Human Resource Economics
Exam Answer Key
Course Introduction
Human Resource Economics explores the application of economic theories and principles to the labor market and human resource management. This course examines how individuals make decisions regarding education, training, employment, and career paths, as well as how organizations design incentive systems, compensation structures, and hiring practices. Key topics include labor supply and demand, wage determination, investment in human capital, discrimination in the labor market, and the impact of public policies on employment outcomes. Through both theoretical frameworks and real-world case studies, students gain a comprehensive understanding of the economic forces shaping workforce dynamics and organizational success.
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) 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
Q2) If there are costs associated with employee turnover,and to reduce these costs,a firm increases the wage it pays its employees,then
A) the firm's profits must decrease.
B) the firm's profits must increase if turnover costs fall.
C) the firm's profits must increase if the turnover rate falls by three percent or more.
D) the firm's profits could increase or decrease, depending on the amount in the wage increase and the change in the turnover rate.
Answer: D
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3
Chapter 2: Overview of the Labor Market
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Q1) According to Table 2.2,real earnings in the Widget Industry in 1986 were
A) $22,500.
B) $12,640.
C) $11,538.
D) $15,730.
Answer: B
Q2) If a union negotiates an industry-wide agreement to set wages above the equilibrium level,
A) the industry's demand curve for labor will shift inward.
B) there will be a surplus of labor in the industry.
C) there will be a shortage of labor in the industry.
D) there will be neither a shortage nor a surplus of labor in the industry.
Answer: B
Q3) Which of the following events could explain why wages and employment could fall in a competitive labor market?
A) The demand curve shifts right and up.
B) The demand curve shifts left and down.
C) The supply curve shifts left and up.
D) The supply curve shifts right and down.
Answer: B
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Chapter 3: The Demand for Labor
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Q1) Suppose that a firm is competitive in both the product market and the labor market.Graph the firm's marginal revenue product curve (be sure to label the axes of your graph appropriately).Explain why the marginal revenue product curve is also the firm's short run labor demand curve.
Answer: Given the assumption of competition in the product market,the MRP curve graph should look like a standard,negatively-sloped,marginal product of labor curve translated into dollar terms by product price,similar to Figure 3.2 in the text.The graph should have the employment level on the horizontal axis and the vertical axis should be measured in dollars.Profit maximization logic requires that the firm employ to the level that equates MRP and the wage.Given that the firm is a profit maximizer,therefore,the quantity of labor demanded at a particular wage will coincide exactly with points on the marginal revenue product curve.The MRP curve,by definition,shows MRP at various levels of employment.Given that a profit maximizing firm chooses its desired level of employment so that W = MRP,points on the MRP curve also represent wage/desired level of employment (labor demand)combinations.
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Chapter 4: Labor Demand Elasticities
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Q1) Industry A has own-wage elasticity of labor demand of -2.5.Industry B has own-wage elasticity of labor demand of -0.5.Which industry is more likely to be unionized? Explain why.
Q2) 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.
Q3) If the own-wage elasticity of demand for professors is -0.5,then an increase in the wage of professors from $45,000 to $55,000 will cause the quantity demanded to fall by A) 2%.
B) 5%.
C) 10%.
D) 20%.
Q4) The minimum wage is a relatively ineffective means by which to reduce poverty.Agree or disagree.Explain your reasoning.
Q5) How is the own-wage elasticity of labor demand for unskilled workers affected by the elasticity of supply of other factors of production (such as skilled labor and capital equipment)? Explain.
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Chapter 5: Frictions in the Labor Market
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Q1) Regardless of area of expertise,a public school pays all teachers the same annual wage.At $70,000,it hires good teachers in all areas except science.Because science is a field in demand,the school can only hire poor science teachers.It would have to pay science teachers $90,000 to hire good science teachers.If one out of five teachers is a science teacher,what is the marginal expense of getting a good science teacher instead of a poor one?
A) $90,000
B) $100,000
C) $20,000
D) $450,000
Q2) A monopsony's marginal worker has a marginal revenue product of $12 an hour and a wage of $8.A minimum wage of $10 will have which of these effects?
