Sample Exam 1 Questions for Econ 371

1. The income effect is:
a) the combination of leisure and wage rate that maximizes one's income.
b) that part of the total change in desired hours of work that is due to the change in real income resulting from a change in the wage rate.
c) that part of the total change in desired hours of work that is due to a change in the wage rate, with real income or utility held constant.
d) always dominated by the substitution effect.

2. Which of the following would unambiguously predict a decrease in desired hours of work?
a) the substitution effect of a wage decrease.
b) the income effect of a wage increase.
c) a wage increase.
d) the substitution effect of a decline in income tax rates.

3. Which of the following circumstances will increase the likelihood of an individual being a non-participant in the labor market?
a) high earnings capacity in the labor market.
b) the absence of non-wage income.
c) a potential market wage that exceeds the individual's reservation wage.
d) availability of substantial non-wage income.

Questions 4 and 5 refer to the diagram below. Worker A's indifference curves are Ia and B's are Ib.

4. Assuming workers must work TS hours of work or not at all, worker A will:
a) not participate in the labor force.
b) be at an optimum at TS hours of work.
c) work the standard work week but will feel overemployed.
d) work the standard work week but will feel underemployed.

5. Assuming workers must work TS hours of work or not at all, worker B will:
a) not participate in the labor force.
b) be at an optimum at TS hours of work.
c) work the standard work week but will feel overemployed.
d) work the standard work week but will feel underemployed.

6. Compared to workers with less education, people who have more education tend to earn higher wages and have higher pensions upon retirement. Given this observation, which of the following statements best explains why those persons with more education also retire at a later age?
a) If tastes for leisure are the same, the effects of the higher pension must outweigh the effects of the higher wage.
b) If tastes for leisure are the same, the effects of the higher wage must outweigh the effects of the higher pensions.
c) Since higher wages and pensions both suggest a lower retirement age, those with more education must value leisure less.
d) Regardless of the tasts for leisure, the higher wages and pensions would both suggest a higher retirement age.

7. According to Becker's model of time allocation, compared to a high-wage worker, a low-wage worker will tend to:
a) pursue more goods-intensive activities.
b) pursue more time-intensive activities.
c) pursue fewer time-intensive activities.
d) sacrifice time-intensive activities in favor of goods-intensive activities.

8. In a particular family, both spouse A and spouse B could earn $15 per hour in market work. However, spouse A has a comparative advantage in the production of home-produced goods. Becker's model of time allocation predicts that:
a) spouse B will be better able to substitute time for goods in the production of commodities.
b) spouse A and spouse B will divide market work and home production equally.
c) spouse A will tend to specialize in market work; spouse B in home production.
d) spouse A will tend to specialize in home production; spouse B in market work.

9. The aggregate labor force participation rate in the US is currently about:
a) one-fourth
b) one-half
c) two-thirds
d) three-fourths

10. Which of the following is not a plausible explanation of the observed change in the participation rate of males age 65 and older since World War II?
a) the increasing practice of granting pension benefits at earlier ages.
b) cutbacks in Social Security benefits.
c) the long-term growth of average real incomes and wealth.
d) the increased generosity of the disability component of Social Security.

11. According to the textbook, each of the following factors may have contributed to increased female labor force participation except:
a) rising divorce rates.
b) expanding job accessibility.
c) fewer educational opportunities.
d) a desire to maintain househould living standards.

12. Which of the following will tend to increase the likelihood of participation in the labor force for a current non-participant?
a) a decrease in the spouse's wage.
b) an increase in the spouse's wage.
c) an increase in family size.
d) falling productivity in househould production of commodities.

13. Because of the ______, the unemployment rate as measured by the Bureau of Labor Statistics tends to understate the extent of unemployment during a recession.
a) labor force participation rate
b) added-worker effect
c) decline in the average work week.
d) discouraged-worker effect

14. "For married women, the substitution effect of rising wage rates has apparently outweighed the income effect." This statement is:
a) not true. The LFPR of women has been increasing, whereas the statement suggests it should have been falling.
b) not true. The LFPR of women has been decreasing, whereas the statement suggests it should have been rising.
c) true. For women who formerly were not labor market participants, the income effect has been zero, while the substitution effect has caused them to increase labor force participation.
d) true. The LFPR of married women has decreased because their husband's wage rates have increased.

15. In the US since 1945, the labor force participation rate(s) of:
a) women has increased, while that of older men has fallen.
b) women has decreased, while that of older men has risen.
c) women and older men have both increased.
d) women and older men have both decreased.

