Midterm Learning Celebration – Labor Economics

September 24, 1998


Please show your work clearly in the space provided.  Difficult-to-read  writing or graphs will be marked incorrect.  Be sure to label all lines and axes on your graphs.  If you use the back of a page, indicate that you have done so on the front of the page.  May your efforts be truthfully revealed.


1.)  [3 points each] Give a brief definition of the terms below. 


bounded rationality


compensating wage differentials


labor force


discouraged worker



2.) [12 points] Practice this graph on the back of the page.  When you have it the way you want it, draw a wonderfully clear rendition of it below.


a.      Draw a budget constraint and indifference curve for a worker with no non-labor income and a wage of $10/hr. who works 40 hours a week.  Label the axes, and indicate her income and hours of leisure.

b.      Suppose our elected officials begin a policy that provides a guaranteed income of $200 a week, with an implicit tax rate of .50 (50%).  Draw our worker’s new budget constraint on the same graph and indicate the break-even point (the actual dollar amount of income).

c.       Draw the worker’s new indifference curve, and clearly label (along the horizontal axis) the substitution effect and income effect resulting from the new policy.

d.      Is the worker necessarily better off with the new policy?  Why or why not?


















3.) [6 points] If you, as Senator, provided an income tax cut to all workers:


a)      What would you expect to happen to the total quantity of labor hours supplied by men?


b)  What would you expect to happen to the total quantity of labor hours supplied by women?


Circle the one best answer to the following questions [4 points each]:

4.)  Under socialism, wages are set by

            a) the government.

            b) employers.

            c) employees.

            d) trade unions.

            e) none of the above.


5.)  The Neoclassical School makes all of the following arguments except that

            a) it is acceptable to analyze the labor market with the same tools as used on other markets.

            b) the University of Chicago is the leader in churning out wise economic theory.

            c) an individual pursues a goal only until reaching a minimum acceptable or satisfactory level.

            d) deductive reasoning is more general and fruitful than inductive reasoning.

            e) human beings are rational and consistent.


6.)  If Betty’s marginal rate of substitution (MRS) is greater than her wage rate, and she is currently working a positive number of hours in a job that allows her to choose the number of hours she works, she should

            a) work more.

            b) work less.

            c) not change a thing.

            d) not work at all.

            e) none of the above.


7.)  According to empirical data, for the average woman providing labor in the workforce,

            a) the substitution effect dominates the income effect.

            b) the income effect equals the substitution effect.

            c) the income effect dominates the substitution effect.

            d) the substitution effect is zero.

            e) the income effect is zero.


8.)  According to Michael Moore, employers have an ethical responsibility to

            a) maximize profits.

            b) serve their shareholders as well as possible.

            c) supply interest-free loans to their workers.

            d) eliminate the cross-substitution effect.

            e) consider the well being of employees and former employees.


9.) All of the following are criteria for being unemployed except

            a) being out of work.

            b) being willing and able to work.

            c) making a recent effort to find work.

            d) none of the above.


10.)  [6 points]  Paul Krugman says that it is OK to exploit workers in third-world countries, paying them a few cents an hour to work in sweat shops, because they are better off with those “jobs” than with the prior alternatives.  What would you say if you were one of these exploited workers?  (This must include at least one concrete argument against such labor exploitation.)
















11.) [18]Indicate the letter assigned to the range of values that includes the current value of each of the following:


____ Labor Force Participation Rate

a. 0-10%

k.0-10 million

____ Unemployment Rate

b. 10-20%

l. 10-20 million

____ Employment to Population Ratio

c. 20-30%

m. 20-50 million

____ Union Participation Rate

d. 30-40%

n. 50-75 million

____ % of mothers, with children < 1, that work

e. 40-50%

o. 75-100 million

____ Number of employed workers

f. 50-60%

p. 100-125 million

____ Number of people in population

g. 60-70%

q. 125-200 million

____ Number of unemployed workers

h. 70-80%

r. 200-300 million

____ % of working wives making > their husbands

i. 80-90%

s. 300-500 million


j. 90-100%

t. > 500 million


12.) [6] If the bottom line is all you care about in your business, give three reasons why you might invest in good labor relations.






13.)  [6] What is one reason why, other things being equal, the unemployment rate might be biased

            a.  upward?


            b. downward?


14.)  [8] List two reasons why women are working more and men are working less than 50 years ago.

            Women                                                            Men

            a.                                                                     a.

            b.                                                                     b.

15.) [8] Use a labor/leisure model to analyze the impact of child-care costs on the decision of a married woman with children to participate in the labor force.


a.       Assume that the maximum number of hours per week is 100.  First, draw a budget constraint assuming the wage is $6/hour and the woman has $200/wk of nonlabor income. Label all lines, axes, and intercepts.  Draw an indifference curve so that her equilibrium hours of work are 20 per week.

b.      Next, assume that if the woman works, she must pay child-care costs.  These costs are of two kinds.  The first is a lump sum or fixed cost of $50 per week for, say, transportation of the child to a day-care facility.  The second is a variable cost of $2 for each hour the child is at the day-care facility.  Given these two types of costs, draw the new budget constraint for this woman.

c.       Without child-care costs, the woman maximized utility by working 20 hours; with childcare costs, will this woman continue to work or will she drop out of the labor force?  (To determine this, draw an indifference curve so that it has a tangency point with the new budget line.) 

Is this level of utility higher, lower, or the same as if she did not work at all?