Department of Economics and FinanceUniversity of GuelphECON 3520 Quiz 1

October 5th, 2011

VERSION 2

Record the answers to the multiple choice questions on the scantron sheet. Write down your name, student number, and the version of the exam you are writing. You have 50 minutes. There are fifteen multiple choice questions.

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MULTIPLE CHOICE QUESTIONS: (15 questions)

1. The "discouraged worker" effect would tend to make labour force participation ________ during a recession. C

a) increaseb) remain unchanged c) decrease d) either increase or decrease

2. A increase in the marginal tax rate will cause Aa) a negative income effect and a positive substitution effectb) a pure substitution effect. c) a pure income effect.d) neither an income nor a substitution effect.e) a positive income effect and a negative substitution effect. .

3. Suppose that a worker is observed to be working, but is forced to work more hours than she really wants to work. Which of the following statements is true?

Aa) She is on an indifference curve which is lower than the one which is tangent to the

budget lineb) The indifference curve that she is on is tangent to the budget line.

c) She is on an indifference curve which is higher than the one which is tangent to the budget line

d) She is on an indifference curve which is lower than the one which passes through the point on the budget line corresponding to zero hours of work.

e) None of the above statements are true; they are all false

4. Consider the vertical portion of the labour supply curve. If there is a wage increase: D

a) The negative income effect dominates the positive substitution effect.b) The positive substitution effect dominates the negative income effect.c) The income effect and the substitution effect work in the same direction.d) The positive substitution effect cancels out the negative income effect.e) There is only a negative income effect.

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5. A increase in nonlabour income (such as one due to a decline in the value of stocks and bonds) will cause the reservation wage to __________ and the labour force participation rate to ___________: B

a) go up; go upb) go up; go down c) go down; go downd) stay unchanged; go upe) go down; go up

6. In the context of the labour supply model, if a wage subsidy is introduced: B

a) There is only an income effect, as there is no substitution effectb) There is an income effect and a substitution effectc) It will not affect the worker’s choice of hoursd) There is only a substitution effect, as there is no income effecte) It may lead to a decrease in the worker’s utility level

7. Assume the following relationship has been estimated:P = -6 Y + 13 w

where P is the labour force participation of women measured as percentage, Y is non-labour income, and w is the expected wage. The size of the substitution effect is: E

a) -5b) 12c) 7d) -7e) 19

8. Assume that at the wage rate of $10 per hour, an individual is supplying 40 hours of labour per week. If the wage elasticity of supply is 0.5, how many more hours of labour will the individual supply if the wage increases by $2 per hour? D

a) 1 hour per weekb) 5 hours per weekc) 2 hours per weekd) 4 hours per weeke) 8 hours per week

Questions 9-11. A labour force survey yields the following estimates (in millions):

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Population 15 and older, non-institutionalized 60Employed 44Not working, but actively seeking work 2Not working, discouraged because of lack of jobs 1Not working, household workers 3Full-time students 4Retired 6

9. What is the unemployment rate in this economy? Da) 0.77b) 0.73c) 0.07d) 0.04e) 0.96

10. What is a negative income tax? Ba) EI, an insurance against unemployment deducted at source from pay chequesb) A guaranteed income combined with a less than 100% clawback rate of benefits.c) A childcare subsidy to encourage low wage mothers to workd) A tax on unearned income of less than 20%.e) A payroll tax for small firms

11. What impact does a change from a 100% welfare claw-back rate to a 50% clawback rate have on incentives of welfare recipients to work? A.

a) Makes them want to combine welfare receipt and part-time work.b) Makes them not work and now have lower utilityc) Makes some people who used to work now leave the labour marketd) A pure income effect. Still don't work but now are happier.e) Increases incentives for 'black market' work, without telling welfare agency.Questions 12-13 Consider the following diagram:

© 2002 McGraw-Hill Ryerson Ltd. Chapter 2-24

E0

leisure0

Income

U0

T

-W0

I0

W0T+YN

W1T+YN

I1

U1

E1

-W1

I’

E’

I0 corresponds to 40 hours of labour per week, I1 to 43 hours per week, and I’ to 48 hours

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per week.

12. Given a wage increase from W0 to W1, the substitution effect is: D

a) 43 hoursb) 48 hoursc) 3 hoursd) 8 hourse) 5 hours

13. Which of the following is not a demogrant: B

a) Ralph Bucks for Albertansb) A program for families with income under $25 000 per year that provides school

lunches free.c) Canada Pension Pland) 1000$ tax credit for all families with children under 18.e) Free bus transportation for people over 65.

14. A childcare subsidy: E.

a) Always lowers mother's labour force participation through the income effectb) Increases purchases of children's clothing and shoes but not mother's workc) Is a pure income effectd) Lowered women's participation in Quebec when daycares were 5$ per daye) Increases women's participation by lowering opportunity cost of time at work.

15. For a worker who is deciding how many hours of labour to supply, all of the following are true except: THIS QUESTION WAS NOT COUNTED

a) The slope of the budget line equals the slope of the indifference curve

b) The marginal rate of substitution between income and leisure is equal to the wage rate

c) The rate at which she is willing to exchange leisure for income equals the rate at which the market allows her to do it.

d) The income effect of a wage change equals the substitution effecte) The worker cannot increase total utility by working more or fewer hours.

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