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Labour Market Economics 5e
Labour Market Economics, 5/e
Dwayne Benjamin, University of Toronto
Morley Gunderson, University of Toronto
Craig Riddell, University of British Columbia


Sample Exam Questions

SAMPLE EXAM QUESTIONS

1. Pat Econ earns $20 per hour in the labour market and receives $1,000 per month (an inheritance annuity). Suppose that the government imposes a 50% proportional tax on labour income (but not on inheritance income).

(A) Illustrate and explain the labour supply effect on Pat. Under what conditions will labour supply increase?

(B) Is it possible that Pat will decide not to participate in the labour force on a permanent basis (explain and illustrate with a new diagram)?

2. Suppose that employees maximize utility by working 40 hours per week (at an hourly wage of $10), but a firm demands 50 work hours per week. The firm is considering two options to obtain 50 hours of work each week: (i) pay overtime premium pay of $15 for ten overtime hours each week or (ii) increase the hourly wage to $11 (both options cost the firm $550 for 50 work hours each week). Which option do you recommend to the firm? Illustrate and explain your answer.

3. Illustrate and explain why a universal day care subsidy could increase the labour force participation rate but decrease total labour supply.

4. Suppose that the existing welfare system provides an annual welfare benefit of $8,000, with a $2,000 earned income exemption level, and a 100% welfare reduction rate for income earned above the exemption level. Using an income-leisure choice diagram, analyze the effects of the following reform to the welfare system: the annual welfare benefit is reduced to $5,000, the earned exemption level is increased to $5,000, and the welfare reduction rate for income earned above the exemption level is reduced from 100% to 80%. Make sure that your analysis considers all possible labour supply outcomes.

5. Given a 10 - 40 [MINimum work weeks - MAXimum benefit weeks] Unemployment Insurance system, analyze the effects on labour supply, the labour force participation rate, and the unemployment rate if the government decreases the UI benefit rate from 60% to 30% of the average wage on the previous job.

6. Given the following assumptions, draw the annual (52 week) income budget constraint for a seasonal worker who collects Unemployment Insurance (UI) benefits each year and identify the income level for key points on the income budget constraint:

[1] there are two weeks of UI benefits for every one week worked prior to job loss, [2] a minimum of 15 weeks of work is required to qualify for any UI benefits, [3] there is a 1 week waiting period prior to the collection of UI benefits, [4] the benefit rate is 50% of the average weekly wage on the previous job, [5] a seasonal worker earns $1,000 per week on a seasonal job, and can earn $300 on a non-seasonal, minimum wage job (the only alternative job) [6] a seasonal job always starts at exactly the same time each year (say January 1) and can last up to 20 weeks (at the discretion of the worker).

7. Using an isoquant diagram, illustrate and explain the scale and substitution effects on the quantity of labour demanded given an increase in the rental cost of capital.

8. Using a labour demand diagram, explain why a profit-maximizing firm may not lay-off employees when there is a cyclical or seasonal decline in product prices?

9. Assume that the labour market is characterized by monopsony power. Illustrate and explain how the government can maximize employment levels by imposing a minimum wage.

10. Explain why labour economists study the income levels of identical twins?

11. Why are firms willing to finance 'specific' on-the-job training but unwilling to finance 'general' on-the-job training? Explain.

12. Explain and illustrate with a diagram why there is a Pareto improvement for the firm if the firm bargains with the union over both wages and employment levels, rather than just bargaining over wages.

13. Why is there an incentive for the firm to cheat on employment levels after it has signed a Pareto efficient contract? Explain using a diagram.

14. Discuss various reasons why a generous unemployment insurance system will lead to a higher equilibrium unemployment rate.

15(A). Under what conditions will there be a short-run (temporary) but not a long-run (permanent) tradeoff between inflation and unemployment?

(B) Explain why the natural rate of unemployment is also called the NAIRU.





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