16. Suppose a welfare system provides a household with a maximum benefit of $400 per month and that the benefit payment is reduced by $2 for every
$3 the household earns. What is the breakeven level of earnings (the level of earnings at which the subsidy equals zero)?
a) $400
b) $600
c) $800
d) $1200
e) I haven't the foggiest idea.

17. The largest single cost of attending college for most students is:
a) foregone earnings.
b) tuition.
c) room and board.
d) books and other expenses.
e) stress from Dr. D's exams.

18. Human capital theory predicts that the proportion of people attending college will increase if:
a) contributions to private colleges lose their tax- deductible status, resulting in a decline in donations.
b) the age at which retirement benefits are received is raised to 70.
c) guaranteed student loan funds are cut from the federal budget.
d) the earnings of college graduates are reduced because of a large influx of highly-educated "baby boom" workers into the work force.

19. Suppose we know the following: In 1970, the average male high school dropout earned $7600 per year; the average male high school graduate earned $9200 per year; and the average male college graduate earned $14,400 per year. We may conclude that:
a) education and earnings are unrelated.
b) a college education is clearly a good investment.
c) education and earnings rise together, but both may result from the effects of yet a third factor.
d) education clearly increased productivity, therefore increasing earnings.

20. If we treat education as an investment, which of the following would cause enrollment rates in education to decrease?
a) a decrease in the discount rate used by people to evaluate educational investments.
b) a decrease in the earnings differential which accrue to people with more education.
c) a decrease in the costs of education.
d) a decrease in the average age of people considering entering education programs.

21. The private rate of return on human capital may _____ the social rate of return because ______.
a) understate; schooling is subsidized.
b) understate; schooling provides external benefits.
c) overstate; schooling provides external benefits.
d) overstate; schooling and ability are positively correlated.

22. General training:
a) will be paid for by the employee in the form of reduced wages.
b) raises the trainee's value only to the firm that is providing the training.
c) helps to make labor a quasi-fixed resource.
d) reduces the worker's value to the firm, because the worker's wage rate would have to rise.

23. Mary's employer is considering her for a training program that will cost $3 per hour. Her current marginal revenue product is $15 per hour and will rise to $20 upon completion of the program. If this is firm-specific training, Mary's training and post-training wage, respectively, will most likely be:
a) $15; $20
b) $15; $17
c) $12; $15
d) $12; $20


Analytical Questions

24. "An increase in the wage rate will cause a person to work fewer hours." True, false, or uncertain. Explain using a labor leisure diagram.

25. Use the labor-leisure diagram to show an individual's choices before and after a wage decrease. Isolate the income and substitution effects, indicate whether each increases or decreases hours of work, and use the two effects to explain the overall impact of the wage decline on hours of work. Is your worker on the forward-rising or backward-bending portion of the labor supply curve?

26. What set of circumstances will tend to cause an individual to choose not to participate in the labor force? What generalizations can you formulate on the basis of (a) education, (b) the presence of preschool children, (c) level of spouse's income, (d) race, (e) location of a household (rural or urban) on the one hand and the probability that a married woman will be a labor force participant on the other?

27. Identify three factors that account for the increase in the participation rates of married women? Use a work-leisure diagram to explain how each of these factors individually might alter either the indifference curves or the budget line of women and make labor force participation more likely.

28. "Human capital theory predicts that women who plan to interrupt their work careers should have a steeper age/earnings profile than women who plan to be continuous workers." True, false, or uncertain. Explain without using any diagrams.

29. "According to one estimate, in 1984 the average college graduate could expect to make $500,000 more over her or his lifetime than the average highschool graduate. From a strictly monetary point of view, this implies that college is a good investment." True, false, or uncertain? Explain.

30. Suppose that the current welfare program involves a basic income guarantee of $200 per week coupled with a benefit reduction rate of t = 0.50. Suppose further that the going wage rate is $8 per hour.
a) Graph the budget constraint for an individual assuming no welfare program exists. Suppose this person works 40 hours a week. Draw the relevant indifference curve to illustrate this situation. (Assume that there are only 100 hours of time available for work and leisure during a week; after all, we all have to eat and sleep some time.)
b) Graph the budget constraint created by the welfare program. What is the break-even level of income for program participants?
c) Will the individual in part (a) participate in such a program? That is, what will happen to this person's labor supply? Illustrate the likely outcome graphically and explain your analysis.

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