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Name [Print]________Answer Key __________________ TEST VERSION D2J1L 1 [28 Pts] 1. True/False and short answer questions. For the true/false questions, indicate whether each statement is true or false and support your answer with a brief explanation or a graph as appropriate. Do not answer “maybe” or “it depends” to the true/false questions. If part of a statement is false, the whole thing is false . [Each statement is worth 6 points]. a. In a two person household, Chris and Dennis specialize completely between household production and market work (that is, only one of them works in the home and only one works in the market). True or False: If Dennis makes a higher wage than Chris, then Dennis will work in the market while Chris stays home. Explain. False. Spouses’ incentives to work in the market or in the household depend on the productivities of each person in the market relative to their productivity in the household. The above statement only compares the absolute productivity levels. For example, if a woman could earn \$20 per hour in the market and could also produce \$20 per hour at home, then each dollar earned in the market would cost the household a dollar of lost home productive. If her husband could earn \$10 per hour in the market and only \$5 per hour at home, then each dollar he earned in the market would cost only 50 cents of home production. In this situation the husband has a greater incentive to work in the market than does the wife, while the wife has a greater incentive to work at home b. True or false: The elasticity of labor supply will be negative if the income effect dominates the substitution effect. Explain your answer. True. The elasticity of labor supply is defined as the percent change in labor supply divided by the percent change in the wage. So, a negative elasticity means that if wages go up, labor supply goes down. If wages go up the substitution effect leads workers to work more, while the income effect leads workers to work less. If the elasticity is negative, then it must be the case that the income effect dominates the substitution effect. c. Writing in the late 18 th century, Thomas Malthus predicted that increased income will lead families to have more children. In fact, the 20 th century saw American incomes rise and family sizes fall. In less than five sentences, explain why the number of kids American families had fell while incomes rose. DO NOT include a graph. Wages rose during the 20 th Century, particularly for women. As Malthus hypothesized, an increase in income would lead parents to desire more children. But rising women’s wages also increases the cost of having children, since women are more likely than men to take time out of the labor market to have and raise children. The cost of this time out of the labor market is the wage a woman would have earned. The rising cost of children generates both an income and substitution effect that lead parents to desire less children. [Another reason the “price” of

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