Practice questions on chapters 2,3,4

Assignment on chapter 2 (#s 2,4,11,15)

2) Indicate in each of the following instances whether the specified circumstances will
cause a worker to want to work more or fewer hours.
a) The wage rate increases and the substitution effect is greater than the income
effect.
b) The wage rate decreases and the income effect is greater than the substitution
effect.
c) The wage rate decreases and the substitution effect is greater than the
substitution effect.
d) The wage rate increases and the income effect is greater than the substitution
effect.

4) The "supply side" economics of the Regan administration (1981-1988) presumed

that income tax cuts would stimulate incentives to work and thereby increases
economic growth. Demonstrate this outcome with work-leisure diagram. What does
this outcome assume about the relative sizes of the income and substitution effects?
Explain "The predicted increase in work-incentives" associated with the supply-side
tax cuts might in fact be more relevant for women than for men".

11) If an income maintenance program entails a $3000 basic benefit and a benefitreduction rate of 0.30, what will be the size of the subsidy received by a family that
earns $2000 per year? What will be the family's total income? What break-even level
of income does this program imply?

15) One way of aiding low-income families is to increase the minimum wage. An
alternative is to provide a direct grant of non-labor income. Compare the impact of
these two options on work incentives.

Assignment on chapter 3 (#s 3,6,9,10,11)

3) In 2002, the US had a population of 291 million, of which 70 million were either
under 16 years of age or institutionalized. Approximately 147 million people were
either employed or unemployed but actively seeking work. What was the participation
rate in 2003?

6) What factors account for the increase in the participation rates of married women?
Use a work-leisure diagram to explain how each of these factors individually might
alter either the indifference curves or the budget line of women and make labor
participation more likely.

9) Use a work-leisure diagram to demonstrate that:

a) If African Americans have labor market opportunities that are inferior to those
of whites.
b) Non- labor is available in the form of, say, disability benefits, African-Americans
will have lower participation rates even though the work-leisure preferences
(indifference curves) of African-Americans and whites are identical.

10) "Empirical evidence for the United States suggests that labor force participation
varies directly with unemployment" Do you agree? Explain in term of the
discouraged-worker and added-worker effects.

11) "The added-worker effect can be explained in terms of the income effect, while
the discouraged-worker effect is based on the substitution effect" Do you agree?

Assignment on chapter 4 (#s 3,5,13).

3) Floyd is now working on a job that pays $8000 per year. He is contemplating a 1year automobile mechanics course that entails costs of $1000 for books and tuition.
Floyd estimates that the course will increase his income to $13000 in each of the 3
years following completion of the course. At the end of those 3 years, Floyd plans to
retire to a commune in Boulder, Colorado. The current interest rate is 10%. Is it
economically rational for Floyd to enroll in the course?

5) What is the college-wage premium? Can you explain why the premium:
a) Declined in 1970's
b) Increased in the 1980's and 1990's?.

13) Indicate the implications of each of the following for the estimates of the rate of
return on a college education:
a) The screening hypothesis.
b) The possibility that a portion of one's expenditures on college should be
considered as consumption rather than investment.
c) The fact that people who go to college are generally more able than those who
do not
d) The fact that jobs acquired by college graduates generally entail larger fringe
benefits than the jobs of high school graduates.
What implications do the ability problem and the screening hypothesis have for the
public policy toward education?