ECO 405 Fall 2005 Midterm Examination
Instructor: Michael Rizzo October 12, 2005
STUDENT ID: ______
READ THE Instructions
There are three sections on this exam. The first section contains 11 short answer questions and you must answer 10 of 11. The second section contains 5 short essay questions and you must answer 20 out of the 30 possible points. The third section is extra-credit.
There are a total of 50 points on this exam, 30 in part I and 20 in part II. The extra-credit will be worth an additional 3 points.
Please write ALL of your answers on this sheet and please write your Centre ID number on the front of this exam. Write your name in small print on the inside of the last page of this exam, up near the staple. Those that do not follow these instructions will lose 1 point from their scores. You have 120 minutes to complete the exam.
PART I: Short Answer Questions
In this section there are 11 questions, each worth 3 points. Using the concepts that you have been learning in this class, please answer 10 of the 11 questions. To answer these questions, simply state the answer as succinctly as possible. If the question is multiple choice, you may write a MAX of 2 sentences to justify your answer.
1. Suppose a firm employs two types of workers, motivated workers and lazy workers, each varying in productivity (MRPMotivated vs. MRPLazy), their skill sets, their prevailing market wages and the other costs associated with hiring them (MEMotivated vs. MELazy). Assuming the output market is perfectly competitive and that the level of capital is fixed, write down the decision rule a firm must follow if it wishes to maximize profits.
2. If the own wage elasticity of demand for labor |hii| at a company were less than one and a union won a substantial wage increase at that company, would workers as a whole be happy or unhappy about their circumstance?
3. Suppose that Centre professors are very attached to the community in Danville. Further, suppose that all are home owners, have children in the local schools and many are directors of charitable and other social organizations in town. The same is likely true for professors at other liberal arts colleges throughout the U.S. What must be true about Centre’s market for professors and / or how it operates in the education market?
a. The marginal expense of hiring workers is the same as in the perfectly competitive case
b. Equilibrium employment levels at Centre are not market clearing
c. Centre will enjoy market power in the education market
d. Equilibrium levels of output are greater than in the perfectly competitive case, particularly since workers are paid less at Centre
e. None of the above
4. Workers’ lifetime age-earnings profiles are likely to be steepest when:
a. Firms pay for some of the costs of training they provide
b. Firms pay for none of the costs of training they provide
c. Workers acquire no training
d. Firms pay for all of the costs of training they provide
5. Indicate what would happen to the own-wage elasticity of demand for labor in the American steel industry when each of the following programs took place (i.e. would it increase or decrease?):
a. An increased tariff on steel imports
b. A law making it illegal to lay off workers for economic reasons
c. An explorer discovers that America is sitting on an unimaginably large titanium deposit
6. From the perspective of current Centre College seniors, why would you like to see a news headline that reads, “Across Nation, Class of 2006 Smallest in Decades.” Explain briefly.
7. Suppose the government implements an across the board employment subsidy of $S per worker. What can we definitively say about the new equilibrium in the labor market (as compared to initial conditions)? Assume that neither the supply nor the demand curves are perfectly elastic or inelastic.
a. Employment will be higher and firm labor costs will be lower
b. We need to know the legal incidence of the subsidy to answer this
c. Employment will be higher and take home pay will be higher by $S per worker
d. Employment will be indeterminate and take home pay will increase
e. None of the above.
8. Empirical evidence on the employment impacts of minimum wage legislation is mixed at best. Some studies conclude that there are small dis-employment effects, while others claim there are no employment losses (e.g. Card & Krueger study). True, False and Explain. “The results in Card and Krueger prove that increases in the minimum wage do not cause disemployment effects.”
9. Without knowing anything specific about each of the following firms, at which firms might union organizers be most interested in pushing for wage increases?
a. Firms located in extremely large cities.
b. Firms that rely largely on labor to make their products.
c. Firms whose workers are extremely high skilled.
d. Firms whose workers are extremely low skilled.
e. Firms that have the ability to “off-shore” their operations.
10. Suppose you are the owner of Adirondack Furniture Corporation (AFC). AFC employs both people and lathes in the short-run. The price of lathes doubles. Your most likely response will be:
a. Increase the price of chairs.
b. Decrease the price of chairs.
c. Substitute more workers for lathes.
d. Reduce the number of lathes you use, but keep the number of workers unchanged.
e. Both (a) and (c).
11. I don’t like having you study mathematics and economic theory just for the sake of it – I like to think there is a good reason why I do what I do in class. In that spirit, please describe in simple language, what the following expression means. In other words, if you were going to explain to your grandma what the expression is, and perhaps why it is important, what would you tell her?
PART II: Essay Questions
In this section there are 5 essay questions, 4 of which are worth 5 points and 1 of which is worth 10. You must attempt to answer 20 points worth of questions in this section. This can be done by answering all of the 5 point questions, or by completing the 10 point question and 2 of the 5 point questions. Longer answers are not always better. In addition, if you have a correct answer and then follow it with an incorrect explanation, I will not hesitate to penalize you. For example, if I ask, “Describe the shape of demand curves,” and you answer, “they slope down because supply curves slope up,” then you will be penalized for the latter part of your answer.
