Final Learning Celebration – Labor Economics

December 10, 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.)  [2 points each] Give a brief definition of the terms below. 


Efficiency wage


Structural unemployment


Lorenz curve


Union shop


Pattern bargaining


Comparable worth


2.) [2] True, False, or Uncertain and explain why:


Diminishing marginal productivity of labor begins when the total product curve reaches a peak and then declines.






If the labor demand curve is inelastic, lowering the wage rate will result in a decrease in the firm’s wage bill.






Since skilled workers are paid a higher wage than the less skilled, the firm has an incentive to lay off the skilled workers first during a recession.






Whether or not a college student receives good grades is a useful screening device for employers.







3.) [4 points] What is the difference between final-offer arbitration and night-time baseball arbitration?




What problem that could occur in conventional arbitration is thwarted by each of these techniques?



4.) [3 points] What are three benefits of union membership according to the text?







5.)  [4] What negative result came from a secondary strike in the Hormel documentary?




6.) [4]  Greko chooses to work 90 hours per week when the wage rate is $16 per hour.  If she is offered time-and-a-half ($24 per hour) for “overtime work” (that is, hours in excess of 90 per week), will she choose to work longer hours?  ________  Support your results with a diagram.









7.)  [4] If the prevailing market wage for low-skilled workers is $7.00 per hour and a minimum wage law is passed dictating a $6.00 per hour, what will be the effect of the law on employment and the prevailing wage rate?





8.)  [4]  Economists have long debated the determination of value, saying that goods are worth what it costs to make them, what service they provide, and so on.  It is a paradox that water is essential but very cheap, while diamonds are inessential but expensive.  The determination of wages poses a similar mystery.  For example, why do forest rangers and teachers receive such low salaries while saving lives and educating the next generation while Michael Jordan gets tens of millions for playing games.  List the determinants of wages that could help to explain this labor paradox.



9.) [4]  Suppose the graphs above illustrate labor supply and demand curves for two similar industries.  Men and women are equally skilled and can work in either industry.  They also exist in equal numbers.


a)      If industry A makes a decision to discriminate and drives all the women out.  Industry B makes no such change.  Use the graph to illustrate the initial effect on the lines and wages in both industries.


b)      Suppose that industry A has found a way to get away with their discriminatory practices on legal grounds and persists.  Will the situation you illustrated in part a continue?  If not, what will happen in the long run?





10.) [4]  What two decision rules can be used to determine whether an investment in human capital is advisable?     






The market interest rate is .06.  Tuition at Centre College is $14,200 (not including room and board costs that apply whether you’re working or studying).  The average economics major makes $32,000 per year after graduating.  Suppose that the alternative is working minimum wage jobs and earning $10,500 per year.  Suppose also that you pay full tuition and you happen to believe a doomsday rock will destroy the earth after 5 years.  Assuming that all of the values remain constant in real terms, set up (but don’t solve) the equation you would use to apply one of the two decision rules described above to this situation. 





11.)  [4] Name two theories of distributive justice and briefly state their distributive “rule.”






12.)  [4] What are the most commonly cited reasons for the alleged shrinking of the middle class?




            Does empirical evidence on the distribution of income support the argument that the middle class is shrinking in relative size?



13.)  [4] A recent headline read, “Worker morale declines despite plentiful jobs, rising income.”  How does this fit with the findings of your own labor force survey?  How can we use this information to inform our management philosophies?  That is, what are workers looking for and how can we best satisfy them and stockholders at the same time?












14.)  [4] What factors (other than the wage rate) affect the amount of labor a firm that operates in a perfectly competitive labor market will hire?  (What determines the firm’s demand for labor?)


   i)                                                                               ii)


How will a change in each of these factors affect the firm’s demand curve for labor?


   i)                                                                               ii)


15.)  [4] Please answer the following with words and a graph.

What is a monopsony?



What distinguishes a monopsony from a competitive employer of inputs?


What does this difference imply for the relative levels of employment and wages under monopsony versus competition?


   employment _______________


   input prices  _______________


16.)  [4] Briefly one argument for and against broadening the official definition of unemployment to include discouraged workers.


a. (For)


b. (Against)



17.)  [4] Roughly what is the poverty level for a family of four?


How was this level established?





Circle the one best answer to the following questions [3 points each]:

18.)  According to empirical research on poverty as described in the text, trickle down economics

            a)  doesn’t work.

            b)  has worked especially well since the 1980’s (when R. Reagan was elected).

            c)  worked well until the 1980’s, when many more children became impoverished.

            d)  always worked and always will.

            e)  is an excuse to promote policies favoring the rich.


19.)  Among the  beliefs of the neoclassical school of economic thought are all of the following except

            a) bounded rationality.

            b) utility maximization.

            c) cognitive ability.

            d) deductive reasoning.

            e) none of the above.


20.)  Which of the following does not characterize female labor supply?

            a) significantly lower wages

            b) additional hours of work are less likely to come from leisure activities than for men

            c) backward bending labor supply curve

            d) labor supply elasticity of 0.9

            e) none of the above


21.)  A colleague recently told me that money is not her goal; what she wants is more free time.  I told her there is no difference—time is money.  With money, she can buy restaurant meals, professional lawn care, laundromat pressing of her shirts, child care, etc.  Whose labor market model explains such a substitution of market goods for time in household production as wages increase?

            a) Elliot Liebow

            b) Alec Baldwin

            c) Kris Kringel

            d) Milton Friedman

            e) Gary Becker


22.)  Which of the following is not necessary in order for a person to be considered unemployed?

            a) able to work

            b) member of workforce

            c) looking for work

            d) out of work

            e) none of the above


23.)  Which of the following is not an element that plaintiffs in a disparate treatment case must prove?

            a) plaintiff belongs to a minority

            b) plaintiff applied and is qualified for the job

            c) plaintiff has succeeded in similar jobs in the past

            d) plaintiff was rejected for the position

            e) after rejection, the job remained open and the employer continued to seek applicants


24.)  According to McCall, workers search for a new job until

            a) compensating wage differentials exceed pecuniary benefits.

            b) marginal benefit equals marginal cost of search.

            c) an employer agrees to pay their reservation wage.

            d) the fat lady sings.

            e) none of the above.