Economics of Inequality Practice
Questions
Course Introduction
Economics of Inequality explores the causes, consequences, and measurement of economic disparities among individuals and groups within and between societies. The course examines the roles of income, wealth, education, and opportunity in shaping inequality, and analyzes how market forces, policy interventions, technological change, and globalization affect the distribution of resources. Students will investigate key theoretical frameworks and empirical evidence, study historical and contemporary trends in inequality, and evaluate policy responses aimed at promoting greater equity and social mobility. Topics include poverty, labor markets, taxation, social welfare programs, and the intersection of race, gender, and inequality.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 12th Edition by Ronald G. Ehrenberg
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Chapter 1: Introduction
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Q1) The most widely used method of estimating a regression line for a data set involves selecting the line
A) on which all data points will fall.
B) which minimizes the sum of the vertical distances between the line and the individual data points.
C) which minimizes the sum of the squared vertical distances between the line and the individual data points.
D) which minimizes the sum of the absolute value of the vertical distances between the line and the individual data points.
Answer: C
Q2) Which of the following is NOT a characteristic of a typical positive economic model?
A) realistic assumptions
B) makes predictions that can be proven false
C) the assumption that people weigh the costs and benefits of their various alternatives
D) makes assumptions that ignore the complexity of behavior
Answer: A
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Chapter 2: Overview of the Labor Market
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Q1) If more people enter the labor market for architects,then
A) both the wage rate and the employment level will increase.
B) both the wage rate and the employment level will decrease.
C) the wage rate will increase and the employment level will decrease.
D) the wage rate will decrease and the employment level will increase.
Answer: D
Q2) Which of the following events will cause the labor demand curve to shift up and to the right?
A) a lower wage
B) an increase in product demand
C) an increase in the supply of labor
D) all of the above shift the labor demand curve up
Answer: B
Q3) When the price of capital increases,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: D
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Chapter 3: The Demand for Labor
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Q1) If two inputs are complements in production,
A) then the inputs cannot be used at the same time.
B) then the inputs can be either gross complements or gross substitutes.
C) then the inputs are gross complements.
D) then the inputs are gross substitutes.
Answer: C
Q2) Employee subsidies will be most effective at raising the effective wage of the poor when
A) demand for labor is elastic.
B) supply for labor is inelastic.
C) both A and B
D) neither A nor B
Answer: C
Q3) Referring to Table 3.1,if wages are $50.00 per day and pots sell for $20.00 each,how many potters will the firm hire?
A) two
B) three
C) four
D) five
Answer: C
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Chapter 4: Labor Demand Elasticities
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Q1) Since the minimum wage was first legislated,a concern has been that it will reduce employment among groups it is intended to benefit.Despite this concern,adverse employment consequences of changes in the minimum wage have been relatively small.Use a two sector model to explain why adverse employment effects of a minimum wage increase might be expected to be small.
Q2) Cross wage elasticities of demand are
A) always positive in magnitude.
B) always negative in magnitude.
C) either positive or negative in magnitude.
D) positive for gross complements, negative for gross substitutes.
Q3) Moving from the upper to the lower portion of a straight labor demand curve,the elasticity
A) changes from elastic to inelastic.
B) changes from inelastic to elastic.
C) stays the same.
D) could change from inelastic to elastic, or from elastic to inelastic.
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) Most colleges pay teachers different salaries in different fields.For example,they usually pay science teachers more than English teachers.Public schools pay teachers in different fields the same.As a result,in public schools,if they want to get better science teachers,they have to raise everyone's wage.Which of the following is a consequence of paying teachers different salaries,as they do in colleges?
A) It raises the cost of hiring a higher quality of teachers.
B) It reduces the cost of getting good teachers in the areas that are in high demand.
C) It results in relatively fewer good teachers being hired in areas of high demand.
D) It results in most teachers getting similar pay.
Q2) A firm could profitably pay for a worker's general training if
A) the worker could change jobs easily.
B) the worker was nearing retirement.
C) the training program would also serve as a screening device.
D) the training increased the quasi-fixed costs of hiring the worker.
Q3) Is an employer's unemployment insurance payroll-tax liability a quasi-fixed cost of employment? Why or why not?
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) A person with ________ indifference curves is most likely to decide not to participate in the labor force.
