Modern Labor Economics Theory and Public Policy 12th Edition Ehrenberg Test Bank Download

Modern Labor Economics Theory and
Public Policy 12th Edition Ehrenberg

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Modern Labor Economics, 12e (Ehrenberg/Smith)
Chapter 6 Supply of Labor to the Economy: The Decision to Work
1) A person who receives time-and-a-half overtime for working more than 8 hours per day will
have a ________ which is ________ beyond 8 hours of labor.
A) budget constraint; flatter
B) indifference curve; flatter
C) budget constraint; steeper
D) indifference curve; steeper
Answer: C
Question Status: Old
2) If leisure is a normal good, then an increase in non-labor income will cause desired hours of
work to
A) increase.
B) decrease.
C) stay the same.
1
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D) either decrease or increase.
Answer: B
3) Through the substitution effect, a decrease in the wage rate will cause ________ in the
quantity of leisure desired.
A) an increase
B) a decrease
C) no change
D) an ambiguous change
Answer: A
4) If income is held constant and the wage rate increases, the desired hours of work will
A) increase.
B) decrease.
C) stay the same.
D) change ambiguously.
Answer: A
5) A wage increase creates a substitution effect which leads the worker to desire ________
leisure, and an income effect which leads the worker to desire ________ leisure.
A) more; less
B) less; more
C) less; less
D) more; more
Answer: B
6) An increase in the marginal tax rate will cause

A) a pure income effect.
B) a pure substitution effect.
C) both an income and a substitution effect.
D) neither an income nor a substitution effect.
Answer: C
7) An increase in nonlabor income due to a rise in the value of stocks and bonds will cause
A) a pure income effect.
B) a pure substitution effect.
C) both an income and a substitution effect.
D) neither an income nor a substitution effect.
Answer: A
8) If Alice's wage increases from $6.00 per hour to $6.50 per hour, then
2
A) she will want to work more hours than before her raise.
B) she will want to work fewer hours than before her raise.
C) she will want to work the same number of hours as before her raise.
D) she may want to work more, fewer, or the same number of hours as before her raise.
Answer: D
9) If Gene receives a raise in his hourly wage and decides he would like to increase his hours of
work, we know that
A) his income effect is greater than his substitution effect.
B) his substitution effect is greater than his income effect.
C) his income and substitution effects are equal.
D) his income and substitution effects reinforce each other.
Answer: B
10) Indifference curves drawn with leisure and income on the axes have negative slopes
A) because people are willing to give up income to obtain more leisure and vice versa.
B) if a person likes leisure more than income.
C) because they cannot cross one another.
D) unless one of the goods is inferior.
Answer: A
3
11) On the portion of a worker's labor supply curve that is backward-bending,
A) the substitution effect outweighs the income effect.
B) the income effect outweighs the substitution effect.
C) the income effect is negative.
D) the substitution effect is negative.
Answer: B
12) Studies of the hours of work of older men have found that the substitution effect dominates
the income effect. This suggests that, other things the same,
A) an increase in non-work expenses will cause older men to work shorter hours.
B) an increase in the tax rate on income will cause older men to work longer hours.
C) tax changes have no effect on their labor supply.
D) older men will retire earlier in those careers where wages fall more as they get older.
Answer: D
13) If a worker's desired hours of labor do not change after a decrease in his wage rate, then
A) his income effect dominates his substitution effect.
B) his substitution effect dominates his income effect.
C) his income and substitution effects are of equal magnitude.
D) his income and substitution effects are small in absolute value.
Answer: C
14) The Earned Income Tax Credit will probably ________ the labor force participation of low-
wage workers and ________ the labor market hours of those with earning in the range that the
tax credit is being phased out.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
Answer: A
15) A decrease in the implicit tax rate on welfare benefits serves as

A) an incentive to work fewer hours.
B) an incentive to work more hours.
C) a way to decrease the incomes of welfare recipients.
D) a way to decrease spending on benefits.
Answer: B
4
16) An Earned Income Tax Credit will
A) increase the reservation wage of low-wage workers.
B) increase the wage rate of some low-wage workers to a rate which is above the reservation
wage.
C) create only an income effect.
D) create only a substitution effect.
Answer: B
17) Empirical studies suggest that the responsiveness of married working women's hours to wage
changes is ________ than for men and that they are ________ to enter or leave the labor force
due to changes in their wages.
A) no different; more likely
B) no different; less likely
C) greater; more likely
D) greater; less likely
Answer: A
18) Empirical estimates show that for men

