BACHELOR OF BUSINESS. Sample FINAL EXAMINATION

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1 BACHELOR OF BUSINESS Sample FINAL EXAMINATION Subject Code : ECO201 Subject Name : LABOUR ECONOMICS This examination carries 50% of the total assessment for this subject. Examiner(s) Moderator(s) Joyce Leu Day : Date : Time : Time allowed : Reading 10 MINUTES Writing 3 HOURS INSTRUCTION(S): 1. This examination consists of TWO (2) sections: SECTION A consists of FORTY (40) multiple choice questions. Answer ALL questions in the multiple choice answer sheet provided. SECTION B consists of SEVEN (7) questions. Answer THREE (3) questions in the answer book provided. 2. Writing on the examination answer book is NOT permitted during reading time. 3. This is a CLOSED BOOK examination. 4. Students must pass this examination in order to pass the subject. (This question paper consists of 2 sections in 14 printed pages, including cover page)

2 ECO201 Labour Economics (Final Examination) Page 2 SECTION A Multiple Choice Questions (40 marks) Answer ALL questions. Each question carries 1 mark. (Note: VMP = Value of marginal product; MRP = marginal revenue product; MWC = marginal wage cost; P = price; MR = marginal revenue; MC = marginal cost; W = wage rate) 1. The convex shape of a standard indifference curve reflects: a. a diminishing marginal rate of substitution of leisure for income b. an increasing marginal rate of substitution of leisure for income c. a constant marginal rate of substitution of leisure for income d. the wage rate 2. In terms of the shape of income-leisure indifference curves a workaholic individual would typically have: a. a relatively steep income-leisure indifference curve as he would be willing to sacrifice only small amounts of leisure time for an additional unit of income. b. a relatively flat income-leisure indifference curve as he would be willing to sacrifice large amounts of leisure time for an additional unit of income. c. a vertical income-leisure indifference curve as work and leisure are independent. d. a horizontal income-leisure indifference curve as leisure and work are independent. 3. We would expect the demand for international airline pilots to be relatively inelastic because: a. relatively few close substitutes exist for highly trained airline pilots. b. their total wage bill is a relatively small share of the total operating costs of international airlines. c. both (a) and (b). d. neither (a) nor (b). 4. Assuming leisure is a normal good, then a backward bending labour supply curve results in the special case when: a. the size of the wage increase ensures that the substitution effect dominates over the income effect. b. the wage increase is so small that only a substitution effect applies and the income effect is negligible. c. the income effect of the wage increase is less than the substitution effect. d. the income effect of the wage increase outweighs the substitution effect.

3 Income ECO201 Labour Economics (Final Examination) Page 3 5. Under conditions of perfect competition in the product market, a. MRP L > VMP L and the labour demand curve slopes down purely because of diminishing returns. b. MRP L = VMP L and the labour demand curve slopes down purely because of diminishing returns. c. MRP L < VMP L and the labour demand curve slopes down purely because of diminishing returns. d. MRP L = VMP L and the labour demand curve slopes down because of diminishing returns to labour and competition amongst firms over product market share. 6. Which one of the following would be most likely to shift an individual s labour supply curve to the left? a. an increase in the wage rate b. a change in the indifference map following improvement of working conditions c. a significant increase in the spouse s income d. a decrease in the wage rate 7. In the absence of coalescing power, we expect that in bilateral monopoly: a. there will likely be greater efficiency loss than if there were market power on only one side of the market b. the resulting employment level will be lower than if there were market power on only one side of the market c. the resulting wage rate will be above the union s desired wage but below the monopsonist s desired wage d. the resulting wage rate will depend on the relative bargaining strengths of the firm and the union Questions 8 9 are based on the following diagram: B 1 B 2 0 C D E A Leisure

4 ECO201 Labour Economics (Final Examination) Page 4 8. The shift from budget line AB 2 to AB 1 implies: a. a decrease in the work hours by DE b. an increase in the work hours by CD c. a reduction in the work hours by CD d. a reduction in the work hours by EA 9. The equilibrium positions shown in the diagram imply that for a wage increase: a. both the income and substitution effects increase desired work hours b. both the income and substitution effects reduce desired work hours c. the individual lies on the upward sloping segment of the labour supply curve d. the individual lies on the forward rising segment of the labour supply curve 10. The demand for human capital curves slope downward and to the right because: a. education is a screening device b. as the interest rate rises, the net present value of education rises c. the benefits of increased education diminish as schooling continues d. investment in education is subject to increasing marginal returns Question 11 refers to the following diagram representing Larry's budget constraint and preferences:

