligible for is $8 an hour?
How many leisure hours is she consuming at her break even point if she has 512 hours a month to leisure
or work?
b. Graph Susie’s budget constraint, labeling the break even point and other breaks in the curve as well as
slopes of each line. Draw Susie’s indifference curves such that she chooses to work 10 hours a week.
c. In your graph from part b, what would be the effect of a decrease in the tax rate to 50%? Show the
income and substitution effects of such a change.
d. How would your answer for part c have differed if instead Susie were instead working close to the
break even point.
e. Think through how you would answer the above question if the tax rate were increased, guarantee
were changed, or wage offer was changed.
You should be able to think through and explain these different relationships.
3. Given that hours of work have fallen throughout the 20th century, what can we say about the income
effect verses the substitution effect and the demand for leisure throughout the 20th century. (Hint: what
has happened to real wages?)
4. a. Why might a married woman with children have a higher reservation wage than a single woman
with no children? Which will have steeper indifference curves on a labor/household time graph? How can
a reservation wage be seen graphically.
b. What factors can explain the rising labor force participation rates for married women over the 20th
century?
1
5. The household model discussed in class suggests that the division of labor in the traditional 1950’s
family where the husband engages in market work and the wife engages in home work is the result of
rational decision making based on considerations of comparative advantage. Critics of this theory argue
that the division of labor between the sexes ahs little to do with the innate productivities of men and
women in market versus home work, but rests on the forces of tradition and male dominance in the
family. Briefly discuss the arguments for and against each point of view.
6. Which effect: the added worker effect or the discouraged worker effect is likely most important on
unemployment rates during recessions? How do these effects differ?
7. a. how does a monopsonist differ from an employer in a perfectly competitive market
b. draw a typical graph for a monopsony and label the wage paid, MRP, and quantity of workers hired.
How do each of these differ from that in a perfectly competitive labor market that is otherwise identical.
c. In your graph from part b, show what happens if a minimum wage (below the intersection of ME and
MRP) is applied to this market. Does the wage paid and quantity hired increase or
decrease?
d. how would your answer in part c be different if instead you drew a minimum wage above the
intersection of ME and MRP.
e. A monopsony can hire one worker at a wage of $10, two workers at a wage of $11 each, three workers
at $12 each, and so on (each added worker adding one dollar to the wage rate). If the marginal revenue
product for all workers is $20, what wage will it pay? Why?
8. How does general training differ from specific training? Who typically bears most of the costs of
training and reaps most of the returns?
9. Why does a typical labor supply curve bend backward?
10. What are the pros and cons of mandating Family and Medical Leave. What are the arguments for and
against mandating that such leaves be paid.
11. Brad’s hourly wage is $72 and the marginal value of his time in the household
sector is $30 per hour. Angelina’s hourly wage is $60 and the marginal value of
her time in the household sector is $24 per hour. Who will specialize in the
household sector and who will specialize in the market sector?
Some multiple choice practice:
1.
A quasi-fixed cost of labor is a cost that
(a)
is expected to change over time.
(b)
is proportional to the number of hours worked.
(c)
is proportional to the number of workers hired.
(d)
is proportional to the amount of capital used.
2.
(a)
(b)
(c)
(d)
Which of the following is NOT a quasi-fixed cost of labor?
unemployment insurance
health insurance
overtime pay
vacation pay
2
3.
An increase in quasi-fixed costs would probably lead to a(n) ________ in the number of
employees hired and a(n) _________ in the number of overtime hours worked.
(a)
increase; decrease
(b)
increase; increase
(c)
decrease; decrease
(d)
decrease; increase
4.
(a)
(b)
(c)
(d)
A mandated increase in overtime pay is likely to
cause employers to reduce overtime hours and convert them into added employment.
directly reduce the quasi-fixed costs per worker.
lead to a reduction in employment if higher costs cause a large scale effect.
lead to a reduction in emp. if those who work overtime & those who are unemp. are perfect subs.
5.
(a)
(b)
(c)
(d)
If income is held constant and the wage rate increases, the desired hours of work will
increase.
decrease.
stay the same.
change ambiguously.
6.
A wage increase creates a substitution effect which leads the worker to desire ________ leisure,
and an income effect which leads the worker to desire ________ leisure.
(a)
more; less
(b)
less; more
(c)
less; less
(d)
more; more
7.
A person who receives time-and-a-half overtime for working more than 8 hours per day will have
a ________ which is ________ beyond 8 hours of labor.
(a)
budget constraint; flatter
(b)
indifference curve; flatter
(c)
budget constraint; steeper
(d)
indifference curve; steeper
8.
(a)
(b)
(c)
(d)
If a firm pays for specific training to its workers, when the training is over,
workers will most likely be paid a wage that is equal to their marginal product.
workers will most likely be paid a wage that is greater than their marginal product, to compensate
workers will most likely be paid a wage that is less than their marginal product.
workers will most likely be paid a wage that is less than their wage before training
9.
When a firm hires a fourth worker, its wage rate goes from $80 a worker to $90. The marginal
revenue product of the fourth worker is $100. If the firm hires the fourth worker, its profits:
(a)
will increase by $10.
(b)
will increase by $20.
(c)
will decrease by $10.
(d)
will decrease by $20.
10.
Initially, when a firm hires a fourth worker, its wage rate goes from $80 a worker to $90. The
marginal revenue product of the fourth worker is $100. Then the government imposes a minimum wage
of $90 a worker. If the firm now hires the fourth worker, its profits will:
(a)
will increase by $10.
(b)
will increase by $20.
(c)
will decrease by $10.
(d)
will decrease by $20.
3
11.
The marginal product of a new worker is 80 units and the marginal expense of a new
worker is $800. The marginal product of hiring current workers another hour is 10 units and the
marginal expense of hiring current workers another hour is $12. If the firm needs extra hours of
work (assuming the work could be done by either the new or current workers), it should:
12.
13.
14.
15.
16.
(a) hire new workers.
(b) hire current workers more hours.
(c) be indifferent between hiring new workers or hiring current workers more hours.
(d) not hire anyone for the added hours of work.
If a worker’s desired hours of labor do not change after a decrease in his wage rate, then
(a) his income effect dominates his substitution effect.
(b) his substitution effect dominates his income effect.
(c) his income and substitution effects are of equal magnitude.
(d) his income and substitution effects are small in absolute value.
If a family’s budget constraint shifts because of an increase in non-labor income, then a member of the family
who works outside of the home will
(a) choose to decrease his or her hours of work.
(b) choose to increase his or her hours of work.
(c) not change his or her hours of work.
(d) either increase or decrease his or her hours of work, depending on the size of the substitution effect.
Because married women have traditionally been the primary household producers in most families, they
would be expected to have a ________ substitution effect than men in response to the same wage increase.
(a) larger positive
(b) larger negative
(c) smaller positive
(d) smaller negative
If the husband and wife are substitutes in the production of household goods, then a decrease in the husband’s
labor supply will tend to
(a) decrease the wife’s labor supply.
(b) increase the wife’s labor supply.
(c) cause no change in the wife’s labor supply.
(d) either increase or decrease the wife’s labor supply.
An increase in the cost of daycare would effectively
(a) increase the value of non-household work.
(b) increase the value of leisure.
(c) increase the value of household production.
(d) increase the utility of a family with young children.
4