A) the income effect is greater than the substitution effect.
B) the substitution effect is greater than the income effect.
C) the income and substitution effects are both large so that wage changes have no effect on
hours.
D) the income and substitution effects are both small so that wage changes have no effect on
hours.
Answer: D
19) A person with ________ indifference curves is most likely to decide not to participate in the
labor force.
A) flat
B) steep
C) straight
D) upward-sloping
Answer: B
20) Fixed costs of working will cause ________ the number of people choosing to work zero
hours.
A) an increase in
B) a decrease in
C) no change in
D) an ambiguous change in
Answer: A
Question Status: Revised
5
21) An individual's reservation wage
A) is determined by supply and demand in the labor market.
B) is the value of the marginal hour of leisure time if the individual does no work.
C) is the amount of money the individual earns by working an additional hour.
D) decreases as non-labor income increases.
Answer: B
Question Status: New
22)
Consider the above figure. If the wage rate is initially $8 per hour and subsequently increases to
$12 per hour, then
A) the income effect dominates and optimal hours of work increase by 3 hours.
B) the income effect dominates and optimal hours of work decrease by 3 hours.
C) the substitution effect dominates and optimal hours of work increase by 3 hours.
D) the substitution effect dominates and optimal hours of work decrease by 3 hours.
Answer: C
23) In 1986 Congress drastically cut the marginal tax rate on upper income levels from 50% to
28%. Empirical evidence analyzing the labor supply effects of the tax cut found that women in
the high income tax bracket
A) did not respond in any significant way to the tax cut, as their high level of income ensured
that they were already content with their labor supply choices.
B) experienced offsetting substitution and income effects.
C) increased both labor force participation and hours of work significantly.
D) reduced their labor force participation and hours worked significantly because of a dominant
income effect.
Answer: C
6
24) The figure above illustrates a "spiked" budget constraint attendant to income replacement
programs such as workers' compensation and unemployment insurance. Assume that, prior to
injury or unemployment, the worker earns $E0 per time period, works H0 = A - L0 hours, and
enjoys utility level U1. In order to minimize the work disincentives associated with income
replacement while maintaining the worker near the original level of utility, the program ought to
pay a benefit
A) a little bit less than Ag.
B) equal to the original earnings level, E0.
C) greater than AC.
D) a little bit less than AC.
Answer: A
25) A worker is indifferent between job one lasting 4 hours a day, job two lasting 8 hours a day,
and job three lasting 12 hours a day. Job two pays $10 an hour and tangency between the
indifference curve and the budget constraint occurs at 8 hours. One can conclude that
A) job one pays less per day but more per hour.
B) job three pays more per day and more per hour.
C) both A and B are true.
D) neither A nor B is true.
Answer: C
26) Empirical evidence on the Earned Income Tax Credit (EITC) shows that expansions in that
program from the latter 1980s through the mid-1990s caused
A) significant withdrawal from the labor force by teenagers.
B) significant increase in the labor force participation of single mothers.
C) adult men to significantly increase their total hours of work.
D) married women to significantly increase their hours of work.
Answer: B
7
27) An increase in the wage rate when the substitution effect dominates will ________ labor
force participation and ________ hours of work.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: A
28) An increase in travel time to work will likely ________ labor force participation and
________ hours spent working and traveling (of those working and traveling before and after the
wage increase).
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: D
29) Mary earns $20 an hour and works 10 hours a week. She gets a raise to $30 an hour but at
the same time her fixed weekly work expenses go up $100. If she continues to work, she will
most likely
A) continue to work 10 hours.
B) increase her hours of work.
C) decrease her hours of work.
D) decrease her hours of work if the income effect dominates the substitution effect.
Answer: B
30) A professor declared "with the recent drop in the value of my stock portfolio, I will have to
put off retirement by another two years." This decision reflects
A) the substitution effect.
B) the income effect.
C) the portfolio effect.
D) the effect of a budget constraint with a spike.
Answer: B
8
31) Indifference curves drawn with income and leisure on the axes are convex to the origin of the
graph because
A) people are willing to give up income to obtain more leisure and vice versa.
B) the marginal hour of leisure time becomes less valuable as one works fewer hours and more
valuable as one works more hours.
C) the marginal hour of leisure time becomes more valuable as one works fewer hours and less
valuable as one works more hours.
D) utility increases as income and leisure increase.
Answer: B
32) A welfare program offers $4000 of benefits to those not working. For those working, it
reduces benefits dollar for dollar until there are no benefits to be paid. The program is then
modified so that for every dollar earned, benefits are only reduced by 50 cents. Mr. X earned
$6000 under the old program. What will be the effect of the new program (noting that he is in the
range to receive benefits)?
A) Both his income and substitution effect will decrease his desired hours of work.
B) Both his income and substitution effect will increase his desired hours of work.
C) His income effect will increase his desired hours of work, but his substitution effect will
decrease his desired hours of work.
D) His income effect will decrease his desired hours of work, but his substitution effect will
increase his desired hours of work.
Answer: A
33) A country has no welfare program. Then it introduces the following program: everyone gets
$4000 if they work more than 1000 hours a year (on top of what they earn). The effect of this
