Name _____________________________
Midterm Exam (225 Points)
ECONOMICS OF LABOR MARKETS AND POLICIES
ECON 353
University of Wisconsin Whitewater
College of Business and Economics
SPRING 2007
Be sure to label all of your graphs as completely as possible.
Use your time wisely; some of the very tough questions are only worth a few points, so if
you are having trouble with a problem skip and come back to it after you have answered
all of the questions you can answer quickly.
If you have any questions do not hesitate to come up and ask me.
I. FILL IN THE BLANKS (you may write all over this page but please put your
answers in the blanks on the next page)
AGGREGATE LABOR MARKET (for the next 5 problems we are talking about the
aggregate labor market):
1. What happens if someone invents a new productivity technique? (8 points)
2. What happens if all computers are outlawed in the economy? (8 points)
3. What happens if workers become lazier? (8 points)
4. What happens if President B. W. Gush makes everyone take a pill that makes them
less smart? (8 points)
5. What happens if someone invents a robot duster? (8 points)
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Aggregate Labor Demand (ALD), Aggregate Labor Supply (ALS), Wage (W), Quantity
of Labor (L)
1. ALD________ ALS________
W________ L________
2. ALD________ ALS________
W________ L________
3. ALD________ ALS________
W________ L________
4. ALD________ ALS________
W________ L________
5. ALD________ ALS________
W________ L________
6. Suppose someone is at a point where the slope of their indifference curve is $8 and
the wage they receive is $10. How much happier/sadder would they be if they
worked 1 more hour?
_________ ______________
7. Suppose someone is at a point where the slope of their indifference curve is $8 and
the wage they receive is $10. How much happier/sadder would they be if they
worked 1 less hour?
_________ ______________
8. The elasticity of labor demand is estimated to be about -0.3.
A. Interpret.
_________________________________________________
B. If wage decreases by 20% what would you expect to happen to labor demand?
_________________________________________________
9. Why do people usually go to college when they are young and not when they are old?
[Just list 2 reasons]
_____________________________________________________________
_____________________________________________________________
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II. SHORT ANSWER
10. What does the absolute value of the slope of the budget constraint tell us? [1
sentence]
11. What does the absolute value of the slope of the indifference curve tell us? [1
sentence]
12. What does a marginal product of labor per hour of 25 mean? [1 sentence]
13. Why will a lower interest rate stimulate investment in education? (hint: you should
use the phrase present value in your explanation) [1 sentence]
Makes returns way off in the future worth more in present value terms and education’s
returns are usually far off in the future.
14. Graph 3 indifference curves of a “Workaholic” and 3 indifference curves for a
“leisure lover”. Do not put these on the same graph. [Label the one with the highest
utility IC3 and the one with the lowest utility IC1]
15. Graph a budget constraint for someone who makes $10 an hour.
16. There is the typical income maintenance program that we discussed in class (i.e. S=b-tY).
This program entails a $3000 basic benefit and a benefit reduction rate of 0.30.
A. What will be the subsidy received by a family that earns $2000 per year?
B. What will be the family’s total income?
C. What break-even level of income does this program imply?
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III. GRAPHS AND EXPLANATIONS
17. Suppose we are examining the wage and number of employees working as carpenters who
make cabinets. Assume the demand for cabinets is fairly elastic.
(Be sure to explain why you are shifting the curves you shift and explain the important
outcomes in words)
Graph both the labor market and the relevant product market and explain outcomes in both.
(Note: you should have two graphs for each part of the question below)
A. What happens if the wage of carpenters who make tables increases?
B. What happens if all people in the country start to value leisure more?
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c. What happens if a new tool is invented that makes making cabinets a lot easier?
18. Suppose we are examining the wage and number of employees working as bike builders.
Assume the demand for bikes is fairly inelastic.
(Be sure to explain why you are shifting the curves you shift and explain the important
outcomes in words)
Graph both the labor market and the relevant product market and explain outcomes in both.
What happens if a new tool is invented that makes building bikes a lot easier?
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19. Use indifference curves to show an individual’s leisure-income choices before and after a
wage increase. Be sure to show on your graph and explain in words the income and
substitution effects. Also be sure to show whether each increases or decreases hours of work.
A. What part of the individual labor supply curve does your result show?
Forward rising or
Backward-bending
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20. A Firm’s problem
The Price a firm gets for selling its product is $2.
For simplicity assume away all other costs of the firm.
The MPL=10 (per hour)
The firms must compete with other firms for labor.
A. First assume this firm operates in a country where there are no labor laws. How much
will this firm pay per hour?
B. Suppose a government organization called OSHA is created that tells firms that they must
install safety equipment. This safety equipment does two things. It decreases the MPL to
8 (per hour) and it costs the firm $0.50 for every hour the worker is working. How much
will this firm pay per hour?
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21. Draw a well labeled diagram (with as much detail as possible) of someone who works 50
hours a week and makes $10 per hour. Label the initial budget constraint and indifference
curve BC0 and IC0 and the initial equilibrium A. [Note: for this problem you should have
one graph, you will lose points for having more than one graph (draw this graph big it will
have lots of things on it)]
A. How much income does this person make per week?
B. Situation 1: Now add a lump-sum tax (that is, a tax that is the same absolute amount at all
levels of earned income) of $120 per week. Label the new budget constraint BC1.
i. What is the slope of this new budget constraint?
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ii. Draw this person’s new indifference curve and equilibrium point, label them IC1 and B.
Hours of work will increase (suppose they now work 60 hours a week). Use income and/or
substitution effects to explain why we know that hours worked will increase (you do not
need to graph the income and/or substitution effects).
iii. Is this person happier or less happy than without the tax? Why? (how can you tell?)
C. Situation 2: Now get rid of the lump-sum tax and add a proportional tax of .2 (for
every dollar someone makes they have to pay $0.20 in tax). Note that this Budget
constraint goes through point B. Label this BC2.
i. Will this person work more or less with the proportional tax than with the lumpsum tax? Explain your reasoning using MRS (and what it stands for) and the slope
of the budget constraint.
ii. Is this person happier or less happy than with the lump-sum tax? Why? (how can
you tell?)
This was not on the Exam, but would be an interesting question.
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