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AnswerKey1 - ° 51 "ts 1% 3'1: ‘13:. 532. ‘13 71-1...

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Unformatted text preview: ° 51 "ts 1% 3'1: ‘13:. 532. ‘13 71-1 81.0 “In. [0 n. I|8 ‘1‘! I5 ° Economics 27 ProfeSSOI Patricia M. Anderson EXAM 1 April 19, 2006 There are two parts to this exam. Part I is made up of 13 multiple choice problems, and is worth 52 points. Part II is made up of 8 short answer problems, and is worth 48 points. There are 7 total pages. Be sure to read each question carefully before answering. Do not use any books or notes. You have 65 minutes to complete the full 100 point exam. Be sure to budget your time. Good Luck! NAME: i“. 2 PART I - MULTIPLE CHOICE PROBLEMS Read each of the following questions carefully and circle the letter of the one best answer. There are 13 questions in this section, each of which is worth 4 points. 1. If the price of a product decreases due to a decrease in demand, then N/ a) the firm moves to the left along the labor demand curve. b) the firm moves to the right along the labor demand curve. @the labor demand curve shifts to the left.- the labor demand curve shifts to the right. 2. A binding minimum wage imposed in a perfectly competitive labor market can: a) increase both wages and employment. . @ncrease wages but lower employment. c) have no effect on wages or employment. (1) lead to any of the above outcomes __.. 3. A subsidy to pay for a portion of child care costs will cause labor force participation rates to: a) definitely remain unchanged b) definitely change, but in an ambiguous direction. [9 most likely increase d) most likely decrease 4. Hiring costs for highly skilled workers are likely to be greater than hiring costs for very low- skill workers. As a result, we would expect that @high-skill workers would have more variable employment over a business cycle 7’ low-skill workers Would have more variable employment over a business cycle ./ c high skill workers would be more likely to be fired when demand decreased x d) low-skill workers would be less likely to be hired when demand increased i it 5. Consider two firms operating in the same lab0r market for janitors. They are identical, except that Finn A sells its output competitively, and Firm B is a monopolist. We can predict that compared to Firm A, the monopolist will pay its janitors a a lower wage E @the same wage 0) higher wage (1). either a higher wage or a lower wage — we cannot be certain 6. Based on the Hicks-Marshall Laws of Derived Demand, labor demand will be less elastic a) when workers are making a product that uses a less capital intensive technologyx 6? when workers are making a product that uses technology with a fixed labor-capital ratio. when workers are making a product that uses a capital input with more elastic supply d) when workers are making a product with more elastic demand ‘ 7. Which of the following is true when the profit-maximizing quantity of labor is employed in the short run and the firm is competitive in both the labor and product markets? a Marginal revenue product is below the value of marginal product @% Marginal revenue product equal the marginal cost of labor. c Wage is greater than the marginal cost of labor (1) Wage is less than the value of marginal product 8. and 9. both use the following information. A regression estimates that Q = 50 — 0.1 *X, where Q is the quit rate (i.e. if 20% of employees quit, then Q=20), and X is the number of employees at the firm. The t-statistics on the slope and the intercept are both greater than two, and the sample firm sizes range from 20 to 200. 8. Based on this regression, we would conclude that a) the intercept is significantly different from zero / b) the slope is significantly different from zero I c) it would be unwise to use’this' regressiou to predict the effect of the number of employees on the quit rate for very large firms, say those with thousands of employees. 11 of the above 9. These estimates imply that doubling the number of employees from 50 to 100 will a) increase the quit rate by 5 percentage points. @decrease the quit rate by 5 percentage points. 0 increase the quit rate by 50 percentage points. d) decrease the quit rate by 10 percentage points. 10. If a firm hires to a point where the marginal cost of labor is greater than the marginal revenue product of labor, then: a) total cost must be greater than total revenue. In ck 7 m 5.?” b) profits could be increased by increasing employment. @rofits could be increased by lowering employment. - profits are maximized. 