event will be to ________ the labor force participation and the effect of this event on those who
were working more than 1000 hours will be to ________ hours of work.
A) increase, increase
B) decrease, increase
C) increase, decrease
D) decrease, decrease
Answer: C
34) Many working mothers have to pay for childcare costs. If they don't work, they do not have
to pay for these costs. If childcare costs go up dramatically, the effect will be to ________ the
labor force participation of working mothers and to ________ the hours of work for those
mothers who continue to work.
A) decrease, decrease
B) increase, increase
C) increase, decrease
D) decrease, increase
Answer: D
9
35) The property tax goes up $4000 a year. This will cause those who are working to work
________ hours and their annual income to go ________ $4000.
A) more, up by more than
B) more, up by less than
C) fewer, down by less than
D) fewer, down by more than
Answer: B
36) "The wage rate (w) is the 'price' that the labor market attaches to an hour of the individual's
time." How is this any different from the individual's marginal rate of substitution between
leisure and income? Explain carefully.
Answer: The marginal rate of substitution between leisure and income represents the dollar
value an individual attaches to the marginal hour of time. The MRS is subjective to the
individual and determined by the individual's tastes and preferences for income and leisure. The
wage rate is objectively determined by market forces and represents the amount that an
individual would be paid for an hour of work time. It is a price in the sense that the wage is the
amount an employer must pay in order to rent an hour of labor service.
37) Why are indifference curves between money income and leisure convex to the origin of the
graph? In your discussion, introduce the concept of marginal rate of substitution between leisure
and money income and explain its relevance to the convexity property of the indifference curves.
Answer: Convex indifference curves reflect diminishing marginal utility in leisure and in money
income. The marginal rate of substitution between leisure and money income is the amount of
money that an individual would need to be compensated with for sacrifice of an hour of leisure
in order to maintain a given level of utility. The MRS is also the absolute value of the slope of
the tangent line to a given point on an indifference curve. Convexity in the indifference curve
means that the indifference curve becomes progressively steeper as income is substituted for
leisure along the curve. As income is substituted for leisure, the marginal dollar becomes
progressively less valuable and the marginal hour of leisure becomes progressively more
valuable, both due to the diminishing marginal utility property assumed for the goods. Hence, as
income is substituted for leisure, the marginal hour of time becomes progressively more valuable
and this is exactly what is reflected in a convex indifference curve. Its slope increases as income
is substituted for leisure, the slope is the MRS, therefore the MRS increases as one has less
leisure and more money income when the indifference curve is convex.
10
38) How does an increase in non-labor income affect desired hours of work for a labor force
participant? Use indifference curve analysis to illustrate and support your answer. State any
assumptions that you make.
Answer: Assuming leisure is a normal good, an increase in non-labor income moves the
individual to a higher indifference curve that is steeper than the new budget constraint at the
initial level of leisure consumption. The extra non-labor income increases the value of the
marginal hour of leisure. Because the indifference curve is steeper than the budget line at the
initial level of leisure consumption following the increase in non-labor income, the individual is
willing to sacrifice more income to obtain an additional hour of leisure time than is necessitated
given the current wage. Working fewer hours and enjoying more leisure, therefore, will raise the
individual's utility further still. The individual should move to a point of tangency between an
indifference curve and the new budget line, which will be to the right of the point reflecting the
original level of leisure consumption on the new budget line..
39) Frankie and Johnny can both earn a wage rate of $10 per hour and, coincidentally, both have
$100 per week in non-labor income. Assume that both have T = 100 hours per week to allocate
to leisure and work. Frankie chooses to work 40 hours per week. Johnny, on the other hand,
chooses not to work at all! Use indifference curve analysis to account for why two individuals
confronting the same wage rate and with the same amount of non-labor income make such
different labor supply choices.
Answer: At any given leisure-income combination Johnny attaches much greater value to an
hour of leisure time than does Frankie. In graphical terms Johnny's set of indifference curves are
much steeper than Frankie's. Given Johnny's preferences, he maximizes utility by choosing not
to work because he requires more in compensation even for the sacrifice of the first hour of
leisure than the $10 the labor market is willing to pay him for that hour. Frankie, on the other
hand, finds the $10 wage more than sufficient to compensate her for many hours of her leisure
time. It is only at the point where she's worked 40 hours during the week that she finds sacrifice
of another hour of leisure for $10 in compensation raises her utility level no further.
40) Jack currently works 38 hours per week at a wage rate of $15 per hour. His marginal rate of
substitution is $20 per hour. Is Jack's utility maximized? If yes, explain why. If no, explain
why not and discuss what Jack should do in order to further increase utility.
Answer: Jack's utility isn't maximized. His MRS implies he's willing to sacrifice $20 in order to
enjoy an additional hour of leisure. Given his wage rate, however, he only gives up $15 by
working one less hour. Hence working fewer hours will increase his utility level as he sacrifices
less income than he's willing to in order to enjoy more leisure time. Jack should substitute
leisure for income (i.e., work fewer hours) to the point where his MRS equals $15.
11
