Contemporary Economic Issues
Test Questions
Course Introduction
This course examines current economic challenges and debates affecting local, national, and global societies. Topics include unemployment, inflation, income inequality, globalization, fiscal and monetary policy, technological change, environmental concerns, and the impacts of government intervention. Through analysis of real-world case studies and recent data, students will develop a critical understanding of how contemporary economic issues influence decision-making by individuals, businesses, and policymakers, and will explore potential solutions for creating equitable and sustainable growth.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 12th Edition by Ronald G. Ehrenberg
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Page 2
Chapter 1: Introduction
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Q1) Economists generally assume that
A) people both pursue their objectives in a consistent fashion and are forced to make choices due to scarcity.
B) people pursue their objectives in a consistent fashion.
C) people are forced to make choices due to scarcity.
D) habit-bound people are irrational.
Answer: A
Q2) Redistributional transactions
A) are never voluntary.
B) should not occur.
C) are usually facilitated by the government.
D) are not Pareto efficient.
Answer: C
Q3) Improvements in equity
A) involve comparing the welfare lost by some against the welfare gained by others.
B) are impossible if the initial distribution is Pareto Optimal.
C) generally increase efficiency.
D) can be scientifically evaluated.
Answer: A
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Page 3
Chapter 2: Overview of the Labor Market
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Q1) Workers in an industry are probably underpaid if
A) employers have difficulty hiring and retaining qualified workers.
B) the workers cannot afford to quit their jobs.
C) the workers could receive a higher salary in another occupation.
D) firms in the industry are making a positive profit.
Answer: A
Q2) When the price of labor falls,the quantity of ________ demanded will ________,but the effect on ________ is ambiguous.
A) labor; increase; capital
B) labor; decrease; capital
C) capital; increase; labor
D) capital; decrease; labor
Answer: A
Q3) How is the monthly unemployment rate determined in the United States?
Answer: The monthly unemployment rate is estimated by the government based on information collected in the Current Populations Survey,a survey administered to approximately 50,000 households every month.In order to be counted as unemployed,one must be available to work and to have looked for work within the last month or,alternatively,must be laid off and awaiting recall to one's previous employer.
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Page 4
Chapter 3: The Demand for Labor
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Q1) If a firm hires another unit of labor,output goes up by 12 units.The wage rate for the unit of labor is $6.What is the firm's cost of producing another unit of output using labor?
A) $18
B) $9
C) $1.50
D) $0.50
Answer: D
Q2) If an increase in the cost of labor causes the firm to use less capital,then
A) the scale effect has dominated over the substitution effect.
B) the substitution effect has dominated over the scale effect.
C) the firm has moved along an isoquant curve.
D) the firm has moved onto a higher isoquant.
Answer: A
Q3) The marginal product of labor tells us
A) which employee is the most productive.
B) the average output produced by each employee.
C) the additional output produced by the last employee hired.
D) how much money the firm can make from hiring each employee.
Answer: C
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Page 5
Chapter 4: Labor Demand Elasticities
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Q1) Other things equal,the own-wage elasticity of demand for a category of labor is higher when
A) the price elasticity of demand for the product being produced is low.
B) other factors of production can be easily substituted for the category of labor.
C) the supply of other factors of production is highly inelastic.
D) the cost of employing the category of labor is a small share of the total costs of production.
Q2) The own-wage elasticity of labor demand tends to decrease in absolute value as worker skill level increases.Agree or disagree,using the Hicks-Marshall Laws of Derived Demand to explain.
Q3) Employment often increases after an increase in the minimum wage because
A) more people want to work at the new, higher wage.
B) independently, labor demand increases significantly at the same time.
C) the minimum wage is below the equilibrium level of wages.
D) the labor supply curve is vertical.
Q4) What does the own-wage elasticity of labor demand measure? What do empirical estimates suggest the elasticity of labor demand is in the short run? In the long run? Explain what accounts for the difference.
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Chapter 5: Frictions in the Labor Market
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Q1) A monopsony can hire one worker at a wage of $5,two workers at a wage of $6 each,three workers at $7 each,and so on (each added worker adding one dollar to the wage rate).If the marginal revenue product for all workers is $16,what wage will it pay?
A) $10
B) $11
C) $16
D) $17
Q2) Specific training is paid for by
A) the employer.
B) the employee.
C) both the employer and the employee.
D) neither the employer nor the employee.
Q3) Which of the following events will likely lead a firm to use overtime rather than hire new workers?
A) The firm gets rid of its pension plan.
B) The firm starts to pay for health insurance.
C) The marginal productivity of all workers, new and current, increases 20%.
D) Both overtime and base pay increase 20%.
Q4) What is the overtime pay premium? Discuss its origin and who it covers.
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Chapter 6: Supply of Labor to the Economy: The Decision to Work
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Q1) If a worker's desired hours of labor do not change after a decrease in his wage rate,then
A) his income effect dominates his substitution effect.
