The University of Western Ontario

London
Canada
G. Stirling

Department of Economics

Oct, 2016

Economics 2155 - 001

Mid-term
VERSION 111
Multiple Choice. 1 mark each.
1. The income effect associated with a change the wage
a. Always works in the same direction as the wage change.
b. Describes the change in the level of leisure, holding utility constant.
c. Always works in the same direction as the wage change if leisure is normal.
d. Both a) and b) are correct.
2. Which of the following statements describes a backward-bending labor supply
Curve?
a. Every hour that I work represents a loss of an hour of leisure.
b. I asked for extra hours this month to pay for a new bicycle.
c. When I received my last raise, I cut back on my overtime hours so that I could work
fewer hours but earn the same amount of money per week.
d. I worked more hours when I was younger.
3. The income effect graphically is always denoted
a. By movement along the original indifference curve, whereas the substitution effect is
represented by a rotation of the budget line.
b. By moving in the direction of the item that is becoming relatively more expensive.
c. By movement from one indifference curve to another.
d. By movement along the original indifference curve, whereas the substitution effect is
represented by a parallel shift of the budget line.
4. Leisure can be
a. Considered to be an inferior good when a parallel outward shift of the budget line
leads to an increase in leisure.
b. Considered to be a normal good when a parallel outward shift of the budget line
leads to an increase in leisure.
c. Considered to be an inferior good when a parallel inward shift of the budget line
leads to a decrease in leisure.
d. Considered to be a normal good when a parallel outward shift of the budget line
leads to a decrease in leisure.

5. If leisure is a normal good and the wage falls

a. The substitution effect will induce the consumer to take more leisure and the
income effect will induce the consumer to take more leisure.
b. The substitution effect will induce the consumer to take less leisure and the
income effect will induce the consumer to take more leisure.
c. The substitution effect will induce the consumer to take more leisure and
the income effect will induce the consumer to take less leisure.
d. The substitution effect will induce the consumer to take less leisure and the
income effect will induce the consumer to take less leisure.
6. Identify the truthfulness of the following statements.
I. The substitution effect of a wage change is unambiguous in its direction.
II. Direction of the income effect depends on whether the good is a normal or an inferior
good.
a. Both I and II are true.
b. Both I and II are false.
c. I is true; II is false.
d. I is false; II is true.
7.

The substitution effect graphically is always denoted

a. By movement along the original indifference curve, whereas the income effect
is represented by a rotation of the budget line.
b. By moving in the direction of the item that is becoming relatively more
expensive.
c. By moving in the direction of the item that is becoming relatively cheaper and
the income effect is always denoted by a rotating budget line.
d. By movement along the original indifference curve, whereas the income effect
is represented by a parallel shift of the budget line.

8.

In a one period model of household production, the effects of a wage increase cause
a. A substitution in consumption and an opposite substitution in production.
b. A substitution in consumption only.
c. A substitution in consumption and a reinforcing substitution in production.
d. A substitution in production only.

9.

Other things being equal the smaller the elasticity of output demand
a. The more elastic is the demand for labour.
b. The less elastic is the demand for labour.
c. The more elastic is the supply of labour.
d. The less elastic is the supply of labour.

Figure 1

10. Which of the following is true in Figure 1?

a. The wage rate is $5.
b. Non labour income is $200.
c. The optimal number of hours to supply is zero.
d. All of the above.
11. In Figure 1, the optimal number of work hours is
a. Zero.
b. 100.
c. 400.
d. 300.
12. The optimal level of leisure occurs where
a. The level of leisure is maximized subject to the budget constraint
b. The level of income is maximized subject to the budget constraint
c. The highest attainable indifference curve is tangent to the budget constraint
d. Both (a) and (b)
13. For an individual that is a participant in the labour market
a. The wage equals the reservation wage.
b. The wage equals the marginal rate of substitution.
c. The wage is less than the reservation wage.
d. The wage determines non-labour income.

14. Suppose leisure is a normal good. As the wage rate increases

a. Work time should go up.
b. Work time should go down.
c. Work time will go up or down depending on the relative sizes of the income
and substitution effect.
d. None of the above.
15. A backward bending labour supply curve occurs when
a. Leisure is a normal good and the substitution effect dominates at low wage rates.
b. Leisure is a normal good and the income effect dominates at high wage rates.
c. At low wages, leisure is a normal good; but at high wage rates leisure is an inferior good.
d. Both (a) and (b).
16. A change in the wage
a. Causes a substitution effect alone.
b. Causes an income effect alone.
c. Causes both an income and substitution effect.
d. Causes an income and substitution effect that must work in the same direction.
17. The theory of household productions assumes that the household derives utility from
a. Income.
b. Time spent in home production.
c. Commodities produced by the household.
d. Market purchased goods services.
18. In the theory of household production, the household must
a. Determine what is to be produce.
b. Determine how to go about produce the commodities they care about
c. Determine the combinations of leisure and income that produce a certain level of utility
d. Both (a) and (b).
19. In a one period model of household production the effects of a wage increase cause
a. The full price of time intensive home produced commodities to increase more than the
full price of market goods intensive home produced commodities.
b. The full price of time intensive home produced commodities to decrease less than the
full price of market goods intensive home produced commodities.
c. The full price of market goods intensive home produced commodities to increase
more than the full price of time intensive home produced commodities.
d. The full price of time intensive home produced commodities to increase and the
full price of market goods intensive home produced commodities to decrease.