41) "People who value leisure more highly have indifference curves that are generally steeper.
People who do not value leisure highly have relatively flat indifference curves." Explain the
quote.
Answer: The absolute value of the slope of the tangent line to a point on the indifference curve
is the marginal rate of substitution between leisure and money income. Intuitively, the MRS
represents the amount of money income an individual would give up in order to enjoy one
additional hour of leisure time with no change in utility. The MRS is, in essence, the dollar
value of the marginal hour of leisure time. Individuals that value leisure highly will have, other
things equal, larger marginal rates of substitution, which in turn implies that they will have
steeper indifference curves at a given combination of income and leisure.
42) Other things equal, the less convex is an individual's indifference curve, the greater will be
the substitution effect of a wage change. Explain why.
Answer: The substitution effect of a change in the wage is the change in leisure consumption (or
hours worked) induced by a change in leisure's opportunity cost while holding utility constant.
An increase in the wage rate other things equal implies that the MRS < W at the original income-
leisure combination. Hence the individual will be compensated for an hour of work by more
than is necessary to maintain utility at a given level. The individual therefore has incentive to
work more hours (i.e., substitute income for leisure) as long as MRS < W. As an individual
works more hours, however, the MRS increases because leisure becomes progressively more
valuable at the margin as you have less of it. Substitution of income for leisure therefore will
ultimately restore equality between the MRS and the wage. If an indifference curve is very
convex, it won't take much substitution of income for leisure to re-equate the MRS and the wage
and the substitution effect will be relatively small. If the indifference curve is not very convex,
substitution of income for leisure will move the value of the MRS slowly, hence it will take a lot
of substitution of income for leisure to restore equality between the MRS and the wage rate.
Accordingly, the substitution effect (the change in hours worked and leisure consumed) will be
comparatively large when the indifference curve is not very convex.
43) Consider two workers–Averil and Taylor. They both earn the same wage rate and neither
has any non-labor income. Averil chooses to work 40 hours per week and Taylor chooses to
work 10 hours per week. Due to improving macroeconomic conditions both workers experience
an exogenous 10% increase in their common wage rate. Explain which worker is likely to have a
larger income effect as a result of the wage increase. Illustrate with the appropriate graph.
Answer: The relevant figure in the text is Figure 6.11. A wage change changes both purchasing
power and the opportunity cost of leisure time. The income effect relates to the first
phenomenon. Suppose both Averil and Taylor experience an increase in wage of a dollar per
hour. Then Averil earns an additional $40 per week given her current work schedule. Taylor
who gets the same wage increase only gets an extra $10 per week in income on her current work
schedule. Though the wage has changed by the same degree for both workers, it confers a much
larger change in purchasing power to the worker that works more hours in the first place and
therefore the income effect of the wage change will be larger for Averil and smaller for Taylor.
44) "When a worker's wage rate changes, there are two opposing effects—an income effect and a
12
substitution effect." Explain the meaning of the quote.
Answer: When the wage rate changes, two things occur simultaneously—the worker's
purchasing power changes and the opportunity cost of leisure time changes. The income effect
and the substitution effect reflect the change in leisure (or hours worked) that occur as a result of
these two opposing forces. The income effect is the change in leisure consumption (or hours of
work) due to the change in purchasing power conferred by the wage change, holding the wage at
its initial value. The substitution effect, on the other hand, is the change in leisure consumption
(or hours of work) that occurs due to the change in the opportunity cost of leisure, holding the
worker at a given utility level (thus holding real purchasing power constant).
45) What is the earned income tax credit (EITC)? The EITC probably increases labor force
participation but probably also reduces hours worked by those already working. Explain why in
both instances using indifference curve analysis.
Answer: The Earned Income Tax Credit is a tax credit that goes to low income workers and is
based on hours worked. The EITC is administered through the federal income tax by by the
Internal revenue Service. The EITC is viewed as an income maintenance program that preserves
work incentives unlike traditional welfare programs. The EITC was expanded significantly
during the 1990s under President Clinton.
Students should draw an EITC budget constraint, as in Figure 6.17 in order to discuss the effects
of the EITC on labor force participation and on hours of work. The EITC increases labor force
participation because it effectively increases the wage rate paid to workers supplying few or no
hours of work. Labor force participation requires that the wage exceed the reservation wage. By
increasing the wage on the order of 40 percent, the labor force participation condition is satisfied
for more individuals under the EITC, other things equal.
The EITC budget constraint has three distinct zones. The first zone, in the lowest income range,
has a wage greater than the market wage, implying a pro-work substitution effect and an adverse-
to-work income effect. The second zone, in the middle income range, is parallel to the original
budget constraint, implying a pure, adverse-to-work income effect. As the EITC is phased out at
higher incomes, the third zone implies both an income effect and a substitution effect that are
adverse to work. Though empirical evidence confirms that hours of work fall under the EITC,
the effect is relatively small.
46) The female labor force participation rate