A) flat
B) steep
C) straight
D) upward-sloping
Q2) What is the earned income tax credit (EITC)? The EITC probably increases labor force participation but probably also reduces hours worked by those already working.Explain why in both instances using indifference curve analysis.
Q3) On the portion of a worker's labor supply curve that is backward-bending, A) the substitution effect outweighs the income effect. B) the income effect outweighs the substitution effect.
C) the income effect is negative.
D) the substitution effect is negative.
Q4) Jack currently works 38 hours per week at a wage rate of $15 per hour.His marginal rate of substitution is $20 per hour.Is Jack's utility maximized? If yes,explain why.If no,explain why not and discuss what Jack should do in order to further increase utility.
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Chapter 7: Labor Supply: Household Production, the Family, and
the Life Cycle
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Q1) 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?
Q2) Over a lifetime,if the income effect dominates the substitution effect,then
A) an expected increase in the wage will reduce work hours.
B) an expected increase in the wage will increase work hours.
C) an expected increase in the wage will leave work hours unchanged.
D) any wage increase, expected or unexpected, will reduce work hours in this case.
Q3) Due to a change in job title,a married woman decides to increase her hours worked outside the home (but with no increase in annual pay).As a consequence,her husband decides to work fewer hours in the home.This suggests
A) the husband and wife are complements in household production.
B) the husband and wife are substitutes in household production.
C) the husband and wife are substitutes in the consumption of household commodities.
D) none of the above.
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) If workers on the third shift make $1 per hour more than workers on the first shift,then
A) working during the day is worth less than $1 per hour to all workers.
B) working during the day is worth exactly $1 per hour to all first shift workers.
C) working during the day is worth more than $1 per hour to all third shift workers.
D) working during the day is worth at least $1 per hour to all first shift workers.
Q2) A firm offers the optimal mix of wages and benefits.It is paying $5 an hour in wages and $3 in benefits.The minimum wage is then increased from $5.15 to $7 an hour.Assume all workers have the same utility curves (and have the usual shape).If the firm continues to spend $8 an hour on workers,then
A) workers will be better off.
B) workers will be as well off as before.
C) workers will be worse off.
D) it is impossible to determine if workers are better or worse off without knowing if benefits are a normal or inferior good.
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Chapter 9: Investments in Human Capital: Education and Training
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Q1) Which of the following is NOT an investment in human capital?
A) buying stock in a company that publishes textbooks
B) attending college
C) learning how to operate new computer software
D) moving to another state in search of better job opportunities
Q2) The psychic costs of college are usually lowest for
A) students with relatively high ability.
B) students from poor backgrounds.
C) students with average or low ability.
D) students who are at the margin in terms of attending college or not.
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
Q4) Plot an age/earnings profile for a "typical" college graduate.How does human capital theory explain the shape of the age/earnings profile?
Q5) Age/earnings profiles "fan out" by education level.Agree or disagree? Explain your reasoning.
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) An increase in his or her expected career length will make a worker
A) more likely to change jobs.
B) less likely to change jobs.
C) exactly as likely to change jobs.
D) either more or less likely to change jobs.
Q2) Studies using local labor markets as units of observation estimate that the effects of immigration on native-born wages and employment are ________.This could be because ________.
A) minimal; immigrants choose to locate in areas where demand is expanding
B) minimal; internal migration by native-born workers is minimal
C) large; immigrants and native-born workers are gross substitutes
D) large; internal migration by native-born workers is large
Q3) What is the human capital view of mobility? Write out the Present Value of Net Benefits formula and use it in answering the question.
Q4) How does the quit rate behave over the business cycle?
Q5) "Quit rates tend to increase with firm size." True,false,or uncertain? Explain your reasoning.
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Q6) How does earnings distribution help predict which skill groups within a sending country are most likely to emigrate from the country?
Chapter 11: Pay and Productivity: Wage Determination within
the Firm
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Q1) A self-enforcing contract requires that
A) employees gain from opportunistic behavior.
B) one party receives the entire surplus.
C) both employees and employers lose by discontinuing their contract.
D) the surplus be divided equally.
Q2) Which of the following would NOT (even if true)explain why wages rise with job tenure?
A) Workers become more productive the longer they are with the firm.
B) Over time, the firm is able to dismiss less productive workers.
C) Workers acquire more specific human capital the longer they are with the firm.
D) Starting with a lower wage and then letting wages rise with job tenure reduces the present value of wages paid to a worker by an employer.
