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Sample questions for Midterm Examination

Sample questions for Midterm Examination 

  1. If a firm has market power in its labor market (monopsony), does this say anything about its market power in the output market?  Explain.  How does the amount of labor employed and the wages paid to workers at these firms compare to those where there is no market power?  (p.s. a follow-up question to this might be WHY) 
  2. If a firm has market power in the output market (monopoly), does this say anything about its market power in the input market? Explain.  How does the amount of labor employed and the wages paid to workers at these firms compare to those where there is no market power? (p.s. a follow-up question to this might be WHY) 
  3. A firm uses two inputs, labor (L) and capital (K). This firm currently produces 2000 units of output and sells them at $6.00 per unit.  To produce these 2000 units, a firm employs 10 workers and 5 machines.  Wages are $100/worker and renting machines costs $400/machine. What are firm��s total revenues?  What are its total costs?  Can you tell if this firm is maximizing profits?  Now suppose I tell you that at this level of employment and number of machines used that the marginal product of labor (MPL)=25 and the marginal product of capital (MPK)=50.  Can this firm be maximizing profits?  Why or why not?  What can this firm do if it is not maximizing profits?   
  4. Does the imposition of the minimum wage cause a shift in a firm��s labor demand curve? Why or why not? Does the imposition of a payroll tax cause a shift in a firm��s labor demand curve? Why or why not? 
  5. Suppose a firm employs multiple inputs.  If when the price of one input increases the demand for another decreases, are these inputs gross substitutes or gross complements?  Do you know enough to determine whether they are substitutes or complements in production?  If so, which are they?  Now suppose when the price of one input increases, the usage of some other input increases.  Are these goods gross substitues or gross complements?  Do you know enough to determine whether they are subtitues or complements in the production process?  If so, which are they.  
  6. Define the cross-wage elasticity of demand for one input with respect to another as: 
    ij = %Ei / %wj.   
    This is the percentage change in the quantity of input i divided by the percentage change in the price of input j.  Thus, when this number is positive, firms employ more of input i when the price of input j increases and when this number is negative, firms employ less of input i when the price of input j increases. 
    Suppose you know that the cross-wage elasticity of demand between two inputs is –2.0.  Does knowing this tell us anything about the scale and substitution effects?  How about whether the inputs are gross substitutes or complements?  Explain. 
  7. How can a firm increase workers�� compensation without incurring larger payroll tax burdens? 
  8. Empirical research has shown that in the long-run, the payroll tax in the United States seems to have manifested itself in the form of lower employee wages.  What does it suggest about the relative elasticities of the long run labor demand and supply curves?


  1. Analyze the impact of the following changes on wages and employment in a given occupations. Make sure to explicitly state whether the change affects the demand or the supply curve for the occupation and indicate the direction in which the change shifts the curve.
    1. A decrease in the danger of the occupation 
    2. An increase in product demand
    3. Increased wages in alternative occupations 
  1. Explain if each of the following programs would effect the elasticity of demand for labor in the steel industry and, if so, in which direction (recall the Hicks-Marshall Laws of Derived Demand):
    1. An decreased tariff on steel imports 
    2. A repeal of a law making it illegal to lay off workers for economic reason
    1. An decrease in the wage paid to steel workers 
    2. A tax on each ton of steel produced 
  1. Which of the following would cause a leftward shift in the demand for construction workers?
    1. a rise in the market clearing wage 
    2. fewer workers being accepted into the construction union
    3. the price of construction equipment falls and the substitution effect dominates over the scale effect
    4. all of the above 
  1. Choose the best answer:   
    Suppose the price of capital falls (we are in the long run).  If capital and labor are used in fixed proportions in the production process: 
    (a) the substitution effect is zero. 
    (b) the scale effect will dominate the substitution effect. 
    (c) labor and capital will be gross complements 
    (d) all of the above.  


