Econ 302 Test Bank Questions With Verified Answers

We assume that the representative consumer's preferences exhibit the properties that - Answer consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundle. We assume leisure is a normal good. This implies that - Answer an increase in taxes decreases the demand for leisure. In the model presented in Chapter 4, the vertical intercept of the consumer's budget line is equal to - Answer wh + π -T At the optimal consumption bundle, the marginal rate of substitution of leisure for consumption is equal to - Answer the real wage and the budget line is tangent to an indifference curve An increase in the real wage - Answer increases consumption and has an ambiguous effect on labor supply On average, Europeans work both fewer hours per week and fewer weeks per year. This can be explained by - Answer Substitution effects dominating income effects where after-tax wage are higher in the US If the government imposes a marginal income tax on labor income, then - Answer the substitution effect will cause leisure to rise Typically, older workers reduce their hours of work for a period prior to retirement. How could we capture such an effect in the consumer model of Chapter 4? - Answer The indifference curve would be steeper Suppose the government imposes a producer tax (say, for environmental cleanup) such that the firm pays t units of consumption goods to the government for each unit of output it produces. - Answer This will reduce the production function and lead to a fall in labor demand Suppose the government subsidizes employment such that it pays s units of consumption goods for every unit of labor the firm hires. - Answer This will reduce the wage bill and increase demand for labor In the course of producing output, a firm causes pollution. The government passes a law that requires the firm to stop polluting. The firm finds it can do this by allocating workers to clean up the pollution so that for every N workers it hires, xN workers are used for cleanup (x1). - Answer This leads to a decreased demand for labor as workers are less productive Constant returns to scale means that, given any constant x0 - Answer xzF(K, Nd) = zF(xK, xNd) An increase in total factor productivity (TFP) shift the production function - Answer upward and increases the marginal product of labor When the representative firm maximizes profits - Answer the real wage equals marginal labor productivity The property of diminishing marginal rate of substitution follows from the property that the indifference curve is - Answer Bowed in toward the origin If a forecaster uses a log-linear utility function to make a labor market forecast over (for each of) the next twelve months, the forecaster is likely going to - Answer Under-estimate the increase in labor supply in response to a rising real wage Which effect (income or substitution) always dominates when there is a change in the lump-sum tax? - Answer Income effect dominates If wages remain constant over time, but we observe people working less, what can we say about the MRSl,c? (HINT: think about marginal utilities) - Answer The MRS must have increased If there is an increase in TFP, z, which effect (substitution vs income) will dominate for leisure? - Answer We cannot say what the effect on leisure will be without knowing more about preferences Why is it impossible for a consumer to have MRS(l,c)=!"(!) w(1-t)? - Answer The consumer could increase utility by increasing leisure since an additional hour of leisure is worth more than the after-tax real wage Suppose a firm originally solves