Exam #1

Question 1

Which of the following is a statement associated with normative economic reasoning?

a. It is important that everyone who wants to attend college be able to do so.
b. Holding all else constant, workers in more dangerous occupations earn more than those employed under safer conditions.
c. Welfare programs can lead to reductions in work incentives.
d. Subsidies given to firms that purchase new capital equipment will lead to an increase in employment.

Answer 1

A

Question 2

The labor force consists of:

a. All individuals aged 16 or older who are employed or unemployed.
b. All individuals aged 16 or older who are employed or looking for work.
c. All individuals aged 16 or older who are employed or waiting to be recalled from layoff.
d. All of the above.

Answer 2

C

Question 3

In the next question, consider a law that would mandate full health insurance coverage for all employees. Assume that currently most, but not all, full-time employees have health insurance coverage, but that few part-time employees are covered. Holding output and capital constant, how would firms adjust the employment/hours mix of part-time workers? (Let M represent number of part-time workers, and H represent the average workweek of part-time workers.)

a. H would increase and M would decrease.
b. M would increase and H would decrease.
c. M and H would both decrease.
d. There would be no change in M or H.

Answer 3

A

Question 4

If the wage paid to automobile workers goes up by 3.5 percent and the quantity of workers demanded goes down by 5.25%, the own-wage elasticity of demand for these workers is

a. -.67
b. -1.5
c. -1.75
d. -5.25

Answer 4

B

Question 5

If there was a decrease in overtime premium, what is the scale effect of the proposal?

Answer 5

The proposal makes labor cheaper, thus more employment due to the scale effect.

Question 6

If there was a decrease in overtime premium, the substitution effect of the proposal (will firms be tempted to substitute labor for capital, capital for labor, or neither)?

Answer 6

The proposal makes labor cheaper relative to capital, implying substitution of labor for capital

Question 7

If there was a decrease in overtime premium, the effect of the proposal on the profit maximizing amount of overtime offered?

Answer 7

The proposal reduces the cost of overtime, so we would expect to see more use of overtime
(and fewer employees).

Question 8

If there was a decrease in overtime premium, would you expect the effect of this proposal to be greater in the long run or in the short run? Why?

Answer 8

In the long run, labor is substituted for capital, so that should increase the number of jobs. Thus, in the long run there will be either a smaller decrease or a larger increase in the number of jobs

Question 9

Is the following statement true, false, or uncertain. Explain your answer.

In the case of monopsony, a higher minimum wage can raise the monopsonist’s profits.

Answer 9

FALSE.

In the absence of the minimum wage, by definition the monopsonist maximizes profits at marginal cost equals marginal revenue product. The wage associated with that solution is the wage associated with the highest possible profit. A minimum wage – by forcing the firm to adopt a different wage – must result in lower profit.

Question 10

What happens when the supply curve is perfectly elastic (horizontal), what would be the effect on the wage rate?

Answer 10

When supply is completely elastic, there will be no change in the wage rate

Question 11

What happens when the supply curve is perfectly inelastic (vertical), what would be the effect on the wage rate?

Answer 11

When the supply is completely inelastic, the wage rate will go up by 50 cents

Question 12

General training

Answer 12

If the training is purely general, then the training is of

equal value in all firms.

Question 13

If the training is purely specific training, who will receive the larger wage after the training

Answer 13

If the training is purely specific training, the firm will want to hold onto the employee in order to reap profits (VMP > Wage).

Question 14

a. If the demand for unskilled labor is elastic (i.e., greater than one in the long-run) at the current value of the minimum wage, will raising the minimum wage, holding all else constant, increase or decrease the total income flowing to those workers receiving the minimum wage? Explain your reasoning.

Answer 14

When demand is elastic, small percentage increases in the wage cause larger
percentage reductions in the quantity of labor demanded. With the quantity of labor
demanded falling faster than the wage is increasing, total income falls as the wage
increases

Question 15

Total Income

Answer 15

Total Income = Quantity of labor x wage

Question 16

When demand is elastic, how does an increase in wage effect the quantity of labor demanded?

