Economics 3111 Fall 2014: Exam Format and Review Questions

Final Exam: Monday, December 8, 1:00-4:00pm, ATAC AT1007

Coverage:Entire course but weighted toward material after the midterm.

Exam Format:

Part 1: Definitions (will include some pre-midterm concepts)

Part 2: Shorter Answer (some choice, probably do 5 : a few of these will be based

on pre-midterm material)

Parts 3: Longer-answer problem type question (pre-midterm material)

Part 4: Longer answer (probably do 2 – based on material after the midterm)

1. (a) “A worker is paid the value their time” - in what sense does the theory of labour

demand suggest that this is true? Explain.

(b) In what sense does labour supply theory suggest that this is true? Explain.

2. Is the following statement true, false or uncertain. “Leisure must be an inferior good for an individual’s labour supply curve to be backward-bending.” Explain your answer.

3. A recent study of women’s rising labour force participation rates identifies:

- the rise of the clerical & professional sectors - increased education of women

- labour-saving advances in households - declining fertility rates

as key reasons for the rise. Discuss how each explanation enters the labour supply model

4. Estimation of a wage equation regression gives the following results for a sample of workers. Dependent variable: Wage rate ($)

VariableEstimatedt-statistic

Coefficient

Education 1.50 4.50

Experience 0.50 2.00

Union 2.5010.12

UR -0.40 1.00

Price 0.90 2.50

Intercept 7.00 4.00

where:Education = workers' years of education

Experience = workers' years of work experience

Union = equals 1 if the worker is a union member, 0 otherwise.

UR = unemployment rate in the region where the worker lives.

Price = a measure of the price of the output produced by the worker.

(a) Interpret the estimated coefficient on each variable.

(b) Interpret the t-statistics.

(c) Consider each coefficient (except the intercept) and its t-statistic. Do the results make economic sense? Explain why or why not.

(d) Suggest another variable that would be useful in explaining worker's wages. What would the likely effect be? Why?

5. (a) What is a monopsony? Explain why in a monopsony the cost of an extra worker is

likely to be higher than the wage paid to that worker.

(b) How much labour would a monopsonist hire? Illustrate and explain. How does

the outcome compare to that of a competitive labour market?

(c) What are the implications of labour mobility for monopsony?

6. Use the model of labour supply to discuss the following statement. “If a married woman’s husband gets a raise, she is likely to work less, but if she gets a raise she is likely to work more.”

7. More educated workers are typically paid more than less educated workers. Explain why this makes sense: (i) from a labour supply (human capital) perspective;

(ii) from a labour demand perspective.

8. Outline how you would calculate the rate of return to education.

9. University enrolment rates for women have been rising over time. Use the human capital model of educational decisions to explain why this may have happened.

10. Baseball teams hire young players and then train them in the minor leagues for 3-5 years. If a player makes it to the major leagues they are then bound to the team which owns their contract for 6 years after which time the player becomes a free agent and can play for any team. Discuss this as an example of a method for general skills training.

11. Outline the human capital model of post-secondary education (provide a diagram and relevant equation). In the context of the framework you have just described explain the likely effect of the following on the decision to undertake additional education: age, wage of unskilled workers, a recession.

12. Outline the screening model of education. Contrast it to the human capital model.

13. Explain why unemployment poses problems for the model of supply and demand as applied to labour markets.

14. Use the isoquant-isocost framework with two inputs (capital and labour) to illustrate and discuss the following:

(i) Illustrate the best choice of input mix when the business uses both capital

and labour to produce output. Explain why this is the best choice.

(ii) Decompose the change in total labour demanded produced by a rise in the wage

rate in (i) into substitution and scale (output) effects.

15. Even if the labour market is competitive firms will typically pay workers less than their productivity if there are substantial hiring and training costs. Explain why this is likely to be so (quasi-fixed costs).

16. Thoroughly discuss each of the following statements concerning the economics of unions. Include diagrams to aid in your answer.

(a) Unionization drives are more likely to be successful if labour demand is elastic.

(b) In the monopoly union model the negotiated wage rate is likely to be higher when

labour demand is inelastic and the union values wages very highly compared

to employment.

(c) Contracts where the union negotiates and sets the wage rate but leaves the choice

of the level of employment up to the employer are inefficient.

(d) Estimates of the union/non-union wage differential are likely to be too small.

(e) Roughly what share of workers in Canada are unionized? In what industry

sectors is unionization highest? How does unionization in Canada

compare to other countries?

17. (a) Describe the likely effects of a rise in the minimum wage in a competitive labour

market. Provide a diagram as part of your explanation.

(b) Discuss the effect of a minimum wage in the monopsony model.

(c) Outline Card and Krueger’s study of minimum wage effects. Be sure to define

and explain the difference-in-differences estimator as part of your answer.

18. Illustrate and discuss the following. A rise in social assistance payments will boost

reservation wages and reduce the number of people working.

19. Given the following data on wage rates for carpenters and a price index calculate the real wage in 2006 dollars (show your work).

Actual wage per hourPrice Index

1986 $20 110

1996 $30 160

2006 $34 176

20. (a) What is a quasi-fixed cost? Give examples. (b) Explain how quasi-fixed might affect the choice between number of employees vs. length of work week. What other variables might affect this choice? Explain.

21. (a) Outline the short-run (Marginal productivity) theory of labour demand.

(b) (i) What factors can shift the short-run labour demand curve? (ii) Say that you observe that employment in manufacturing is falling. Use these factors to suggest why this may be happening.

22. The share of wage and salary income that has gone to the very highest paid workers has risen sharply in the past few decades. Explain why this might be consistent with the short-run theory of labour demand.

23. The short-run theory of labour demand suggests that high productivity will (via competition between employers) leads to higher wages. Incentives theories have causation run the other way. Give examples of two incentive theories of pay determination.