5 ECO201 Labour Economics (Final Examination) Page Consider the three combinations of leisure and income represented by points A, B, and C. Which of the following is a correct statement? a. Larry prefers A to B b. Larry prefers A to C c. Larry prefers B to C d. Larry prefers C to A 12. The fact that the jobs of college graduates are more pleasurable and entail superior fringe benefits than the jobs of high school graduates implies that: a. the rate of return on college education is understated b. the rate of return on college education is overstated c. the private rate of return to education will tend to overstate the social rate of return d. the private rate of return to education will tend to understate the social rate of return 13. The higher the individual's wage rate: a. The steeper the budget constraint b. The lower the marginal rate of substitution of leisure for income c. The greater the desired number of hours of work d. The greater the desired number of hours of leisure 14. The wage elasticity of labour demand is best defined as the: a. ratio of the percentage change in the wage rate to a percentage change in the quantity of labour demanded. b. ratio of the percentage change in the quantity of labour demanded to the percentage change in the wage rate. c. ratio of the percentage change in the quantity of labour demanded to the average wage per unit time. d. ratio of the percentage change in the average quantity of labour demanded to the percentage change in the average wage per unit time. 15. Which of the following best explains why the market labour supply curve is upward sloping, even though individual supply curves are normally backward bending? a. the statement is not true: market labour supply curves are also backward bending b. market labour supply curves are price-adjusted, whereas individual supply curves are not c. lower wages in a given market increase the demand for labour, so more labour must be supplied to maintain labour market equilibrium d. higher wages in a given market attract more workers away from other activities, more than compensating for any reduction in hours by individuals already in the market

6 ECO201 Labour Economics (Final Examination) Page A net increase in people s preferences for work versus leisure in this market will: a. increase labour supply, reducing the wage rate b. decrease labour supply, increasing the wage rate c. increase labour demand, increasing the wage rate d. decrease labour demand, reducing the wage rate 17. At the profit maximising level of employment for a monopsonist: a. the wage exceeds the marginal wage cost b. the wage is less than marginal wage cost c. marginal revenue product equals the wage d. marginal product equals marginal revenue product 18. One implication of efficiency wage models is that: a. firms pay wages below the market-clearing rate to maximize costs b. an excess supply of labour may be created c. an excess demand for labour may be created d. the labour market will be in equilibrium 19 If nonunion workers in a given occupation are paid $15 per hour while union workers receive $20 per hour, the pure union wage advantage is: a. 20% b. 33% c. 80% d. more information is required 20. Demand for labour is a derived demand. To maximise profit, employers under perfectly competitive industry (in both product and labour markets) will hire labour until: a. W = VMP b. P = MC c. W = MWC d. MC = MR 21. All else equal, the imperfectly competitive seller's labor demand curve is: a. Greater than that of a perfectly competitive seller b. More elastic than that of a perfectly competitive seller c. Less elastic than that of a perfectly competitive seller d. The same as than that of a perfectly competitive seller

7 ECO201 Labour Economics (Final Examination) Page By reducing labour turnover, unions may increase productivity because a lower turnover rate: a. results in a less-experienced workforce b. increases the incentive for firms to provide specific training to their workers c. allows firms to employ a greater number of younger, more energetic workers d. increases the incentive for firms to substitute labour for capital in the production process 23. In industry A, all displaced workers remain in the union sector waiting to be recalled. In industry B, all displaced workers seek work in the nonunion sector. All else constant, the: a. allocative efficiency loss is greater in industry A b. allocative efficiency loss is greater in industry B c. allocative efficiency loss is the same in A and B d. dynamic efficiency loss is greater in industry A Questions are based on the following diagram. 24. Consider Figure 1 above. As determined along the MRPL curve, the total wage bill when Le = 5 workers is: a. $3,000. b. $3,600. c. $6,000. d. $600.

8 ECO201 Labour Economics (Final Examination) Page Consider Figure 1 above. The rightward shift in the firm s MRPL curve implies that: a. the wage bill has increased to $3600 assuming that the wage rate is constant. b. labour productivity may have risen due to additional specific training. c. the firm s product price may have risen in an expanding market. d. all of the above statements are potentially correct. 26. At the profit maximising level of employment for a monopolist: a. marginal revenue product equals the value of marginal product b. marginal revenue product exceeds the value of marginal product c. value of marginal product equals the marginal wage cost d. marginal revenue product is less than the value of marginal product Questions refer to the information in the following table. Q s and Q d are the quantities of labour supplied and demanded, respectively: Wage Q s Q d $ If the union wishes to maximise its membership and employment, it would set a wage rate of: a. $6 b. $10 c. $12 d. $ If the labour market is initially in equilibrium, and the union sets a wage of $14, employment will: a. fall by 8 b. rise by 12 c. fall by 4 d. not be affected

9 ECO201 Labour Economics (Final Examination) Page The unemployment rate at which there is neither excess demand nor excess supply in the aggregate labour market: a. must be 0% b. is called the natural rate of unemployment c. will lead to higher inflation if pursued as a policy goal d. corresponds to the rate we would observe if inflation were lower than had been expected 30. An increase in government demand for output is a tool that would most likely be used to combat: a. search unemployment b. structural unemployment c. wait unemployment d. demand-deficient unemployment 31. A monopsony firm s marginal wage cost (MWC) curve is positively sloped because: a. it discriminates by paying each worker a different wage according to his or her opportunity cost. b. it must charge a lower price for each additional unit of output, and it must charge this lower price for all units sold. c. it pays its workers lower wages, so that the supply of labour to the market is restricted. d. it must pay a higher wage to attract additional workers, and it must pay this higher wage to all workers employed. 32. If jobless persons who had given up searching suddenly resumed active searches for paying jobs but had not yet found any the unemployment rate would: a. rise b. fall c. stay the same d. more information is needed

