Deck 6: Supply of Labor to the Economy: the Decision to Work

Question 1

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 1

B

Question 2

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 2

B

Question 3

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 3

A

Question 4

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.

Question 5

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) that an increase in non-work expenses will cause older men to work shorter hours.
B) that an increase in the tax rate on income will cause older men to work longer hours.
C) show that tax changes have no effect on their labor supply.
D) that older men will retire earlier in those careers where wages fall more as they get older.

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

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.

Question 10

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

Question 11

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.

Question 12

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

Question 13

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

Question 14

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.
D) either decrease or increase.

Question 15

If Alice's wage increases from $6.00 per hour to $6.50 per hour, then

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.

Question 16

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.

Question 17

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.

Question 18

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

Question 19

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

Question 20

Fixed monetary 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

Question 21

A country has no welfare program. Then it introduces the following program: every one 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 were working more than 1000 hours will be to ________ hours of work.

A) increase, increase
B) decrease, increase
C) increase, decrease
D) decrease, decrease

Question 22

Fixed costs of working act like

A) a pure substitution effect.
B) a pure income effect.
C) a combination of both a substitution and an income effect.
D) neither a substitution nor an income effect.

Question 23

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.

Question 24

An increase in the wage rate when the substitution effect dominates will ________ labor force participation and ________ hours of work (of those working before and after the wage increase).

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question 25

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.

Question 26

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.

Question 27

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 constant 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 are true

Question 28

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

Question 29

A subsidy to pay for a portion of child care costs will cause labor force participation rates to

A) remain unchanged.
B) change ambiguously.
C) increase.
D) decrease.

Question 30

A subsidy to pay for a portion of childcare costs will cause women who are participating in the labor force to work ________ hours.

A) more
B) fewer
C) the same number of
D) at least as many

Question 31

A welfare program offers benefit B to those not working. For those working, it reduces benefit by a dollar for every dollar earned until no benefits are left to be paid. It is found that increasing B results in longer hours of work for those who continue to work. The likely cause of this is

A) the dollar for dollar reduction in B reduces the increase in income to zero, resulting in an income effect that causes people to work longer hours.
B) only those with a higher preference for working (flatter utility curves) will continue to work
C) the increase in B reduces the substitution effect.
D) the increase in B results in an income and substitution effect on those working that causes them to work longer hours.

Question 32

The property tax goes up $4000 a year. This will cause those who are working to work ________ hours and their annual income to go by ________ $4000.

A) more, up by more than
B) more, up by less than
C) decrease, down by less than
D) decrease, down by more than

Question 33

A decrease in the fixed time cost of working will cause an increase in hours of work and

A) therefore, a decrease in hours of leisure.
B) an increase in hours of leisure.
C) no change in hours of leisure.
D) an uncertain change in hours of leisure.

Question 34

An increase in the fixed cost of working will ________ labor force participation and ________ hours of work (of those working before and after the increase in the fixed cost of working).

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question 35

An increase in travel time 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