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Unformatted text preview: Sample Questions for Exam 1 1. Assuming that consumption and leisure are normal goods, then hours worked will fall when the wage increases if: a)The income effect dominates the substitution effect. b)The substitution effect dominates the income effect. c)If the income and substitution effect move in the same direction (i.e., if they are of the same sign). d)If the income and substitution effect move in the opposite direction (i.e., if they are of the opposite sign). 2) Mary’s preferences for consumption ( C ) and leisure ( L ) are captured by the utility function: U ( C,L ) = ( C- 200)( L- 56). If she has 168 hours to devote to work or leisure each week and she receives $240 from a pension each week, what is Mary’s reservation wage? a) 1 . 428 b) 0 . 357 c) 2 . 80 d) 0 . 750 3) Cash transfers to the non-working poor fail to encourage work because: a)The hourly wage will continue to be less than the reservation wage. b)An increase in non-labor income encourages more leisure (and less work) according to the income effect assuming that leisure is a normal good....
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This note was uploaded on 01/19/2012 for the course ECON 320 taught by Professor Shin during the Fall '08 term at University of Michigan.
- Fall '08