B) his substitution effect dominates his income effect.
C) his income and substitution effects are of equal magnitude.
D) his income and substitution effects are small in absolute value.
Q2) A person who receives time-and-a-half overtime for working more than 8 hours per day will have a ________ which is ________ beyond 8 hours of labor.
A) budget constraint; flatter
B) indifference curve; flatter
C) budget constraint; steeper
D) indifference curve; steeper
Q3) An increase in nonlabor income due to a rise in the value of stocks and bonds will cause
A) a pure income effect.
B) a pure substitution effect.
C) both an income and a substitution effect.
D) neither an income nor a substitution effect.
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Chapter 7: Labor Supply: Household Production, the Family,
and the Life Cycle
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Q1) The government raises taxes on wages by 20% and splits the money evenly across households as "free money" such that the average household gets back what it paid extra in taxes.In a household where the dollars collected by the 20% added tax initially equals the dollars received as free money,their work hours are likely to A) increase.
B) decrease.
C) increase if the income effect dominates the substation effect.
D) remain unchanged.
Q2) Most people travel more and enjoy more leisure when they are elderly than when they are middle-aged.This can be explained by
A) income effects due to decreasing wages.
B) substitution effects due to increasing wages.
C) life-cycle considerations.
D) the fact that their time is relatively expensive.
Q3) Suppose that a cultural trend causes people to attach a growing value or higher status to purchased goods that are easily observed by others and less value on commodities produced in the home.What are the labor supply implications of such a trend?
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) If a worker does not have good information and thinks that risks are lower than they actually are,then OSHA regulations which increase safety standards in the workplace
A) decrease utility for the worker.
B) increase utility for the worker.
C) could increase or decrease utility for the worker.
D) move the worker to his highest possible utility level.
Q2) If a firm reduces the risk in its workplace,then
A) the firm will be able to pay higher wages.
B) the firm will be able to increase profits.
C) the firm will likely pay lower wages to make up for the cost of increased safety.
D) the firm will see a decrease in total costs.
Q3) Graph an indifference curve for an individual that depends on the wage rate (on the vertical axis)and on the risk of injury on the job (on the horizontal axis).Explain why the indifference curve looks as you have drawn it.
Q4) What is a compensating wage differential? What socially desirable ends does a compensating wage differential serve?
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Page 10
Chapter 9: Investments in Human Capital: Education and Training
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Q1) Which of the following is a cost of going to college?
A) the cost of living in a dorm
B) the cost of college cafeteria food
C) the cost of dating while in college
D) None of the above is a cost of going to college.
Q2) Suppose the wages of both high school and college graduates decrease by $2,000 per year.In response to the opportunity cost,the number of people attending college will consequently ________,while in response to the earnings differential between high school and college graduates,college enrollments will ________.
A) increase; decrease
B) increase; increase
C) increase; remain unchanged
D) decrease; remain unchanged
Q3) Which of the following is NOT an expense of acquiring human capital?
A) purchase of textbooks
B) anxiety caused by final exams
C) any wages foregone to attend school
D) cost of food and housing while attending school
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) One immigrant to country X increases his wage from $13,000 (in their home country)to $15,000.There are no costs to moving.A native worker was earning $15,000.However,the immigrant replaces him and the native instead lives and works at home,which he values at $15,000.Which of the following statements is true?
A) Country X (not counting the immigrant) is better off.
B) The native worker is worse off.
C) The immigrant could be taxed $1000 with the proceeds going to the native worker and the employer so that everyone is better off (compared to no immigration).
D) The net benefit of this immigration to everyone (native worker, employer, immigrant) is zero.
Q2) Which of the following can NOT explain why wages in Miami did not fall and unemployment rates did not increase after the Mariel boatlift?
A) The labor demand curve shifted to the right.
B) Some people moved out of Miami in response to the influx.
C) Miami's economy went through a rapid "boom" right after the immigrants arrived.
D) A high percentage of the immigrants were unskilled workers.
Q3) How does the quit rate behave over the business cycle?
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Page 12
Chapter 11: Pay and Productivity: Wage Determination
within the Firm
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Q1) Higher wages generally
A) decrease worker productivity due to the fact that workers have backward-bending labor supply curves.
B) decrease worker productivity due to shirking.
C) increase worker productivity due to moral hazard.
D) increase worker productivity by increasing the quality of the applicant pool.
Q2) Fairness in regards to a worker's reference group is important in the labor market because
A) workers think it is unfair for employers to earn a profit.
B) workers care about their relative treatment.
C) employers must supervise most workers closely.
D) employers want to maximize profits.
Q3) About 30 percent of CEO pay is in the form of stock or stock options.What is the rationale for paying a chief executive officer with company stock or options to buy the company stock? What are the drawbacks of paying corporate decision makers with stock?
