October 25, Your Name: Midterm Exam Autumn Econ 580 Labor Economics and Industrial Relations

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1 October 25, 2010 Your Name: Autumn 2010 Econ 580 Labor Economics and Industrial Relations There are twenty-five (25) questions in this exam. All questions are equally weighted but they are of different difficulty level. Most of them are short answer questions. The space after each question is an indicator about the approximate length of your answer. Please read each question carefully. Good Luck!!!

2 1. What is the pattern in the labor force participation of men? What is the main reason for the observed change in their participation rates in the period ? 2. List three possible explanations, according to the literature, for the increased participation rates of women. 3. Suppose that, at a particular combination of income and leisure, the slope of the budget line is flatter than the slope of the indifference curve it intersects. How should the worker adjust his/her hours of work? Explain. 4. Define Pareto optimality. 2

3 5. What is the relationship between the labor demand curve under monopoly and under perfect competition? Explain (you may need to use formulas). Assume you face a labor market described by the following relations: and. Please answer questions 6-9 using this information. 6. Find the equilibrium for this labor market. 7. Can be a market clearing wage? If not, what are the adjustments so as to achieve equilibrium? 3

4 8. What is the slope of the labor demand and labor supply curves? What is the interpretation of each slope? 9. At any given labor price, is labor demand elastic? Inelastic? Illustrate. 10. What is the equilibrium condition for a: i. Monopolistic output market ii. Long-run labor market iii. Short-run labor market 11. Which effect(s) can explain the slope of the labor demand curve in the short-run? Is there any difference with the long-run? 4

5 12. List three characteristics of an indifference curve. 13. Why do economists prefer using real variables instead of nominal variables? 14. Given the data in the following table, calculate the unemployment rate. 15. What does the property of transitivity imply for the indifference curves? 5

6 16. We have seen that the labor supply curve is backward bending. Explain, in terms of income and substitution effect, why this happens. 17. Who makes the decisions and what are these decisions in the labor demand model? Who makes the decisions and which are these decisions under the labor supply model? 18. Let a utility function be described by the form. How is this utility function called? What does each of the term stand for? 6

7 19. Assume that the individuals have a non-labor income given as the distance TN and they cannot choose the amount of hours they work; that is, hours worked is a discrete choice. Under this scenario, the alternatives are either not working or working a positive amount of hours (distance TD). For an individual who decides to work, how do the required hours of work (TD) differ from the case where hours of work are treated as continuous? Give the appropriate graph (hint: there are two cases). 20. In the same graph show the case of a corner solution for the labor supply model when non-labor income is zero and when non-labor income is some positive amount. 7

8 21. Assume that your wage decreases. What is the effect of this change on your hours of work? 22. As you know, the budget constraint is characterized by an initial height and a slope. Write down the mathematical expression of a budget constraint where there is labor income, non-labor income and benefits so that we can clearly see the expression for the height and the slope. 23. If a married woman s husband gets a raise, she tends to work less, but if she gets a raise, she tends to work more. Evaluate the accuracy of the above statement using the appropriate economic theory. 8

9 In 2002, a French law went into effect that cut the standard work week from 39 to 35 hours (workers got paid for 39 hours even though working 35), while at the same time prohibiting overtime hours from being worked. Overtime in France is paid at 25% above the normal wage rate. Answer questions 24 and 25: 24. Show the old and the new budget constraint on the same graph. 25. Analyze which workers in France are better off under the 2002 law. Are any worse off? Explain. 9