The University of Western Ontario

London
Canada
G. Stirling

Department of Economics
Economics 2155 - 001
Sample Mid-term #1

Multiple Choice. 1 mark each.
1. With a common wage rate and a distribution of reservation wage rages, and increase the wage
leads to
a. An increase in the participation rate.
b. A decrease in the participation rate.
c. No change in the participation rate.
d. An increase in the participation rate if it is already over 50%
2. Which of the following statements describes a backward-bending labor supply
curve?
e. Every hour that I work represents a loss of an hour of leisure.
f. I asked for extra hours this month to pay for a new bicycle.
g. When I received my last raise, I cut back on my overtime hours so that I could work
fewer hours but earn the same amount of money per week.
h. I worked more hours when I was younger.
3. If labour demand is elastic, than an increase in the wage
a. will increase the wage bill.
b. will decrease the wage bill.
c. will have an indeterminate effect on the wage bill.
d. will decrease the tax revenue.
4. Leisure can be
a. considered to be an inferior good when a parallel outward shift of the budget line leads
to an increase in leisure.
b. considered to be a normal good when a parallel outward shift of the budget line leads
to an increase in leisure.
c. considered to be an inferior good when a parallel inward shift of the budget line leads
to an decrease in leisure
d. considered to be a normal good when a parallel outward shift of the budget line leads
to a decrease in leisure

1

both a) and c) are correct. If leisure is a normal good and the wage falls a. whereas the income effect is represented by a rotation of the budget line. the substitution effect will induce the consumer to take less leisure and the income effect will induce the consumer to take less leisure 6. The substitution effect associated with a change the wage describes a. II is false. holding wage constant. The income effect associated with a change in the wage a. b. a. II. Both I and II are false. I is true. holding utility constant.5. c. c. describes the change in the price of time. d. holding utility constant. the change in the level of leisure. I is false. 7. Direction of the income effect depends on whether the good is a normal or an inferior good. The substitution effect graphically is always denoted a. by movement along the original indifference curve. 2 . II is true. b. the substitution effect will induce the consumer to take less leisure and the income effect will induce the consumer to take more leisure c. c. b. describes the change in the level of leisure. d. by movement along the original indifference curve. The substitution effect of a wage change is unambiguous in its direction. describes the change in the level of leisure as a result of the individuals change in utility. can be either negative or positive with normal leisure 8. b. Both I and II are true. the substitution effect will induce the consumer to take more leisure and the income effect will induce the consumer to take less leisure d. Identify the truthfulness of the following statements. 9. I. the substitution effect will induce the consumer to take more leisure and the income effect will induce the consumer to take more leisure b. c. by moving in the direction of the item that is becoming relatively cheaper and the income effect is always denoted by a rotating budget line. d. by moving in the direction of the item that is becoming relatively more expensive. holding wage constant. whereas the income effect is represented by a parallel shift of the budget line. the change in the level of leisure as a result of the individuals change in utility. the change in the price of time d.

b. c. 13. Non labour income is $400. 400. the sensitivity of the wage to the quantity of labour demanded. have the same participation rate as the other group for all wage rates. d. zero. d. d. c. Which of the following is true in Figure 1? a. always have a lower participation rate. The optimal number of hours to supply is zero. the slope of the labour demand. the relationship of percentages to the wage. 11. b. 12. c. d. 100. the optimal number of work hours is a. have a lower participation rate of participation is more common than not. the sensitivity of the quantity of labour demanded to the wage. All of the above. With a common wage rate and a distribution of reservation wage rages for two groups of individuals. 3 . c. b. In Figure 1. have a higher participation rate of participation is more common than not. Wage elasticity of demand measures a. b.Figure 1 10. The wage rate is $4. 300. The group with a higher variance in the reservation wage will a.

income b. b. d. 16. b. The theory of household productions assumes that the household derives utility from a. market purchased goods services 18.14. must be zero by law. In the theory of household production. c. In a one period model of household production the effects of a wage increase cause a. b. A backward bending labour supply curve occurs when a. 19. the full price of market goods intensive home produced commodities to increase more than the full price of time intensive home produced commodities. at low wages. the full price of time intensive home produced commodities to decrease less than the full price of market goods intensive home produced commodities. leisure is a normal good and the substitution effect dominates at low wage rates. d. The price of children a. determine what is to be produce. time spent in home production c. the household must a. leisure is a normal good and the income effect dominates at high wage rates. the full price of time intensive home produced commodities to increase and the full price of market goods intensive home produced commodities to decrease. work time will go up or down depending on the relative sizes of the income and substitution effect. work time should go down. leisure is a normal good. b. none of the above. b. 4 . c. determine the combinations of leisure and income that produce a certain level of utility d. both (a) and (b). both (a) and (b). commodities produced by the household d. determine how to go about produce the commodities they care about c. but at high wage rates leisure is an inferior good. the full price of time intensive home produced commodities to increase more than the full price of market goods intensive home produced commodities. only includes expenditure on goods and services. 15. Suppose leisure is a normal good. includes female foregone earnings d. c. work time should go up. c. d. As the wage rate increases a. has been decreasing over time 17.