20. The reservation wage of a nonparticipant

a. Is less than a participant.
b. Cannot be calculated.
c. Is less than the wage available.
d. Is more than the wage available.
21. If the wage rate is increasing over time, and household consumption time is decreasing, then
a. The substitution of the wage increase has been dominated by the income effect.
b. The substitution of the wage increase dominates the income effect.
c. The substitution in consumption working in the same direction as the substitution
in production.
d. The substitution in consumption works in the opposite direction as the substitution
in production.
22. If the demand elasticity of output is .9 and labour takes up 30% of total cost and the
Hicks-Allen elasticity of substitution is .7. The own wage elasticity of labour is
a. 1.6
b. 0.76
c. 1.9
d. Cannot be calculate given this information
23. Biased technical change
a. Renumbers the isoquants.
b. Only changes the shape of the isoquants.
c. Changes the type of outputs that can be produced.
d. Changes the shape and renumbers the isoquants.
24 .A competitive firm will hire up to the point where
a. The wage equals the marginal cost of output.
b. The wage equals the marginal revenue product of labour.
c. The wage equals the marginal cost of labour.
d. The wage equals the value of the marginal product of labour.
25. An individual with standard downward-sloping indifference curves will participate in the
labour market provided
a. The indifference curves between leisure and income are steep
b. A tangency between the budget constraint and the indifference curve is reached
c. At the point where leisure is at its maximum, the indifference cure is steeper than the
budget constraint
d. At the point where leisure is at its maximum, the indifference cure is flatter than the
budget constraint

26. Full income is

a. The highest income attainable for an individual
b. The income that has the highest marginal tax rate
c. The utility maximizing level of income
d. The revenue maximizing income
27. If the reservation wage of an individual is less than the market wage
a. They are better of keeping all their time for themselves.
b. They value the last hour of their time less than the market does.
c. Will no look for a job.
d. Values the last hour of their time more than the market does.
28. If the demand for output is elastic then
a. Biased technical change increases the demand for labour.
b. Larger the substitution effect of a wage change.
c. Neutral technical change increases the demand for labour.
d. The large the effect of a price change of the price of labour.
29. In a life cycle model of household production, with constant returns to scale and no
joint production, and a positive interest rate, if the wage in two periods the same then
a. The full prices of home produce goods will be the same.
b. The full prices of home produce goods will be higher in the later period.
c. The full prices of home produce goods will be higher in the earlier period.
d. The full prices of home produce goods will depend on the production function.
30. The Full price of a home produce good depends on
a. The price included the relevant taxes.
b. The price of market goods and services and the price of ones own time.
c. The price of market good and services and the price of ones own time and
production function parameters.
d. The level of income the household earns.
31. If a person has preferences that lead to a choice of zero work hours, an increase in
the wage rate will result in
a. An income effect only.
b. An increase in leisure time.
c. Possibly becoming a participant in the labour market.
d. A higher reservation wage.
32. If labour and capital are substitutes, then an increase in the price of labour causes
a. A substitution and scale effect that work in opposite directions to each other.
b. A substitution and scale effect that work in the same direction to each other.
c. An increase in the quantity of labour demanded and a decrease in the quantity of capital.
d. A backward bending demand for labour.

33. If labour in an inferior factor, a wage decrease causes

a. A substitution and scale effect that work in opposite directions to each other.
b. A substitution and scale effect that work in the same direction as the wage change.
c. An increase in the quantity of labour demanded and a decrease in the quantity of
output.
d. A backward bending demand for labour.
34. At the utility maximizing level of leisure
a. The price of time is irrelevant.
b. The leisure time is maximized.
c. The marginal rate of substitution equals the wage.
d. The level of income is irrelevant.
35. Constant returns to scale of home production functions means
a. Inputs can be written as functions of output.
b. The scale of production is constant in terms of price.
c. The level of output is independent of the income earned.
d. That the full price of a home produced good is constant.
36. The substitution effect of a wage change
a. Must always dominate the income effect if leisure is normal.
b. Must always reinforce the income effect if leisure is normal.
c. Must always counteract the income effect if leisure is normal.
d. Is measured at the reservation wage.
37. An individual will be a non-participate in the labour market provided
a. The indifference curves between leisure and income are steep.
b. A tangency between the budget constraint and the indifference curve is reached.
c. At the point where leisure is at its maximum, the wage is less than the slope of
the indifference curve.
d. At the point where leisure is at its maximum, the wage is more than the slope of
the indifference curve.
38. If a person has preferences that lead to a choice of positive numbers of work hours, an
increase in the wage rate will result in
a. An income effect only.
b. An increase or decrease in leisure time.
c. Possibly becoming a non-participant in the labour market.
d. A higher reservation wage.
39. If the wage decreases by 10 percent and the quantity of workers demanded goes down by
4 percent, the wage elasticity of the demand for labour is
a. 0.8.
b. 0.4.
c. 1.75.
d. 4.0.

40.
a.
b.
c.
d.

An increase in the share of labour in total cost

Makes the demand for labour more elastic.
Makes the demand for labour less elastic.
Makes the demand for labour more elastic if the elasticity of substitution is greater than
the output demand elasticity.
Makes the demand for labour less elastic if the elasticity of substitution is greater than
the output demand elasticity.