Q4) What are the basic features of a promotion tournament? What are the potential problems with a promotion tournament?
Q5) What is the firm-size effect? What accounts for the firm-size effect?
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Chapter 12: Gender,Race,and Ethnicity in the Labor Market
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Q1) In the model where employers discriminate against females,those employers that devalue the productivity of the females more than other employers will
A) pay a lower wage to females.
B) still hire females even when they earn the same wage as males.
C) earn a lower profit.
D) do all of the above.
Q2) Suppose that a female worker has considerable child-raising duties at home which reduce her labor market productivity and pay by 10% compared to her male counterpart.Also suppose that their observable productivity characteristics are equal.Then the standard procedure will estimate that wage discrimination reduces her wages by ________,while her actual reduction in wages due to labor market discrimination is ________.
A) 10%; 10%
B) 10%; 0%
C) 0%; 10%
D) 0%; 0%
Q3) What does the employment-to-population ratio measure? What has happened to the employment-to-population ratio of African American males over time? Of white males over time?
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Page 14
Chapter 13: Unions and the Labor Market
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Q1) Any point on the contract curve will
A) make the union better off than they would be in monopoly union negotiations.
B) make the firm better off than they would be in monopoly union negotiations.
C) make both the union and the firm at least as well off as they would be in monopoly union negotiations.
D) make both parties worse off than they would be in monopoly union negotiations.
Q2) The potential gains to a union in terms of wages and employment will be greatest if the firm's demand for labor is
A) elastic.
B) inelastic.
C) of unit elasticity.
D) horizontal.
Q3) Employee benefits and the share of compensation that goes to benefits are usually
A) roughly equal in unionized and nonunionized firms.
B) higher in unionized than in nonunionized firms.
C) lower in unionized than in nonunionized firms.
D) impossible to compare between unionized and nonunionized firms due to insufficient data.
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Chapter 14: Unemployment
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Q1) Unemployment tends to go up when aggregate demand falls mainly because
A) when wages fall, workers seek alternative employment.
B) unions renegotiate for lower wages, making it difficult for job searchers to find suitable jobs.
C) wage rates tend to be downward rigid.
D) most human capital is general and not firm-specific.
Q2) An increase in an individual's reservation wage
A) will increase the duration of the individual's unemployment but not affect the expected wage.
B) will increase the individual's expected wage but not affect the duration of unemployment.
C) will not change the individual's duration of unemployment.
D) will increase both the individual's duration of unemployment and expected wage.
Q3) What is the wage curve? What is the efficiency wage explanation of the wage curve?
Q4) How does demand-deficient unemployment arise? Use a demand/supply diagram to illustrate your answer.
Q5) Does the unemployment insurance payroll tax encourage layoffs? Why or why not?
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Page 16
Chapter 15: Inequality in Earnings
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Q1) In an economy,employers cover the cost of health insurance by the difference between what the worker produces and what the worker gets in wages.If the cost of health insurance goes up by $5000 for all workers,what will happen to earnings inequality (as measured by the 80:20 ratio)?
A) Earnings inequality will go up.
B) Earnings inequality will go down.
C) Earnings inequality will remain unchanged.
D) Uncertain: it depends upon who gets sick more.
Q2) The increase in wage inequality has been more rapid in the United States than in other industrialized countries for all the following reasons EXCEPT
A) the supply of skilled workers has grown less quickly in the United States.
B) wage determination is more decentralized in the United States.
C) unskilled workers are retrained more quickly in the United States.
D) unemployment rates among unskilled workers have risen more rapidly in other countries.
Q3) How can skill-biased technological change account for increased earnings inequality?
Q4) What are the dimensions along which changes in the earnings distribution have occurred since 1980?
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Chapter 16: The Labor-Market Effects of International Trade and
Production Sharing
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Q1) Mr.X values a good at $100 and buys it from Mr.Y at $80 (who produces it at a cost of $70).Mr.Z then offers Mr.X the same good at $60.Mr.X buys the good from Mr.Z,and stops buying it from Mr.Y.Which of the following makes this event Pareto optimal?
A) Mr. X gives Mr. Y $11.
B) Mr. X gives Mr. Y $30
C) Mr. X pays Mr. Z $80.
D) Mr. X and Mr. Z join to give Mr. Y $70.
Q2) A nation is more productive when
A) more jobs are needed to produce any given level of output.
B) workers stay in their current job.
C) it takes fewer jobs and resources to produce a given amount of goods.
D) consumers cannot change which goods they buy when this results in the loss of some jobs.
Q3) Which of these displaced workers is likely to be most harmed by losing their job due to foreign trade?
A) Worker A who has firm-specific skills.
B) Worker B who has general skills.
C) Worker C who has a very elastic supply curve of labor.
D) Worker D who spends a large fraction of her income on imported goods.
Page 18
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