  1. Both low-skilled workers and high-paid college professors have high rates of voluntary quits. What to they have in common that leads to their high quit rates? 
  2. A firm is considering hiring a worker and providing the worker with general training. The training costs the firm $1,000 and the worker��s actual marginal product during the training period would be $3,000. If the worker received no training, he or she would have a marginal product of $4,000 during the period 
    1. How much will the firm pay the worker during the training period? 
    2. If the training the worker received were specific rather than general, how would your answer change? 
  3. Tell me why this statement does or does not make sense: ��One reason that real wages have not been seen to rise over the past two decades are that employee benefits have risen dramatically over this period.�� 
  4. True or false:  As the share of total compensation that is made up of quasi-fixed costs increases, firms are inclined to prefer hiring new workers over adding hours to existing workforce? 
  5. True or false:  As the share of total compensation that consists of quasi-fixed costs increases, firms are inclined to prefer hiring new full-time workers over new part-time workers? 
  6. Describe two reasons why the labor demand curve for hiring new workers exhibits the property of diminshing marginal product.  Describe one reason why the labor demand curve for adding hours to an existing workforce exhibits the property of diminshing marginal product. 
  7. Theoretically, what should happen to employment when the overtime pay premium is increased?  Name two reasons why this has not/will not happen in practice. 
  8. Age-earnings profiles are steepest under which type of training?  Why? 
  9. Why is it the case that workers with general training are laid off first during a recession?    
  10. Which of the following is not a quasi-fixed cost of labor
    1. unemployment insurance 
    2. health insurance
    3. vacation pay
    4. holiday pay
    5. overtime pay
  1. Workers in a certain job are trained by the company, and the company calculates that to recoup its investment costs the workers�� wages must be $5 per hour below their marginal productivity.  Suppose that after training, wages are set at $5 below marginal productivity, but that developments in the product market quickly (and permanently) reduce marginal productivity by $2 per hour.  If the company does not feel it can lower wages or employee benefits, how will its employment level be affected in the short-run? How will its employment level be affected in the long run?  Explain, being sure to define what you mean by short-run and long-run! 
  2. Suppose firms in New York employ two types of workers, full-time workers (each works 35 hours per week) and part-time workers (each works 20 hours per week).  Each type of worker is able to perform the same task, though the full-timers are more productive at it.  The market for each type of worker is perfectly competitive.  The part-time workers currently receive no benefits outside of their hourly wage rate.   
    1. In deciding how many full-time workers to use and how many part-time workers to use, explicitly state a representative firm��s profit maximizing decision rule with respect to each of these inputs.  Assuming the output market is perfectly competitive, combine these two decision rules into one decision rule that the firm can follow.  Explain in words what this rule means and write out the expressions. 
    1. Suppose now that a law is passed in New York that requires any worker in New York that is employed at least 10 hours per week to have mandatory health insurance coverage provided by the firm.  What will this law do to the employment of full-time workers?  To part-time workers?   Comment on whether this law is able to help the people it was intended to help. 
    2. Suppose that for some reason the firms cannot substitute full-time workers for part-time workers (but scale effects are still present).  Suppose further that the health insurance plan for part-timers is financed through a payroll tax in which the firms bear the legal incidence. Graphically depict what happens to the equilibrium number of part-time workers employed, the wage rate they receive and the cost to the firms when this payroll tax is instituted.  ��Since the firms are legally liable for this tax, it must be true that they bear all of the economic burden, part-timers won��t be affected�� – is this true? Why?  What do I need to know to say more about who bears the economic incidence? 
  1. Explain how a partially covering minimum wage may contribute to wait unemployment. 
  1. In chapters 3 and 4 we studied static labor demand when the only cost to hiring workers was the wage cost.  Explain in words how the presence of quasi-fixed costs affect firms�� hiring decisions.   
  2. In recent years, many plants have closed, forcing thousands of workers out of their jobs and into new ones.  Studies of wage loss suffered by those displaced workers find that, among groups of workers with exactly the same types of skills and types of training, workers who had been with the firm for many years and were in the 55-64 age range had greater wage losses than those in the 25-34 age range.  Is it possible that the presence of employer-provided specific training (among the new employers of the displaced workers) could cause this outcome?  Explain. 
  3. Major league baseball teams scout and hire younger players whom they then train in the minor leagues for a period of three to five years. Very few of their trainees (perhaps 5 percent) actually make it to the major leagues, but if they do they are bound to the team that owns their contract for a period of five years. After five years, the player can become a "free agent" and choose any major league team on which to play. Keeping in mind that the major league teams pay the costs of, but derive no revenues from, their minor league teams, what would be the most important predictable effects of allowing players to become free agents immediately upon entry into the major leagues? 
  4. The general manager of the New York Mets baseball team argues: ��Even if I thought that Jeremy Burnitz was ��washed up��, I couldn��t get rid of him.  He��s in the 2nd year of a guaranteed four-year, $30 million deal.  Our team is in no position financially to eat the rest of his contract.  He must be our starter in right-field��  Analyze the efficacy of the general manager��s comment using economic theory. 
  5. You are the manager of the New York Ballet company.  You would like to hire a star ballerina and are trying to figure out how to pay her.  If you signed her for a five-year, $2.1 million contract, which income stream would you prefer to pay her if the current interest rate were 0%?  What if the interest rate were 10%?  Which stream would the ballerina prefer?  Is this different than what the company prefers?  Why? 

          Stream 1 Stream 2

    Year 1 $100,000 $1,100,000

    Year 2 $200,000 $200,000

    Year 3 $300,000 $233,333.33

    Year 4 $500,000 $266,666.67

    Year 5 $1,000,000 $300,000 



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