Labor Supply | Econ Homework

Labor Supply | Econ Homework

Name: ___________________________________________

ECON 656: Labor Economics

Midterm Exam

Spring 2021

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Instructions:

• You may write answers within this Word document, in your own Word document or on paper. Save Word documents with your last name and 656 midterm.
• Put your name at the top of the first page of a Word File and on every handwritten page that will go into a photo/.pdf.
• Be very careful in labeling questions and the graphs that go with them. (Use A1, A2, A3, B1, B2, C1, C2).

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1. Short Answer (30 points)

Answer two of the three questions.

1. Explain what an isoquant is and why it gets flatter as employment increases. The answer should provide any relevant technical definitions and an intuitive explanation. Draw a graph to accompany your answer.

2. Define the term reservation wage, verbally and graphically. If a person chooses not to work, how does her reservation wage compare to the wage offered by an employer? Draw a graph that shows this.

3. Does the Earned Income Tax Credit (EITC) make individuals more likely or less likely to work? Why? Draw a graph to illustrate your answer.

1. Problems (40 points)

Answer both questions.

1. Workers at these firms are trying to unionize, so they can raise wages while not causing a decrease in employment. In each case, which firm would be more successful and why? And what might be real-world examples of each type of firm? (You do not need graphs or equations.)

1. Firm A has higher elasticity of substitution of K and E than Firm B.

1. Firm C has higher elasticity of demand in its product market than Firm D.

2. Answer each of the questions about Tasha’s labor supply decision. Label all graphs carefully.

1. Tasha is currently working 30 hours per week at wage w. She has no non-labor income. Draw a graph that represents this situation and label it fully.

1. Now her wage falls and she works more hours. Show this graphically, adding to the existing graph. Which is dominating – and income or substitution effect? Explain what that effect means.

1. Start with a clean graph to match part a. Now explain what happens when Tasha qualifies for a substantial cash benefit each month if she does not work. If she starts to work, she loses $1 of the cash benefit for each $1 she earns. Will this make her less likely or more likely to work? Show this graphically.

1. Essay (30 points)

Answer one of the two questions. You should allow for about 20 minutes to answer this question. Two pages double-spaced should be sufficient.

1. In 2018, 7 million Americans worked but still had incomes at or below the poverty line. What policy would you recommend to fix this problem? There is no “right answer” to this question, but your response should reference material from one or more of the following articles: Meyer (2010), Card and Krueger (1995), Sabia et al. (2012), Neumark (2015).

2. How does the U.S. compare to other countries in terms of female labor force participation? According to Blau and Kahn (2013), what are two explanations for the difference?

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