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

5. If leisure is a normal good and the wage falls

a. the substitution effect will induce the consumer to take more leisure and the income
effect will induce the consumer to take more leisure
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. the substitution effect will induce the consumer to take more leisure and the
income effect will induce the consumer to take less leisure
d. the substitution effect will induce the consumer to take less leisure and the income
effect will induce the consumer to take less leisure

6. Identify the truthfulness of the following statements.

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

Figure 1

10. Which of the following is true in Figure 1?

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

14. Suppose leisure is a normal good. As the wage rate increases

a. work time should go up.
b. work time should go down.
c. work time will go up or down depending on the relative sizes of the income and
substitution effect.
d. none of the above.
15. A backward bending labour supply curve occurs when
a. leisure is a normal good and the substitution effect dominates at low wage rates.
b. leisure is a normal good and the income effect dominates at high wage rates.
c. at low wages, leisure is a normal good; but at high wage rates leisure is an inferior good.
d. both (a) and (b).
16. The price of children
a. must be zero by law.
b. only includes expenditure on goods and services.
c. includes female foregone earnings
d. has been decreasing over time

17. The theory of household productions assumes that the household derives utility from
a. income
b. time spent in home production
c. commodities produced by the household
d. market purchased goods services
18. In the theory of household production, the household must
a. determine what is to be produce.
b. determine how to go about produce the commodities they care about
c. determine the combinations of leisure and income that produce a certain level of utility
d. both (a) and (b).
19. In a one period model of household production the effects of a wage increase cause
a. the full price of time intensive home produced commodities to increase more than the full
price of market goods intensive home produced commodities.
b. the full price of time intensive home produced commodities to decrease less than the full
price of market goods intensive home produced commodities.
c. the full price of market goods intensive home produced commodities to increase more
than the full price of time intensive home produced commodities.
d. the full price of time intensive home produced commodities to increase and the full
price of market goods intensive home produced commodities to decrease.

20. In a one period model of household production, the substitution in consumption is

a. the effect of changing the relative full price on home produced commodities.
b. the effect of changing the price of consumption time
c. the effect of changing the price of market goods
d. the effect of changing the non-labour income of the household
21. If the wage rate is increasing over time, and household consumption time is decreasing, then
a. the substitution of the wage increase has been dominated by the income effect.
b. the substitution of the wage increase dominates the income effect.
c. the substitution in consumption working in the same direction as the substitution in
production.
d. the substitution in consumption works in the opposite direction as the substitution in
production.
22. If the demand elasticity of output is .9 and labour takes up 30% of total cost and the
Hicks-Allen elasticity of substitution is .7. The own wage elasticity of labour is
a. 1.6
b. 0.76
c. 1.9
d. cannot be calculate given this information
23. The wage that just makes an individual indifferent between being a participant in
the labour market and not being a participant is
a. the reservation wage
b. the optimal wage
c. the value of a person time in the market
d. the wage that determines full income.
24 .The own wage elasticity of labour depends on
a. The share of labour in total cost.
b. The elasticity of the supply of capital
c. The elasticity of the demand for output.
d. all of the above.
25. The Utility maximizing level of leisure occurs where
a. full income is reached
b. the marginal valuation of ones own time equals the wage rate
c. the marginal rate of substitution is maximize.
d. peak of the labour supply curve

26. For children to be inferior goods

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

33. If labour in an inferior factor, the a wage decrease causes

a. a substitution and scale effect that work in opposite directions to each other.
b. a substitution and scale effect that work in the same direction as the wage change.
c. an increase in the quantity of labour demanded and a decrease in the quantity of output.
d. a backward bending demand for labour.
34. At the utility maximizing level of leisure
a. the price of time is irrelevant
b. the leisure time is maximized
c. the marginal rate of substitution equals the wage
d. the level of income is irrelevant
35. Constant returns to scale of home production functions means
a. inputs can be written as functions of output
b. the scale of production is constant in terms of price
c. the level of output is independent of the income earned
d. that the full price of a home produced good is constant
36. The substitution effect of a wage change
a. must always dominate the income effect if leisure is normal
b. must always reinforce the income effect if leisure is normal
c. must always counteract the income effect if leisure is normal
d. is measured at the reservation wage.
37. An individual will be a non-participate in the labour market provided
a. the indifference curves between leisure and income are steep
b. a tangency between the budget constraint and the indifference curve is reached
c. at the point where leisure is at its maximum, the wage is less than the slope of the
indifference curve
d. at the point where leisure is at its maximum, the wage is more than the slope of the
indifference curve
38. If a person has preferences that lead to a choice of positive numbers of work hours, an
increase in the wage rate will result in
a. an income effect only
b. an increase or decrease in leisure time
c. possibly becoming a non-participant in the labour market
d. a higher reservation wage
39. If the wage decreases by 5 percent and the quantity of workers demanded goes down by 4
percent, the wage elasticity of the demand for labour is
a. 0.8.
b. 0.5.
c. 1.75.
d. 4.0.

40. An increase in the share of labour in total cost

a. makes the demand for labour more elastic.
b. makes the demand for labour less elastic.
c. makes the demand for labour more elastic if the elasticity of substitution is greater
than the output demand elasticity.
d. makes the demand for labour less elastic if the elasticity of substitution is greater
than the output demand elasticity.

Econ 2155 Sample solutions

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