The final exam will consist of 75 questions that are equal in weight. Following are 51 questions that are similar in nature to the actual exam questions, grouped by topic, with answers and explanations of the answers attached at the end. You will find that the lecture slides (or your notes) are a good guide in recalling the material from class and making sure that you know it; for material that you never learned or never understood, the textbook would be a better source.

TOPIC 1: INTRODUCTION

1. Hours worked in the labor market are higher in _________ than the rest of the world.

a. the United States and Europe

b. the United States and Japan

c. Europe and Japan

d. Asia

2. An economy with widespread child labor will likely violate

a. the law of demand.

b. the rational actor framework.

c. the law of one price.

d. all of the above.

3. Use of deductive logic as a dominant method was introduced into economics by the ________ school.

a. classical

b. neoclassical

c. first institutionalist

d. second institutionalist

4. The idea that worker effort is a fundamental part of any model of the production process was first captured by

a. Karl Marx.

b. the second institutional school.

c. the fourth institutional school.

d. efficiency wage models.

5. The Second Institutional School was heavily influenced by

a. the Great Depression of the 1930s.

b. World War Two.

c. models of imperfect competition.

d. all of the above.

6. According to Oliver Williamson, the structure of modern firms is designed

a. to minimize compensating differentials.

b. to minimize internal labor markets.

c. to minimize opportunism.

d. to minimize search costs.

TOPIC 2: LABOR SUPPLY

7. In Ethiopia, when compared with most industrialized countries,

a. the public sector share of employment is large.

b. the formal private sector share of employment is large.

c. formal private sector employment is large relative to the public sector.

d. public sector employment is large relative to the formal private sector.

8. If we observe _______, it would be strong evidence that the informal sector is a secondary labor market.

a. lower wages in the informal sector than in the formal sector

b. lower skills in the informal sector than in the formal sector

c. higher quit rates in the informal sector than in the formal sector

d. a higher average age in the informal sector than in the formal sector.

9. For someone who does not work, except in a borderline case,

a. the marginal value of an hour of leisure is greater than the wage.

b. the marginal value of an hour of leisure is equal to the wage.

c. the marginal value of an hour of leisure is less than the wage.

d. the marginal value of an hour of leisure is negative.

10. If we draw a budget problem for time allocation where a worker has 100 discretionary hours, earns a wage of ETB3 per hour, the marginal rate of substitution of earnings for leisure is 3 (three hours leisure for one Birr) at every possible outcome, and we place leisure on the vertical axis and earnings on the horizontal axis, then the person will choose

a. 100 hours of work and no leisure

b. 50 hours of work and 50 hours of leisure

c. no work and 100 hours of leisure

d. an allocation that cannot be determined from the above information.

11. The individual labor supply curve slopes upward if

a. the income effect is negative.

b. the substitution effect is positive.

c. the income effect is larger in magnitude than the substitution effect.

d. the substitution effect is larger in magnitude than the income effect.

12. The individual labor supply curve is more likely to be upward-sloping for categories of workers

a. who have a higher wage than most.

b. who work fewer hours in the labor market.

c. who have a large unearned income.

d. who are highly skilled.

13. In the Nash solution to a bargaining game,

a. each player receives an equal outcome.

b. the outcome is Pareto efficient.

c. the outcome is unaffected by the default allocation, as long as it is above the default allocation.

d. all of the above are true.

14. In West African households, women and men often raise and harvest their own crops separately even in situations when joint harvest would increase output. This is seen as an example of

a. dictatorial behavior on the part of one household member.

b. a non-cooperative outcome in a marriage.

c. bargaining behavior when a non-cooperative marriage is possible.

d. overly altruistic household behavior.

15. A married couple has one child. After the wife's wage goes up, she decides to spend more time working and less time taking care of the child. As a result, the husband decreases his work hours so he can spend more time at home taking care of the child. This suggests that

a. the cross-income effect of the wage is positive.

b. the cross-income effect of the wage is negative.

c. the cross-substitution effect of the wage is positive.

d. the cross-substitution effect of the wage is negative.

TOPIC 3: LABOR DEMAND

16. The wage equals the price of the good a producer sells times the marginal product of labor whenever

a. the employer sells in a perfectly competitive product market.

b. the employer is in a perfectly competitive labor market.

c. the employer both buys labor and sells her product in perfectly competitive markets.

d. the employer is making short-run decisions.

