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WSC - ECO 320 Exam 1 Spring 2012 Parker Exam 1

WSC - ECO 320 Exam 1 Spring 2012 Parker Exam 1. Note the point value of each question. Q1 – 15 points. To answer parts of Q1 you will need to use the following diagram:. income. budget with wage w2. budget with wage w1. Leisure. a b c d. Q1.

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WSC - ECO 320 Exam 1 Spring 2012 Parker Exam 1

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  1. WSC - ECO 320 Exam 1 Spring 2012 ParkerExam 1 Note the point value of each question.

  2. Q1 – 15 points To answer parts of Q1 you will need to use the following diagram: income budget with wage w2 budget with wage w1 Leisure a b c d

  3. Q1 a) In words, what is the income effect of a wage change? b) In words, what is the substitution effect of a wage change? c) In the professional economic literature, diagrams like the one presented above are often used to illustrate economic concepts. Indicate from the diagram how the amount of leisure, and hence labor supplied, changes when the wage changes from w1 to w2. Also indicate the income effect and substitution effect movements. d) Do the same as in part c except have the wage fall from w2 to w1. e) Is the labor supply in this example upward sloping or backward bending? Why?

  4. Q2 – 7 points Consider a situation where an individual can work or have leisure up to 16 hours a day. Also say after 8 hours a day, time and a half can be earned. Say the person earns $10 for the first 8 hours of work. Also say the person chooses to work 10 hours a day. What does the person earn per day? Now, what wage would they have to make to earn the same amount, but with total straight pay? Explain why the person is not likely to work the same number of hours under the straight time system.

  5. Q3 – 10 points Say the demand for labor and the supply of labor have the forms Ed = 50 – w Es = -6 +6w. Using math What is the equilibrium wage and labor amount traded? If a minimum wage is set at $11 in this market, what number of people lose their job, what number of additional people seek employment, and what is the unemployment rate at the minimum wage? Instead of having a minimum wage set at $11 in the market say a tax of $3.50 is levied on each unit of labor a firm would like to hire. What is the deadweight loss of the tax?

  6. Q4 – 8 points a) Describe the basic idea of how the earned income tax credit affects the budget line for the worker. b) What are the two major conclusions from economic theory about the impact the earned income tax credit has on labor markets? c) Describe how the difference-in-differences estimator was used to highlight one of the two major conclusions.

  7. Q5 – 10 points Labor used Output Reproduce this table on your answer 0 0 page. Add columns to show the 1 100 marginal product of labor and the 2 180 value of the marginal product 3 240 assuming the price of the output is 4 280 $10 per unit. 5 300 Describe what is happening as you move down the marginal product of labor column and explain why this is happening. In other words, tell what is the underlying rationale for the numbers to turn out the way they do. What happens to the value of the marginal product if the price of the output falls to $5?

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