A) doubled because of World War II and has remained roughly constant at near 50% since that
time.
B) dropped sharply from approximately 60% in 2000 to under 45% in 2011 because of the Great
Recession.
C) increased steadily from about 30% in 1950 to approximately 60% in 2000.
D) is now about the same as the overall male labor force participation rate thanks to the
eradication of gender inequality.
Answer: C
13
47) The average workweek in U.S. manufacturing plants
A) has dropped steadily since 1960 from about 60 hours per week to 35 hours per week
currently.
B) has increased from about 35 hours per week in 1970 to about 45 hours per week by 2010.
C) fluctuates significantly over the business cycle, averaging about 50 hours per week at
business cycle peaks and 32 hours per week at business cycle troughs.
D) dropped from about 55 hours per week in the early part of the 20th century to approximately
40 hours per week by 1950 and since 1950, aside from small variation over the business cycle,
has remained at about 40 hours per week with no trend in either direction.
Answer: D
48) The opportunity cost of leisure

A) is the wage that one could earn by working an additional hour.
B) is the amount of income that would be necessary to hold an individual's utility level constant
were they to work an additional hour (that is, give up an hour of leisure time).
C) is equivalent to the individual's non-labor income.
D) is directly related to the individual's level of leisure consumption per time period.
Answer: A
49) If an individual's income effect is stronger than the individual's substitution effect, a wage
increase will cause that individual to
A) increase hours worked, and this increase will be larger than if the same change in wealth were
caused by a change in non-labor income.
B) decrease hours worked, but this decrease will be smaller than if the same change in wealth
were caused by a change in non-labor income.
C) decrease hours worked, and this decrease will be larger than if the same change in wealth
D) increase hours worked, but this increase will be smaller than if the same change in wealth
Answer: B
14

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Modern Labor Economics Theory and Public Policy 12th Edition Ehrenberg Test Bank Download

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Modern Labor Economics Theory and

Public Policy 12th Edition Ehrenberg

Full download at link:

Test Bank: https://testbankpack.com/p/test-bank-for-modern-labor-

Solution Manual: https://testbankpack.com/p/solution-manual-for-

6) An increase in the marginal tax rate will cause

15) A decrease in the implicit tax rate on welfare benefits serves as

18) Empirical estimates show that for men

46) The female labor force participation rate

48) The opportunity cost of leisure

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