EC 350 EXAM QUESTIONS AND ANSWERS
Many individual labor curves are backward-bending, but the market labor supply curve
has a positive slope everywhere. Why is this? - Answer -*this can be explained by the
income and substitution effects.
As the wage rate rises, the labor supply curve for a typical person first is positively
sloped as the substitution effect swamps the income effect; eventually the curve
becomes negatively sloped (turns backward) as the income effect of further wage rate
hikes exceeds the substitution effect.
Income effect - Answer -refers to changes in the desired hours of work resulting from a
change in income, holding the wage rate constant.
if we make a reasonable assumption that leisure is a normal good-a good of which more
is consumed as income rises-then we can expect that a part of one's expanded income
might be used to "purchase" leisure.
when wage rates rise, and leisure is a normal good, the income effect reduces the
desired number of hours of work.
substitution effect - Answer -indicates the change in the desired hours of work resulting
from a change in the wage rate, keeping income constant.
the substitution effect merely tells us that when wage rates rise and leisure becomes
more expensive, it is sensible to substitute work for leisure.
For a wage increase, the substitution effect makes the person want to work more hours.
Elasticity of Labor - Answer -(%change in quantity of labor supplied)/(%change in the
wage rate)
Gross substitutes - Answer -If labor and capital are gross substitutes, the decline in the
price of capital will decrease the demand for labor.
Gross substitutes are inputs such that when the price of one changes, the demand for
the other changes in the same direction.
Gross compliments - Answer -If labor and capital are gross complements, a decline in
the price of capital will increase the demand for labor. Gross complements are inputs
such that when the price of one changes, the demand for the other changes in the
opposite direction.
Three uses of time within a household: - Answer -Labor market participation
, Household production
Consumption time
Commodities can be either: - Answer -Goods-intensive: requiring lots of purchased
goods
Time-intensive: requiring lots of time
Indicate in each of the following instances whether the specified circumstances will
cause a worker to want to work more or fewer hours: (1 point each)
(a) The wage rate increases and the substitution effect is greater than the income
effect.
More hours
(b) The wage rate decreases and the income effect is greater than the substitution
effect.
More hours
(c) The wage rate decreases and the substitution effect is greater than the income
effect.
Fewer Hours
(d) The wage rate increases and the income effect is greater than the substitution
effect.
Fewer Hours - Answer -
In 2011, the United States had a total population of 311 million. 71 million were under
16 or institutionalized, and 154 million were employed or actively unemployed. What
is the labor force participation rate? (3 points) - Answer -Potential Labor Force = Total
population - Underaged and Institutionalized Population
Labor Force Participation Rate = Actual Labor Force / Potential Labor Force
Potential Labor Force = 311 million − 71 million = 240 million
LFPR = 154 million
240 million = .6417 = 64.2%
Use the Becker Household model (talking about uses of time and comparative
advantages)
to discuss how each of these societal changes affected the changing labor force
participation rates of women in the past 60 years. (2 points each) - Answer -(a)
Reduced birth rates and availability of birth control
As women have fewer children, there is less demand of their time for child-rearing,
and they have (or are perceived to have) less of a comparative advantage in
childrearing.
Therefore, they can spend less time on household production (which includes
childcare) and more on working.
2(b) Increasing wages and availability of jobs for women
As women have access to higher-paying jobs, and jobs that women previously held
increased in wages, men no longer have as much of a competitive advantage in
earning wages, so women enter the workforce at rates closer to men. Also, with
increased wages, households can substitute toward good-intensive commodities, and
Many individual labor curves are backward-bending, but the market labor supply curve
has a positive slope everywhere. Why is this? - Answer -*this can be explained by the
income and substitution effects.
As the wage rate rises, the labor supply curve for a typical person first is positively
sloped as the substitution effect swamps the income effect; eventually the curve
becomes negatively sloped (turns backward) as the income effect of further wage rate
hikes exceeds the substitution effect.
Income effect - Answer -refers to changes in the desired hours of work resulting from a
change in income, holding the wage rate constant.
if we make a reasonable assumption that leisure is a normal good-a good of which more
is consumed as income rises-then we can expect that a part of one's expanded income
might be used to "purchase" leisure.
when wage rates rise, and leisure is a normal good, the income effect reduces the
desired number of hours of work.
substitution effect - Answer -indicates the change in the desired hours of work resulting
from a change in the wage rate, keeping income constant.
the substitution effect merely tells us that when wage rates rise and leisure becomes
more expensive, it is sensible to substitute work for leisure.
For a wage increase, the substitution effect makes the person want to work more hours.
Elasticity of Labor - Answer -(%change in quantity of labor supplied)/(%change in the
wage rate)
Gross substitutes - Answer -If labor and capital are gross substitutes, the decline in the
price of capital will decrease the demand for labor.
Gross substitutes are inputs such that when the price of one changes, the demand for
the other changes in the same direction.
Gross compliments - Answer -If labor and capital are gross complements, a decline in
the price of capital will increase the demand for labor. Gross complements are inputs
such that when the price of one changes, the demand for the other changes in the
opposite direction.
Three uses of time within a household: - Answer -Labor market participation
, Household production
Consumption time
Commodities can be either: - Answer -Goods-intensive: requiring lots of purchased
goods
Time-intensive: requiring lots of time
Indicate in each of the following instances whether the specified circumstances will
cause a worker to want to work more or fewer hours: (1 point each)
(a) The wage rate increases and the substitution effect is greater than the income
effect.
More hours
(b) The wage rate decreases and the income effect is greater than the substitution
effect.
More hours
(c) The wage rate decreases and the substitution effect is greater than the income
effect.
Fewer Hours
(d) The wage rate increases and the income effect is greater than the substitution
effect.
Fewer Hours - Answer -
In 2011, the United States had a total population of 311 million. 71 million were under
16 or institutionalized, and 154 million were employed or actively unemployed. What
is the labor force participation rate? (3 points) - Answer -Potential Labor Force = Total
population - Underaged and Institutionalized Population
Labor Force Participation Rate = Actual Labor Force / Potential Labor Force
Potential Labor Force = 311 million − 71 million = 240 million
LFPR = 154 million
240 million = .6417 = 64.2%
Use the Becker Household model (talking about uses of time and comparative
advantages)
to discuss how each of these societal changes affected the changing labor force
participation rates of women in the past 60 years. (2 points each) - Answer -(a)
Reduced birth rates and availability of birth control
As women have fewer children, there is less demand of their time for child-rearing,
and they have (or are perceived to have) less of a comparative advantage in
childrearing.
Therefore, they can spend less time on household production (which includes
childcare) and more on working.
2(b) Increasing wages and availability of jobs for women
As women have access to higher-paying jobs, and jobs that women previously held
increased in wages, men no longer have as much of a competitive advantage in
earning wages, so women enter the workforce at rates closer to men. Also, with
increased wages, households can substitute toward good-intensive commodities, and