1. (5 points) The media pays very close attention to the unemployment statistics that are reported monthly by the Census. Clearly the idea of lots of Americans being unemployed sounds terrible, so when certain states or the country as a whole report higher unemployment rates, the media coverage typically tells a story of doom and gloom. I appreciate that this is likely accurate in the majority of cases - higher unemployment rates are cause for concern. However, can you describe why data that show increases in the measured unemployment rate should be taken with a grain of salt?
2. (5 points) Describe what economists refer to as “the hidden cost” of a military draft.
3. (5 points) How can you use the theory of labor demand (or the history of labor markets, or Western Economic history in general) to explain to a Luddite (someone that hates technological change and advancement) why they should not worry that, “machines will someday replace all workers and as a result we will all be destitute”?
4. (5 points) Write your own exam question and answer it. You will be graded on the quality of the question as well as your answer. It could be very simple. The submission of "Write your own exam question and answer it" would give you, for a philosophy class, an "A+", but for labor economics, a "C minus".
5. (10 points) This is one question consisting of many parts and is worth a total of 10 points.
Wal-mart is frequently criticized for “exploiting its workforce” – in rhetoric eerily reminiscent of the faulty logic of Karl Marx.
a. (1.5 points) According to what you know about wage determination from this class, what does it mean to say that workers are being exploited?
NOTE: if you do not know the answer to part (a), and still want to answer this question, come see me and I can tell you what the answer to (a) is, of course you will not receive credit for that part – but at least you can answer the remaining parts of this question.
b. (1 point) Describe why it is highly unlikely that this claim has any real meaning (you may assume that markets are in fact perfectly competitive in crafting your argument, though in reality you do not need this assumption to make your point).
c. (0.5 points) What do you think “Walmart-haters” mean when they say that employees are being “exploited”? In other words, I doubt that they are thinking about the implications of part (a).
d. (3.0 points) What conditions must prevail in order for the claim in part (a) to have any truth? Thusfar in class, we have discussed in detail two cases when this is likely to occur. You can either name both cases, or name one AND describe why this leads to the claim in part (a) being true.
Read the following before answering part (e):
You have read several short articles about Wal-mart for me during this term – and for good reason. The arguments made against Wal-mart are all excellent case studies of how the “law of unintended consequences” plays out. Further, they are even better cases studies of the differences between “that which is seen” versus “that which is unseen.” For examples of these two important concepts in economics, think about how mandatory seat belt laws have impacted automobile safety. The intension of these policies is to make drivers safer in the event of an accident. However, the unintended consequence of this law (there are several) is that mandating seat belts lowers the “price” of driving aggressively, which increases the quantity of aggressive driving that is “demanded” by most drivers – and hence we have seen a substantial increase in accidents since this law has been installed (there are obvious caveats to make, but you get the idea). An illustration of “that which is seen” versus “that which is not seen” (which is a related concept) is seen by a description of the “benefits” of a hurricane wiping out a city. Many will argue that this event will create thousands of jobs for construction workers and other infrastructure workers. This is “what is seen.” What is not seen is that had the city not been destroyed, all of this money would have been spent on MORE PRODUCTIVE activities. Just think of it – pre-hurricane there is a city and a lot of money to spend on other goods and services. Post-hurricane, you need to rebuild that same city that existed before, and now will have no money to spend on other goods and services. Alas, hurricanes are NOT good for the economy – they serve to redistribute income from one group of workers and firms to others, and also stifle any economic growth that would have occurred absent the tragedy.
Marx and Engels erroneously suggested that a revolution by exploited workers would be the solution to the exploitation of workers they decry. Realizing that worker revolution and private property confiscation is a highly unlikely scenario, activists try to “help” workers in other ways. Suppose that Wal-mart’s most serious opponents are actually interested in improving the lot of low-wage, low-skilled workers (and not in rent-seeking for themselves or their own organizations). In the answers to the questions that follow you might use the concepts of “unintended consequences” and of “that which is seen versus unseen” to characterize your answer.
e. (0.5 points) Describe one proposal that we have studied or that you might have read about in the press that is designed to help low-wage, low-skilled workers.
f. (1.0 point) Characterize the labor market impacts of implementing such a policy?
g. (0.5 points) Who actually wins when this proposal is enacted? (“that which is seen”)
h. (0.5 points) Who actually loses? These may include “that which is seen” as well as “that which is not seen.”
i. (1 point) Will this proposal help the people that are most in need?
j. (0.5 points) What does your answer suggest about the effectiveness of poverty reduction strategies that are aimed at the labor demand, and wage, side of the labor market?
Extra Credit
This question will be worth 3 points. Partial credit will only be awarded in unusual circumstances.
We talked in class about how “the best laid plans of mice and men …” really applies to the study of labor demand. In other words, many policies designed to help the poor have failed miserably. What questions does our study suggest need to be answered by policymakers when designing programs to help the poor?
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