0mg MK 11. If two inputs are technological substitutes (but not perfect substitutes) and an increase in the price of one input shifts the demand curve for the other input to the left, then: @ the scale effect is greater than the substitution effect and the two are gross complements. b) the scale effect is less than the substitution effect and the two are gross complements. x c) the scale effect is greater than the substitution effect and the two are gross substitutes. e d) the scale effect is less than the substitution effect and the two are gross substitutes. 12. A minimum wage imposed in a monopsony market can: a) increase both wages and employment.’ b) increase wages but lower employment. ’ c have no effect on wages or employment.’ @ possibly lead to any of the above outcomes. 13. In “The Past and Future of Welfare Reform,” Douglas J. Besharov documents that over the past 10 years or so welfare receipt has and attributes this change mainly to a) increased dramatically; expansion of the EITC increased dramatically; the switch from AFDC to TANF 3" decreased dramatically; expansion of the EITC / decreased dramatically; the switch from AFDC to TANF PART II - SHORT ANSWER QUESTIONS Read each of the following questions carefully and answer each in the space provided. Diagrams should be clearly labeled, and explanations should be clear and concise. There are 8 questions in this section, each of which is worth 6p0ints. 1. Consider three firms that are identical in all ways except one. Firm A does not provide any of its workers with health insurance, Firm B provides all of its workers with health insurance, and Firm C only provides its full-time workers with health insurance. Assuming that health insurance is a quasi-fixed cost, how will the fraction of workers that are full time in Firm A compare with the fraction that are full-time in Firm B? How will the fraction that are part time in Finn A compare with the fraction that are part-time in Firm C? Briefly explain your answers. '3 Aw 61+ FT; k < FT; s (mm a. “a wan ru‘ guilt-F “mtg” pd kghhkwpmaaa Jay» Cgfia'p MM.ka wu’u... fi, gal. it.an FT PTLA.‘ ll-{MQ' lam wwk‘h‘éflfl “Aka I I «and; 15r-uivbvp'vCI‘Is sl lwul. if" Questions. 2 and 3 both use the graph below. $1 a \ $17 « --'A- $16 --—-——--Am- $13 _----IEr—— $13 —fi-———'A-—- $12 --E--V‘--- $11 ——-m_r'A-——_ mg I-E-hfi-EII 3 $8 -—_—m—m-—— g; IIIA-I-hg- g3 .HA-I-Iluh $3 -rza-—----—— gr vfl-I-IIIII $0 m--------_ 0 1 2 4 5 6 7 8 9 10 Worker Hours (10005) 2. Focus on the bold supply and demand lines, ignoring the dashed line. What is the equilibrium wage in this market? How many thousands of worker hours are hired? Now suppose that a payroll tax of $3 per worker hour is imposed. Now how many thousands of worker hours are hired? Including the payroll tax and the wage, how much do the firms pay per worker hour? Briefly explain how you obtained your answers. I With 5K. “HM "fK Mime m; ” “3*? M my D; ‘3 {Mimml trh’z +50. may as to~yl’ 4m (7m) ’5 mafia lem’u «Jo u—er/Q 3. Now suppose the graph is not for a perfectly competitive labor market, but for a monopsony. ‘ ' There is no payroll tax in this market. How many thousands of worker hours are hired? At what ., hourly wage? What is the marginal revenue product of the last worker hour? In "Financial ‘ Restraint in the Free Agent Labor Market-for Major League'Baseball: Players Look at Strike ' Three," did Thomas H. Bruggink and David R. Rose, Jr. find a similar relationship between wages and marginal revenue product in the years baseball owners were accused of colluding? Briefly explain how you obtained your answers. Lé'iKm: *1 I'm: '12 .' '12s. p3 teal-WW“? Fi/vtx QWSL Pl» MKPth/VLCL l— Sdl‘ “mil nglJW 5”? OM Questions 4_ and 5 both use the graph below. The budget line is applicable for a 40-year—old that expects to live until age 90 who must decide when to retire. You can assume that discounting is already built into the problems. Thus, the budget line implies that this individual can expect to make $50,000 in real terms every year that he continues working. 7 .. 