10 ECO201 Labour Economics (Final Examination) Page 10 Questions refer to the following graph, in which all product markets are assumed to be competitive. Wage Union Wage Non-union W u a W n c d b VMP u W n W s c d VMP u e f Labour g h Labour 33. If half of the displaced union workers opt to remain in the union sector hoping to be recalled, the area corresponding to the efficiency loss of the union wage increase is: a. greater than c abd b. less than c abd c. c abd d. gcdh 34. Assume the two labour demand curves are identical, and that all union workers who lose their job as a result of the union wage increase to W u find jobs in the non-union sector. The area corresponding to the efficiency loss is: a. eabf b. gcdh c. c abd d. W n W u ac 35. The allocative efficiency loss implied by the diagram is a static, short-run loss. Compared to the static loss, the dynamic, long-run loss may be: a. smaller, because the decline in non-union wages increases the extent of poverty b. smaller, as firms have less opportunity to exercise their monopsony power c. greater, because unemployment is greater in the long run d. greater, because unions increase firm profitability and thereby inhibit investment

11 ECO201 Labour Economics (Final Examination) Page Assume that all workers are equally productive, but the white wage is $14 and the African American wage is $10. An employer who employs only African American workers has a discrimination coefficient of: a. 0 b. At least $4 c. At most $4 d. At least 10/ An employer whose discrimination coefficient is zero: a. Refuses to hire any women or minorities regardless of the wage differential b. Does not discriminate for or against women or minorities c. Discriminates against women and minorities d. Discriminates in favor of women and minorities Questions refer to the following diagram, in which W aa /W w is the ratio of the African American wage rate to the white wage rate: 38. The horizontal portion of the demand curve will be extended by an increase in the: a. Number of firms that discriminate b. Number of firms that do not discriminate c. Productivity of white workers d. Supply of African American workers

12 ECO201 Labour Economics (Final Examination) Page A decrease in the supply of African American workers will: a. Extend the horizontal portion of the demand curve, raising the relative wage of African Americans b. Lower the relative wage of African Americans c. Eliminate the wage differential between whites and African Americans if the resulting supply curve intersects the horizontal portion of the demand curve d. Embolden more employers to discriminate, reducing the horizontal portion of the demand curve, and lowering the relative wage of African Americans Question 40 refers to the following aggregate demand-aggregate supply diagram: 40. The full-employment level of output is given by: a. Q 1 b. Q 2 c. Q 3 d. Q 3 - Q 1

13 ECO201 Labour Economics (Final Examination) Page 13 SECTION B Essay Questions (60 marks) Answer any THREE (3) of the seven questions. Each question carries 20 marks. Question 1 a) Define wage elasticity coefficient. What is the indication if wage elasticity coefficient is greater than 1 or less than 1? Describe the relationship between this elasticity coefficient and total wage bill? (8 marks) b) Describe factors that will influence the elasticity of labor demand. (12 marks) Question 2 a) Discuss the normal individual labor supply curve, when does it start to be backward-bending. Illustrate TWO (2) different individual labor supply curves. Can the individual backward bending labor supply curve affect the market labor supply curve? Why or why not? (14 marks) b) Explain how each of the following would affect the demand schedule you derived in part (a) by using appropriate diagrams: i. An increase in the price of a gross substitute for labor ii. A decrease in the price of a pure complement in production with labor iii. A decrease in the demand for the product that the labor helps produce. (6 marks) Question 3 Describe the process of equal wage rate for different occupations using Crowding Model. Identify the main assumptions of this model. (20 marks) Question 4 a) Explain investment in human capital using the Human Capital Model. What are those factors that may cause differences in human capital investment. (10 marks) b) Discuss general training and specific training. Why general training generally occurs in schools and not on the job? Indicate the implication on the estimates of the rate of return on a college education if (i) education expenditures are considered as consumption rather than investment; (ii) jobs acquired by college graduates generally entail larger fringe benefits than the jobs of high school graduates. (10 marks)

14 ECO201 Labour Economics (Final Examination) Page 14 Question 5 Define pure union advantage and measured union advantage. What are the various types of effects resulting from an increase in wage rate as requested by union? (20 marks) Question 6 How does demand-deficient unemployment occur? Explain using appropriate diagram(s). List and discuss the reasons for wage rigidity. (20 marks) Question 7 Explain how each one of the following would tend to hire less than the socially optimal level of employees. Illustrate your answers using appropriate diagrams. Indicate on the diagrams the actual levels of employment, the optimal levels of employment and the loss in allocative efficiency (if any): (a) Monopolist hiring from a perfectly competitive labour market (10 marks) (b) Monopsonist selling in a perfectly competitive product market (10 marks) ***END OF EXAMINATION PAPER***

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