17. The labor demand curve is given by the downward sloping portion of the firm's marginal revenue product curve for labor

a. in the short run.

b. when labor markets are perfectly competitive.

c. when the employer is maximizing profits.

d. when all of the above conditions hold.

18. If an employer is a monopolist, then

a. the wage is below the marginal revenue product.

b. the wage is below the marginal cost.

c. the firm hires fewer workers than would be efficient.

d. the marginal revenue product is below the marginal cost.

19. A reallocation of workers from a firm to a different firm might increase output if

a. the firm is a monopolist.

b. the firm is a monopsonist.

c. the firm is either a monopolist or a monopsonist.

d. the firm is both a monopolist and a monopsonist.

20. If every firm in an industry experiences a drop in the wage it has to pay,

a. employment at each firm will increase more than it would if that firm alone faced a a drop in the wage it had to pay.

b. the industry will become more competitive.

c. the industry will sell its products at a lower price.

d. employment in the industry will decrease.

21. A drop in the wage at which a firm can employ the number of workers it is currently employing will always raise employment

a. when firms are maximizing profits.

b. when the product market is perfectly competitive.

c. when the labor market is perfectly competitive.

d. when both the product market and the labor market are perfectly competitive.

22. The demand for labor, L, is given in terms of the wage, w, by the function L = 15 – 3w for the range 0 < w < 5. At an employment level of 9, the elasticity of labor demand is

a. -0.33

b. -.67

c. -1.5

d. -3

23. The wage bill and the wage are positively correlated whenever

a. the demand for labor is inelastic.

b. the demand for labor is elastic.

c. the employer is a monopolist.

d. the employer sells in a perfectly competitive product market.

24. The demand for labor is more elastic

a. when labor is a higher fraction of the total cost.

b. for less skilled workers.

c. when product demand is more elastic.

d. when any of the above conditions holds.

TOPIC 4: WAGE DETERMINATION

25. If firms have imperfect information about available workers, then

a. the supply of workers to the firm will be perfectly inelastic.

b. the law of one price may fail.

c. the firm-level supply curve may be downward-sloping.

d. the firm-level demand curve may be upward-sloping.

26. The law of one wage is violated by wage differences based purely on

a. skill.

b. industry.

c. effort.

d. any of the above.

27. In the equilibrium of a search-based wage model,

a. the flow of workers into higher wages must equal the flow of workers into lower wages.

b. the wage must equal the marginal product.

c. the number of firms hiring workers must equal the number of workers looking for jobs.

d. all of the above must hold.

28. Suppose that in a search-based wage model, the quit rate, as a function of the wage, is q(w)=1/w and number of workers available for hire every period is s(w)= w², for w>1. There is no involuntary turnover, i.e., workers stay until they quit. Then, if the equilibrium wage is 5, the equilibrium firm size must be

a. 5

b. 24.8

c. 25

d. 125

29. Efficiency wages may help explain

a. why identical workers may earn different wages.

b. why there is structural unemployment.

c. why labor markets do not clear.

d. all of the above.

30. If there is a binding nutrition wage that covers the entire labor market, then

a. firms will have monopoly power.

b. everyone will eat poorly.

c. there will be unemployment.

d. the wage level will be inefficiently low.

31. Suppose that there is a job amenity x that workers would be willing to pay for according to the hourly (inverse) demand function q = x²/4, where q is the amount by which the wage would be lowered. Firms can provide x at a constant marginal cost of 4. If the wage is 16, then in equilibrium, firms must be providing x in the amount of

a. 1

b. 4

c. 8

d. 16

32. When the wage is drawn on the vertical axis and a costly non-wage amenity is drawn on the horizontal axis, the firm's marginal willingness to pay for x at a particular quantity and a particular wage is given by its

a. isoquant.

b. isocost line.

c. isoprofit line.

d. isomorphism.

33. In a standard perfectly competitive labor market, unlike a compensating differentials model,

a. all workers have an equal opportunity in the labor market.

b. firms pay a wage premium for work effort.

c. equally productive workers always earn the same wage.

d. worker effort is difficult to observe.

TOPIC 5: LABOR MARKETS

34. We should expect to see larger internal labor markets in industries

a. where the production process is easier to understand.

b. where opportunism is less of a problem.

c. where specific human capital requirements are higher.

d. where all of the above conditions hold.

35. Some economists claim that industry wage differences are due to differences in unobservable skills of workers between industries. A piece of evidence in support of this claim is that

a. industry wage differences are smaller for workers who switch industries.

b. quit rates are lower in high-paying industries.

c. workers in high-paying industries have longer job durations.

d. high-paying industries pay highly across all occupations within the industry.