Q3) What are the basic features of a promotion tournament? What are the potential problems with a promotion tournament?
Q4) What is the firm-size effect? What accounts for the firm-size effect?
Q5) Identify and discuss the two general problems that output-based pay schemes suffer from.
Page 13
Q6) How does the payment of an efficiency wage affect worker productivity?
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Chapter 12: Gender,Race,and Ethnicity in the Labor Market
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Q1) Which of the following CANNOT explain differences in earnings of men and women?
A) experience
B) occupation
C) unobservable characteristics
D) income maximization by all workers
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 is the dual labor market explanation of discrimination?
Q4) What is affirmative action?
Q5) 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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Chapter 13: Unions and the Labor Market
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Q1) The efficient contract model implies that
A) the union and the employer are both better off than they would be in a monopoly union model.
B) the union maximizes a utility function, subject to the firm's labor demand function.
C) the union negotiates only on wage levels, not on employment levels.
D) firms have more negotiating power than unions.
Q2) Suppose the firm's demand for labor is L<sup>D</sup>= 100 - W.The supply of labor is perfectly elastic at a wage of $20.If a monopoly union's goal is to maximize total rents (= [W<sub>U</sub> - $20] × L),what wage will it seek?
A) $20
B) $40
C) $60
D) $80
Q3) What are the two types of unions operating in the United States? What do unions do?
Q4) Strikes are more likely and of longer duration in periods of relative prosperity.Use the Hicks Bargaining Model to account for this empirical observation.
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Chapter 14: Unemployment
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Q1) Suppose that a country has two types of workers-young workers and older workers.Young workers make up 10 percent of the labor force and normally have a group unemployment rate of 15 percent.Older workers comprise the rest of the labor force and normally have a group unemployment rate of 5 percent.What is the country's natural rate of unemployment? If twenty years earlier,the country experienced a baby boom such that the labor force composition of young workers now jumps to 20 percent,what is the country's new natural rate of unemployment? Comment on your calculations.
Q2) What is the reservation wage? How does an individual's reservation wage affect the duration of a spell of unemployment? How does an individual's reservation wage affect the individual's expected wage?
Q3) Does the unemployment insurance payroll tax encourage layoffs? Why or why not?
Q4) European policies which make it difficult to dismiss workers and reduce wage flexibility have probably
A) increased the rate of job creation.
B) decreased the unemployment rate.
C) decreased the rate of long-term unemployment.
D) increased the costs of doing business.
Q5) What is the wage curve? What is the efficiency wage explanation of the wage curve?
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Chapter 15: Inequality in Earnings
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Q1) Which of the following could NOT increase the earnings gap between highly-educated and less-educated workers?
A) a faster increase in the demand for highly-educated workers than for less-educated workers
B) a faster increase in the supply of highly-educated workers than of less-educated workers
C) a decrease in the demand for less-educated workers
D) a decrease in the average strength of unions
Q2) In a competitive industry,output is produced with skilled and unskilled labor.Factor-biased technical change that increases the productivity of skilled labor,will,at a given ratio of skilled to unskilled labor,shift any given isoproduct curve ________ the origin and ________ the absolute slope of the isoproduct curve (when the number of skilled workers is measured along the horizontal axis).Pick the best pair of answers.
A) towards; increase
B) towards; decrease
C) away from; increase
D) away from; decrease
Q3) Identify the major changes in earnings inequality in the U.S.since 1980.
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Chapter 16: The Labor-Market Effects of International Trade and
Production Sharing
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Q1) With differing comparative advantages,nations who trade (compared to when they did not trade)
A) get more of the good that they have the comparative advantage in but less of other goods.
B) get less of all goods, but are better off because they can get the mix of goods they want.
C) will only be better off if they export more than they import.
D) can get more of all goods.
Q2) The wage rates of Southerners have been slow to converge to the higher wage rates of Northerners.Which of the following is a likely reason for this?
A) Tariffs by Northern states on goods made in the South remain high.
B) Displaced Northern workers have been not been able to find other well-paying jobs.
C) Southerners find it hard to understand the Northern accent.
D) It is costly to move production from the North to the South.
Q3) Elimination of barriers to international transactions tends to reduce the elasticity of demand for domestic labor.True or false? Explain.
Q4) What is the Trade Adjustment Assistance program?
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