all of the above. 25. the effect of changing the price of market goods d. the substitution of the wage increase has been dominated by the income effect. In a one period model of household production. The own wage elasticity of labour is a. the substitution in consumption working in the same direction as the substitution in production. the wage that determines full income. c. cannot be calculate given this information 23. 0. If the wage rate is increasing over time. the marginal rate of substitution is maximize.7. the value of a person time in the market d. b. the substitution in consumption is a. The elasticity of the demand for output. 1. The share of labour in total cost. the substitution of the wage increase dominates the income effect. the reservation wage b. 22. the effect of changing the non-labour income of the household 21. the optimal wage c. b. the effect of changing the relative full price on home produced commodities.20. the marginal valuation of one’s own time equals the wage rate c.6 b. peak of the labour supply curve 5 . b. 24 . The wage that just makes an individual indifferent between being a participant in the labour market and not being a participant is a. d. 1.The own wage elasticity of labour depends on a.9 d.9 and labour takes up 30% of total cost and the Hicks-Allen elasticity of substitution is . the effect of changing the price of consumption time c. The elasticity of the supply of capital c. the substitution in consumption works in the opposite direction as the substitution in production. The Utility maximizing level of leisure occurs where a. and household consumption time is decreasing. d. If the demand elasticity of output is . full income is reached b.76 c. then a. d.

9 and labour takes up 30% of total cost and the Hicks-Allen elasticity of substitution is . The Full price of a home produce good depends on a. If labour and capital are substitutes. used in fixed proportions c. d. unrelated to each other. 32. a substitution and scale effect that work in the same direction to each other. the price of market goods and services and the price of one’s own time. the quantity must decease as family income increases. will no look for a job. d. 29. b. d. c. 28. how time and market goods can be turned to home produced goods. the quantity must increase as the price of children increase. c. d.7. the full prices of home produce goods will be higher in the later period c. Then labour and capital are a. b. the price included the relevant taxes b. If the reservation wage of an individual is less than the market wage a. if the wage in two periods the same then a. In a life cycle model of household production. how time and market goods can be turned to utility. how time can be turned to earned income. an increase in the quantity of labour demanded and a decrease in the quantity of capital. c. 27. and a positive interest rate. In the household production model. c. the home production functions show a. a substitution and scale effect that work in opposite directions to each other. If the demand elasticity of output is . substitutes. the price of market good and services and the price of one’s own time and production function parameters d. the price of children must remain constant as family income increases. complements. a backward bending demand for labour. the full prices of home produce goods will be higher in the earlier period d. b. 6 . For children to be inferior goods a. the full prices of home produce goods will depend on the production function 30. b. values the last hour of their time more than the market does. c. they value the last hour of their time less than the market does. they are better of keeping all their time for themselves. the quantity must increase as family income increases. the level of income the household earns 31.26. with constant returns to scale and no joint production. then an increase in the price of labour causes a. b. the full prices of home produce goods will be the same b. how time can be turned to market goods. d.

a backward bending demand for labour. c. the level of output is independent of the income earned d. If labour in an inferior factor. at the point where leisure is at its maximum. a substitution and scale effect that work in the same direction as the wage change. 0. must always reinforce the income effect if leisure is normal c. the leisure time is maximized c. must always dominate the income effect if leisure is normal b. 1. c. the price of time is irrelevant b. an increase in the quantity of labour demanded and a decrease in the quantity of output. 4. the wage is more than the slope of the indifference curve 38. the wage elasticity of the demand for labour is a.33. an income effect only b. At the utility maximizing level of leisure a. d. If the wage decreases by 5 percent and the quantity of workers demanded goes down by 4 percent. is measured at the reservation wage. an increase in the wage rate will result in a. If a person has preferences that lead to a choice of positive numbers of work hours. d. An individual will be a non-participate in the labour market provided a. 34. a tangency between the budget constraint and the indifference curve is reached c. Constant returns to scale of home production functions means a.5. b. 37.75. an increase or decrease in leisure time c. must always counteract the income effect if leisure is normal d. b. 7 . 0. The substitution effect of a wage change a. the a wage decrease causes a. possibly becoming a non-participant in the labour market d. the wage is less than the slope of the indifference curve d. that the full price of a home produced good is constant 36. the marginal rate of substitution equals the wage d.8. the indifference curves between leisure and income are steep b. a substitution and scale effect that work in opposite directions to each other. the scale of production is constant in terms of price c. at the point where leisure is at its maximum. a higher reservation wage 39. the level of income is irrelevant 35. inputs can be written as functions of output b.0.

makes the demand for labour less elastic. An increase in the share of labour in total cost a. d. makes the demand for labour less elastic if the elasticity of substitution is greater than the output demand elasticity. c.40. 8 . b. makes the demand for labour more elastic. makes the demand for labour more elastic if the elasticity of substitution is greater than the output demand elasticity.

20. 34. 5. 16. 19. 35. a c b b c a a b d a b b a c d c c d a a c b a d b b b d c c d b c c a c c b a c 9 . 29. 15. 2. 4.Econ 2155 Sample solutions 1. 23. 32. 36. 30. 28. 11. 40. 8. 25. 39. 33. 37. 17. 27. 13. 7. 24. 12. 6. 14. 31. 21. 18. 9 10. 26. 22. 38. 3.