36. In a perfectly competitive labor market, if Uzbek workers are prejudiced against Kazakh workers, then in equilibrium,

a. Kazakh workers will receive a lower wage.

b. Uzbek workers will receive a lower wage.

c. Kazakh and Uzbek workers will work in different firms.

d. firms that hire Kazakh workers will make lower profits.

37. Wage discrimination will never strictly increase profits unless

a. the firm pays an efficiency wage.

b. the firm pays a compensating differential.

c. the firm has monopsony power.

d. at least one of the above holds.

38. If a firm is a monopsonist,

a. it will discriminate against workers with more elastic labor supply to the firm.

b. it will discriminate against workers with less elastic labor supply to the firm.

c. it will pay an efficiency wage.

d. it will pay a compensating differential.

39. In a perfectly competitive labor market, statistical discrimination, unlike job segregation due to employee prejudice,

a. will result in different wages for equally productive workers.

b. is profitable for employers.

c. assumes that one group is less observable than the other.

d. has all of the above features.

40. Society consists of two groups: Trogladites and Toads. Seventy percent of Trogladites have a marginal product of one, and 30 percent have a marginal product of two. Fifty percent of Toads have a marginal product of one, and fifty percent have a marginal product of two. Firms cannot observe a worker's marginal product, but merely whether the worker is a Trogladite or a Toad. They then pay Trogladites 1.30 and Toads 1.50. In this case,

a. there is statistical discrimination against Trogladites as a group.

b. there is discrimination against high-ability Trogladites.

c. there is discrimination against low-ability Toads.

d. all of the above forms of discrimination exist.

41. Unlike wage discrimination in a perfectly competitive labor market, wage discrimination in a market with efficiency wages

a. increases profits.

b. does not lower profits.

c. does not require prejudice by employers.

d. will not lead to occupational segregation.

42. In the standard Harris-Todaro model, if labor demand in the urban formal sector is everywhere elastic, then getting rid of the wage rigidity in the urban formal sector wage

a. will increase rural employment.

b. will decrease rural employment.

c. will increase urban unemployment.

d. will raise the rural wage.

TOPIC 6: HUMAN CAPITAL

43. If a worker lives forever, invests ETB500 in human capital, the rate of return to investment is 10 percent per year starting next year, and the interest rate is 5 percent, then the present value of the investment is

a. ETB 100

b. ETB 250

c. ETB 500

d. ETB 1000

44. Given the common differences between the social and private cost of and return to an education, the quantity of education chosen by individuals

a. will generally be below the socially optimal quantity.

b. will generally be above the socially optimal quantity.

c. could be above or below the socially optimal quantity.

d. will entail an inefficiently high return.

45. If people with a high cost of education also tend to have a lower return, then we should see

a. people having different amounts of schooling but a similar return.

b. people having different returns to schooling but similar quantities.

c. people with more schooling having a lower return.

d. people with more schooling having a higher return.

46. If the labor market is monopsonistic, and workers with a secondary education have a more elastic labor supply than workers with a primary education, then

a. there will be wage discrimination against workers with a secondary education.

b. the wage difference between these two groups of workers will be smaller than the difference in their marginal products.

c. the wage difference between these two groups of workers will be larger than their difference in marginal products.

d. firms will hire more workers with a secondary education than workers with a primary education.

47. According to job signaling theory,

a. education is at least partly a waste of resources.

b. the economy would be equally productive if no one went to school.

c. education is uncorrelated with intelligence.

d. all of the above are true.

48. If firms have monopsony power,

a. firms will pay more for general training than for firm-specific training.

b. firms will pay more for firm-specific training than for general training.

c. firms will pay equally for general training and firm-specific training.

d. any of the above could be true.

49. According to pure job matching models,

a. wages do not grow with job seniority.

b. workers do not become more productive with time spent on the job.

c. the average worker with a long job tenure has the same productivity as the average new worker.

d. all of the above are true.

50. A perfectly competitive firm may pay its newer workers less than their marginal products, and its senior workers more than their marginal products,

a. to prevent workers from quitting.

b. to guarantee worker effort.

c. to make workers afraid of losing their jobs.

d. to do all of the above.

51. Wages of more educated people will peak later in life if

a. education and job training are complements in production.

b. education and job training are substitutes in production.

c. general capital depreciates faster than specific capital.

d. specific capital depreciates faster than general capital.