Name Student # Practice Midterm Exam #2 Economics 370 University of Victoria - Fall 2016 Prof. H.J. Schuetze The midterm exam consists of ten multiple choice questions and two short-answer style questions. There will be a total of 50 marks for the exam. Each of the multiple choice questions are worth 2 marks. Short-answer questions account for the remaining 30 marks. Be sure to answer each of the questions in full, carefully labelling all graphs that may be used in answering. -- You will be given 50 minutes -- Good Luck!! 1
PART I: Multiple Choice 1. Which of the following cannot apply to an unanticipated wage increase? a) Permanent b) Evolutionary c) Temporary d) Transitory e) None of the above, as an unanticipated wage increase can apply to all. 2. What is the primary impact that is expected from an anticipated evolutionary wage change over the life cycle? a) The discounted present value of wages b) Inter-temporal substitution response c) Substitution effect dominating the income effect d) Income effect dominating the substitution effect e) None of the above 3. The effect of the retirement test, according to which pensions are clawed back, is to: a) discourage recipients from working b) increase the funds flowing into the fund c) improve equity between workers and retirees d) raise the supply of labour e) increase reliance of private pensions 4. Assume that at the wage rate of $10 per hour, a firm is hiring 100 hours of labour per week. If the wage elasticity of demand is -1.2, how many hours of labour will the firm shed if the wage increases by $2 per hour? a) Indeterminate b) 30 hours per week c) 10 hours per week d) 24 hours per week e) 20 hours per week 5. The primary reason why workers in the fast food industry are poorly paid is that: a) The demand for the product that they produce is quite elastic, making the demand for labour wage elastic b) It is easy to substitute capital for labour in the industry, making the demand for labour wage elastic c) Labour costs comprise a large share of the employer s expenses, making the demand for labour wage inelastic 2
d) These workers collect economic rents e) These workers are seldom unionised 6. Which of the following statements is false? a) The quantity demanded for schoolteachers is equal to the quantity supplied in equilibrium b) The demand for schoolteachers is downward sloping because it is profitable for schools to hire more teachers when wages fall c) The demand for schoolteachers is likely to fall when the government decides to cut funding to schools d) The demand for schoolteachers is likely to be quite wage elastic e) None of the above 7. For a firm that is a competitor in the output market, the demand for labour does not depend on: a) The price of capital b) The market demand for the final product c) The structure of the labour market d) The marginal product of labour e) The price of the output 8. In the short run, the demand for labour for a competitive firm is: a) The marginal product of labour curve b) The value of the marginal product curve c) The downward sloping portion of the value of the marginal product curve d) Perfectly elastic at the market wage e) All of the above 9. The scale effect of a wage change implies that: a) Firms substitute toward the input that has become relatively cheaper b) Along with the substitution effect, the demand for labour is downward sloping c) The demand for labour may be upward sloping if labour is an inferior input d) The output always increases when the wage rate falls e) None of the above 3
10. In order to obtain the scale effect of a wage change: a) one traces the change of the quantity demanded of labour through a parallel shift in the isocost line. b) one moves either up or down the labour demand curve c) one traces the change in the quantity demanded of labour by moving along an isoquant curve as the prices change d) one needs to first know the wage elasticity of demand for labour e) one traces the change in output as firms respond to it. 4
PART II: SHORT-ANSWER QUESTIONS 1. [20 marks] Suppose that the production function for a firm operating in a perfectly competitive labour market and a perfectly competitive output market is given by the following: Q 100 10N 2 N 40, where N is the number of units of labour hired per week. a) If the price of output produced by the firm is $10 per unit, what is the equation for the firm s MRPN curve? b) Calculate optimal labour demand, the level of output and profits for the firm if the equilibrium wage is $40. (Note: ignore fixed costs in your calculations) 5
c) Suppose instead that the firm is a non-discriminating monopsonist in the input market but still faces perfect competition in the output market. If the industry labour supply curve is given by: w = 0.75N then it can be shown that the firm s marginal cost function is given by: MC = 1.5N Find the firm s optimal choice of labour. What is the wage and MRPN at the optimum. 2. [20 marks] Suppose that Graham s Angora Sweater Factory has the following long-run production function: 1 2 Q 20K N 1 2 a) Solve for the firm s Marginal Rate of Technical Substitution of capital for labour. 6
b) Suppose that the wage is equal to $10 and the rental rate on capital is equal to $40. Using your response to a), find the cost-minimizing capital to labour ratio at Graham s Angora Sweater Factory. For each unit of capital used how many units of labour should be used to minimize costs. c) Suppose that Graham (the owner) decides that he wants to produce 360 sweaters this period (i.e. Q=360). Given the firm s production function and your answer to b), how many units of labour and how many units of capital should the firm employ? 7
d) If the wage goes up to $20, but Graham does not adjust the output level, what do you predict (without calculating the result) will happen to the amount of labour demanded by the firm? Explain using income and/or scale effects. End of Exam 8