3,33 3-m------- a 2,5, nmm------ a 2,0, §qgg----- 1; .75, -§mfil---- 3 .50, --aum---- a 1,5, ---&‘__L\!l.l-- g 10,, ----m-l\3u-- 5 750 -----§§\‘-- : 5,, ------a-- ,5, -------a! o ------a P‘ -o ’5 -- '10 ‘15 20 ‘2‘5 30 35 4o 45 50 9' 65 8“ Ye‘diis offietirgrhen fleeissqrse) 5' '15 ‘1' #645 M ten W 4. Suppose that the following pension program is put in place. Pension payments are not available to anyone retiring before age 60, but retiring at 60 brings a pension worth $25 thousand per year, every year, until death at age 90. For each year that retirement is postponed, the annual pension is increased in an actuarin fair manner, until age 75. That is, it is increased just enough to make up for the lost year of pension receipt. Thus, for example, retiring at age 65 brings a pension worth $30 thousand per-year and retiring at age 75 brings a pension worth $50 thousand per year. Postponing retirement past age 75 brings a pension that is frozen at $50 thousand per year. Add a new budget line to the graph that reflects the pension availability just described. Briefly explain how you came up with your graph. 2 sun 50 '3 “I S k town-rt in midi Ms l-‘thT, 10k. Hf '-' 75K Sn. no " 50K Sit-1‘ 5 " a“ 5. Suppose that without the pension program, individual A chooses to retire at age 50, individual B chooses to retire at age 65 and individual C chooses to retire at age 80. Sketch in, and clearly label an indifference Curve for each individual that woiild be Consistent ‘with each having maximized utility at the chosen retirement age. Assuming that leisure is a normal good, can we predict that with the pension program, a) any of these individuals will might retire later? If so, which one(s) and why? b) any of these individuals will definitely retire earlier? If so, which one(s) and why? In your answer, be sure to make proper reference to income and substitution effects where applicable. mm Ami“ ml»: My fink toll.be £0 (mum/3 l7) 3% will claim] rth-t thy. B A“, PM W, t/M’miy Mm: Qua—i, C, Am smmzc/ g/M {I sat a) [mm dad/w (ML :3 um (um a rth} {aw/u} 5 Questions 6, 7, and 8 all use the following information. Suppose that full-time jobs (i.e.working over 40 hours) pay $20 per hour and part-time jobs (i.e. working less than 40 hours) pay $10 per hour. The solid line below reflects this situation, assuming $400 in unearned income and 80 hours available for leisure or market work per week. 6. Suppose that when facing this budget line, individual A chooses to work 50 hours per week, and individual B chooses to work 30 hours per week. Sketch in,“ and clearly label, an indifference curve for each individual that would be consistent With'eaCh having maximized utility at the chosen number of hours. Now suppose that part-time workers have formed a lobbying group, Parents Are Really Ticked — Time Is More Essential (PART-TIME), that argues families are being harmed by the two-tier wang system. That is, if a parent chooses to spend more time with the children, they have to take a pay cut. PART-TIME succeeds in getting a new program implemented under which the'government provides part-time workers with a $10 per hour subsidy, so that everyone earns $20 per hour no matter how many hours are worked. However, in order to fund this new program, the government must raise taxes. This tax increase is equivalent to a $400 per week-lump sum tax on every individual (whether they work or not!). Add a new budget line to the graph that reflects the new program and tax increase. Briefly explain how you obtained your new budget line. 5hr. .h '11 J [Jr ‘1‘“ “in [mm a All Other Goods 0 51015202530354045505560657075 Bo 167v ‘39- a; s. Eeipurgxhua-u 1; lo_5 0 work. 7. Consider Individual A. Making proper reference to the role of income and substitution effects, and assuming that leisure is a normal good, discuss whether this individual would be predicted to work more hours or fewer hours now that the new program and tax increase are in place. Repeat the analysis for Individual B. ,4» Work: "we [Mt (11c p/ 45$ I'M: ,éfiféqwg 7) ka 8. Assuming the population is equally divided between people like Individual A and people like Individual B, does it appear that PART-TIME has sucoeeded in encouraging people to spend more time away from work and hence with their children? What if there had been no tax increase? Then could we be certain that overall individuals would work less? Briefly explain your reasoning, making proper reference to income and substittition effects where appropriate. “03 "Belicia/[>6 0M Uoflljvw—L Nu). tin/i” 75% More“) 72” f) MEX/ My]; Q55} xflfiéfl 5W 7) work mM. Mw 1% u mw’mo Jo m [Ufa/t 2’ W44” ch75‘ié fall/S M/WWAfcx/l H II 5w! Mac 5 WM m S; nix/bf Vuan-«M. ‘2. ...
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This note was uploaded on 04/30/2008 for the course ECON 27 taught by Professor Anderson during the Spring '08 term at Dartmouth.

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AnswerKey1 - ° 51 "ts 1% 3'1: ‘13:. 532. ‘13 71-1...

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