Sample Midterm Exam #1
Name______________________________
Student Number_V00____________________
Economics 370
University of Victoria - Fall 2016
CRN: 11021
Prof. H.J. Schuetze
The midterm exam consists of ten multiple-choice questions and two short-answer style
questions. Answer Section 1 questions on the bubble form. Answer Section 2 in the space
provided. There will be a total of 60 marks for the exam. Each of the multiple-choice
questions is worth 3 marks. Short-answer questions account for the remaining 30 marks.
Be sure to answer each of the questions in full, carefully labelling all graphs that may be
used in answering.
-- You will be given 50 minutes -Good Luck!!
1
SECTION I: MULTIPLE CHOICE
Answer on bubble sheet. Each question is worth 3 marks.
1. The empirical literature on labour supply patterns for married women has tended to
find all of the following except:
a)
b)
c)
d)
e)
Participation for married women peaks in the 35-44 age group
Women with children have lower rates of labour force participation
The higher the education level, the higher the labour force participation rate
The higher the husband’s income, the higher the labour force participation rate for
most income levels
All of the above are true.
2. Which of the following statements is false?
a)
b)
c)
d)
e)
In periods of high unemployment, discouraged workers tend withdraw from the
labour force.
In periods of low unemployment, discouraged workers tend to re-enter the labour
force
In periods of high unemployment, added workers (particularly married women)
tend to enter the labour force
Discouraged workers contribute to the phenomenon of hidden unemployment.
All of the above statements are true.
3. The slope of the indifference at the lower left-hand corner of the income/leisure
diagram, where no hours are supplied to the labour market, is equal to:
a)
b)
c)
d)
e)
The going market wage
The reservation wage
The level of non-market income
The slope of the budget constraint
Indeterminate
4. Why does the budget line slope downwards and to the right?
a)
b)
c)
d)
e)
Because the worker has to work in order to earn income.
Because the level of non-market income determines the intercept of the budget
line.
Because leisure is a normal good
Because the worker has a time endowment, and can only work for so many hours
per time period.
Because both income and leisure are valued by the worker
5. In the neo-classical model of labour supply, which of the following is always true?
a)
If leisure is a normal good, a wage increase causes an increase in hours worked.
2
b)
c)
d)
e)
If leisure is a normal good, a wage increase causes a decrease in hours worked.
The income effect and the substitution effect work in the same direction
The substitution effect causes the worker to work more hours if wages increase
None of the above statements are always true.
6. The curvature of the indifference curve reflects: (from intermediate micro theory)
a)
b)
c)
d)
e)
Constant returns to scale
Diminishing rate of marginal substitution
A trade-off between income and leisure
A substitution effect that dominates the income effect
None of the above
7. Why are budget constraints modelled as either one or a series of linear functions (line
segments)? (from intermediate micro theory)
a)
b)
c)
d)
e)
The rate of return to working is assumed to be constant
Workers prefer higher wages to lower wages
Non-market income shifts the income constraint upward
The marginal rate of substitution is constant
None of the above
8. An increase in non-market income will have which of the following effects? (P. 40)
a)
b)
c)
d)
e)
An upward shift in the income constraint
A downward shift in the income constraint
A clockwise rotation in the income constraint, making it steeper
A counter-clockwise rotation in the income constraint, making it flatter
A kink is created in the income constraint
9. What of the following best describes a demogrant? (P. 79)
a)
b)
c)
d)
e)
A grant to develop of demo tape
A demographic welfare program
A grant whose amount varies with the worker’s wage
Lump-sum transfer
None of the above
10. Another term for a guaranteed annual income is: (P. 83)
a)
b)
c)
d)
e)
A minimum income policy
A negative income tax
A child tax benefit
Total job security
Social insurance
3
SECTION II: SHORT-ANSWER QUESTIONS
1. [15 marks] Curious George must decide how much to work. He has 60 hours per week
available that he can spend either working or engaged in leisure (which for him is various
kinds of mischief). He can work at a wage of $5 per hour. The Man with the Yellow Hat
(who looks after George) also gives him an allowance of $100 per week, no matter how
much George works. George’s only source of income that he can use for consumption
(mostly bananas) is this allowance plus his wage earnings.
a) In a carefully labeled diagram, draw George’s consumption-leisure budget constraint.
Show an equilibrium where George chooses to work 40 hours per week.
4
b) In an effort to have George pay for other household expenses, The Man in the Yellow
Hat decides to tax George 50 percent of his wage income. Using the same diagram you drew
in part (a) (where George worked 40 hours), show what happens to his labour supply. To do
this, show one possible outcome, and break it down into income and substitution effects.
Explain the diagram below.
c) Instead of the wage tax, the Man with the Yellow Hat could impose a “poll tax”, a
lump-sum tax independent of George’s wage earnings. This tax must raise the same
revenue as the wage tax in part (b), and could be accomplished by reducing George’s
allowance. Draw the budget constraint with the poll tax and the wage tax, and compare
the work incentive effects of the poll tax to the wage tax in part (b). As in part (b),
assume that George was working 40 hours before any taxes were imposed.
5
2. [15 marks] Consider two individuals with endowments of T=60 hours (per week) of
leisure, non-labour income of YN, and facing a wage of $7.50 per hour. At this wage,
assume that workers are constrained by their employers to work 20 hours per week, or not at
all.
a) On a carefully labelled diagram, show the equilibrium for a worker (Abby) for whom 20
hours is the optimum labour supply; and a second worker (Ally) who would like to work 40
hours, but still prefers the 20-hour week to not working. Compare the marginal rates of
substitution for these individuals at 20 hours per week.
6
b) Which of the two workers, Abby or Ally, could be made better off at a job that pays a
lower wage but offers full-time hours? Explain making reference to your diagram above.
End of Exam
7