Labor Economics Exam 1 2007

Labor Economics

Spring 2007

Exam 1

Please respond to the first question and then select one question from group A and one question from group B. Finally, select two questions from group C. Your five responses will each be graded based on the % allocations below and you will receive a score out of 100 points. Well-written, thorough responses, with evidence presented to support your position, will be given extra consideration. You have two hours and you may consult your book, your notes, any handouts and you may use a calculator.

You must respond to this question. (20%)

1. Use the labor/leisure model to analyze the effect on hours of work of a law requiring employers to pay time-and-one-half for hours worked over 40 per week. You may assume that the worker has 100 hours to divide between labor and leisure.

a. Prior to the new overtime law, draw a budget constraint for someone earning $8 per hour who receives $100 per week in non-labor income. A worker is currently choosing to work exactly 40 hours per week. After the law is passed, what happens to the budget constraint and the worker’s utility maximizing choice? Have hours of work increased or decreased as a result of the overtime laws? Explain why.

b. Define the income and substitution effects. Next, use the graph to identify the income and substitution effects. Which is stronger?

c. If the wage had increased (by the same amount) for all hours worked rather than just for those after 40 per week, would the change in hours of work be any different? Show this in a new graph and explain why or why not.

Group A

Please respond to only one of the following.(30%)

A1. a. Discuss the reasons why the labor force participation rate of women increased so much, relative to men, in the past century. In the process, define the following concepts.

Reservation wages and labor force participation rates.

The added worker and discouraged worker hypotheses.

b. Use specific examples from the video “Fast Food Women” to explain how the above concepts (reservation wages, added worker and discouraged worker hypotheses) affected those women and their families.

A2. a. Why do some firms outsource certain activities? Provide examples.

b. One economist (Slaughter, 2004) found that American firms that outsource jobs created 2.8 million new foreign jobs and 5.5 million new American jobs. How can this be possible? Explain with clearly labeled diagrams and intuition.

c. Some of the same people (I’m talking to you, Lou) that are concerned with outsourcing are concerned with immigration of foreign workers into the U.S. Suppose the domestic labor market in Arizona is in equilibrium with a wage of $20 per hour and there is no immigration from Mexico. The labor market in Mexico has an equilibrium wage of $4 per hour. If immigration is costless across the border, how should these two labor markets adjust? Does your analysis change if Mexican and Arizonan workers are viewed as substitutes or complements? Explain with graphs and intuition.

d. What does the economic evidence say with regards to the impact of immigration on native employment and/or wages?

Group B

Please respond to only one of the following. (20%)

B1. Lou has a utility function for consumption and leisure U = L.5C.5. There are 100 discretionary hours in the week, Lou earns $14 per hour, and has no non-labor income.

a. Draw Lou’s budget constraint.

b. What is Lou’s optimal amount of leisure, labor, and consumption? How much utility does Lou enjoy? Illustrate in your diagram.

c. If the government starts a policy that pays W weekly dollars to all non-workers and pays $0 to all workers, at what value of W will Lou opt out of the labor force in order to go on welfare? Illustrate in your diagram. How much utility would Lou enjoy in this situation? Explain Lou’s decision in this case. Has Lou suddenly lost his taste for work?

B2. Complete problem #10 at the end of Chapter 2 in your text.

B3. Complete problem #9 at the end of Chapter 3 in your text. Use illustrations to assist your explanations.

Group C

Please respond to any two of the following.(15% each)

C1. Complete problem #3 at the end of Chapter 4 in your text. Relate your conclusion to Marshall’s 4 Rules.

C2. a. Complete problem #10 at the end of Chapter 4 in your text. Use illustrations to assist your explanations.

b. If the hourly wage rises to $30, how much labor should the firm employ? Assume capital is still fixed. What is the elasticity of labor demand? Interpret this value.

C3. a. Complete problem #1 at the end of Chapter 5.

b. Does your response to part a describe what is happening, and likely to happen, in Fairfax County, Virginia? Explain with graphs and supporting evidence.

c. Could the labor market in FairfaxCounty experience a cobweb effect as it adjusts? Explain how this might happen.

Eric DodgePage 112/17/2018