Answer 16

When demand is elastic, small percentage increases in the wage cause larger percentage reductions in the quantity of labor demanded

Question 17

Which of the following is not a quasi-fixed cost?

a. The hourly wage the firm pays.
b. Costs associated with a defined benefit pension.
c. Costs associated with a defined contribution pension.
d. Employer contributions to Social Security.

Answer 17

B

Question 18

A union bargaining for wage increases will be in a stronger position if the demand
for labor is inelastic since increases in the wage will not bring about significant reductions in
employment and the total income received by members will rise. According to the Hicks Marshall
laws, which factor will be a contributor to union success?
a. Elastic product demand.
b. The production process is very labor intensive.
c. Supply of capital is very elastic.
d. Labor and capital are used in fixed proportions.

Answer 18

C

Question 19

Suppose the price of capital falls. If the scale effect associated with the price
change dominates the substitution effect
a. The quantity of labor demanded will increase.
b. The quantity of labor demanded will decrease.
c. Labor and capital can be called gross substitutes.
d. Both b and c

Answer 19

A

Question 20

Unions often try to bring all workers in an industry into a union. They prefer to
avoid organizing a few scattered firms. Explain this using the concept of elasticity

Answer 20

Unions would rather organize in situations where labor demand curves are inelastic. That way, they can
raise wages without losing members.

Question 21

If the government requires a monopsonist to pay a payroll tax (for example, a tax of $10 per worker), then at least some of that tax will be shifted onto workers in the form of lower wages.

a. Is this statement true, false, or uncertain. Explain your answer.

Answer 21

A monopsonist faces an upward sloping supply curve of labor. A tax like that in the question will
cause the monopsonists MRP curve to shift down – it gets less revenue per unit of labor. As a result the
new equilibrium will involve both a lower number of people working and a lower wage.

Question 22

Pareto efficient transactions may not occur because

a. Parties may not have all the relevant information.
b. They may be against the law.
c. The cost associated with completing the transaction may deter one or more of the
parties.
d. All of the above.

Answer 22

D

Question 23

If the cross-wage elasticity between adult and teenage labor is negative

a. Adults and teens are gross complements.
b. Adults and teens are gross substitutes.
c. The substitution effect associated with a rise in the price of teenage labor will
dominate the scale effect.
d. Both b and c.

Answer 23

A

Question 24

Firms want the workers to pay some of the initial cost of specific training because

a. The firm will recover more of its investment in the workers.
b. The post- training wage will be farther above the workers’ marginal product in other
firms.
c. Workers will be less likely to quit the firm.
d. Both b and c

Answer 24

D

Question 25

Is the following statement true, false, or uncertain. Explain your reasoning.
The usual analysis of monopsony assumes that employers can not pay each worker his or
her reservation wage. If a monopsonist could pay each worker his or her reservation
wage, then the monopsonist would employ more workers.

Answer 25

True. If a firm can perfectly discriminate, then the firm will pay the marginal cost of
the worker, i.e. his/her reservation wage, as his/her wage. If the firm cannot perfectly
discriminate, then the wage paid to workers diverges from their reservation wage and the firm ends up hiring fewer workers.

Question 26

Suppose Congress passes a law requiring that one-half of all US exports be
shipped in ships built in U.S. ship-building facilities.

What effect would this have on the own-wage elasticity of demand for ship-building
labor in the U.S?

Answer 26

This law makes the demand for the U.S. ship more inelastic since it enforces
that one-half of all U.S. exports be shipped in U.S. ships. This makes the output of U.S.
ship-building companies more inelastic, leading to more inelastic demand for labor

Question 27

Immigration laws now require employers to determine whether newly hired workers are legally residing in the country.

Assuming for simplicity that output and capital are constant, what effect does this law have on the employment/hours mix used by firms?

Answer 27

The cost of checking new hires for legal residency (and the fines levied if a
violation is detected) would represent an increase in hiring costs, and hence an increase in quasi-fixed costs. This raises MEM and will lead the firm to substitute a longer workweek for more workers

Question 28

Immigration laws now require employers to determine whether newly hired workers are legally residing in the country.

How would the analysis be different if output were not constant?

Answer 28

Therefore, whether the workweek actually increases depends on whether the substitution effect dominates the scale effect (whether hours and employment are gross substitutes).