A) decrease the average hourly cost of a worker
B) decrease the marginal hourly cost of a worker
C) increase the marginal revenue product of the marginal worker
D) increase the firm's average profit per worker
Q3) Discuss how the use of credentials in the hiring process can represent an efficient investment by the firm.
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) 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.
Q2) 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.
Q3) Empirical studies suggest that the responsiveness of married working women's hours to wage changes is ________ than for men and that they are ________ to enter or leave the labor force due to changes in their wages.
A) no different; more likely
B) no different; less likely
C) greater; more likely
D) greater; less likely
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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) If someone enjoys household production (such as raising children)this
A) would be shown by a shift in his budget constraint.
B) will make his household production isoquant curves flatter than otherwise.
C) is the same as being more productive in household production.
D) will make his household production isoquant curves steeper than otherwise.
Q3) In a life-cycle model,expected wage changes cause ________,while unexpected wage changes cause ________.
A) income and substitution effects; income and substitution effects
B) only substitution effects; income and substitution effects
C) income and substitution effects; only substitution effects
D) only substitution effects; only substitution effects
Page 9
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) What are the difficulties inherent in estimating compensating wage differentials empirically?
Q2) With the assumptions made in our model,OSHA standards that decrease risk levels in the workplace should establish the allowable risk levels
A) to ensure the highest degree of health and safety protection for all workers.
B) so that they will not result in higher costs/lower profits for employers.
C) by focusing on jobs currently paying the largest compensating wage differentials.
D) by weighing the costs of safety programs against the value workers or other beneficiaries attached to the benefits of reduced risk.
Q3) Holding all other factors constant,workers who are strongly averse to risk will tend to have jobs paying
A) average wages.
B) below average wages.
C) above average wages.
D) at least average wages.
Q4) What are the major insights of the hedonic model of compensating wage differentials?
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Chapter 9: Investments in Human Capital: Education and Training
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Q1) Suppose an individual expects to receive a payment of $5,000 in 10 years.What is the present value of the payment if the discount rate is 8%? What is the present value of the payment if the discount rate is 4%? What principle is illustrated by this example?
Q2) Fewer women leaving the labor market to raise children has given women the incentive to acquire ________ on-the-job training early in their careers,yielding age-earnings profiles which are ________ than they were about twenty years ago. A) more; steeper
B) more; flatter C) less; steeper D) less; flatter
Q3) Increased grants and loans for college expenses would ________ the number of college graduates,while ________ wages paid to college graduates. A) increase; increasing B) decrease; decreasing C) increase; decreasing D) decrease; increasing
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) Which of the following would cause quit rates to decline?
A) an increase in the urbanization of the population
B) a decrease in the unemployment rate
C) a decrease in average wages
D) an increase in the average age of workers
Q2) Young workers are more likely to quit their jobs than older workers for all of the following reasons EXCEPT
A) younger workers have a longer period over which to collect the benefits of a job change.
B) younger workers have lower psychic costs from mobility.
C) younger workers have better job matches.
D) younger workers have less firm-specific training.
Q3) Higher costs of changing jobs will result in all of the following EXCEPT
A) individual firms' labor supply curves will slope upward.
B) some workers will stay in jobs even when they can earn more in an identical job with another firm.
C) firms will lose some monopsony power.
D) quit rates will not be perfectly responsive to changes in wages.
Q4) "Quit rates tend to increase with firm size." True,false,or uncertain? Explain your reasoning.
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Chapter 11: Pay and Productivity: Wage Determination
within the Firm
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Q1) Pay for performance works LEAST well for an employee
A) who works as a counselor for other employees in a company.
B) who is closely supervised.
C) who maximizes utility.
D) whose value added is easily measured.
Q2) The workers who will prefer piece-rate pay will usually be
A) less present-oriented than average.
B) less motivated than average.
C) more productive than average.
D) more risk-averse than average.
Q3) An employer and a worker,if both are honest and work hard,together produce $200,000 a year,of which the employer gets $50,000 and the worker $150,000.If either one is dishonest and lazy,they break up,the employer employs someone else and the worker gets another employer.The following shows what they might earn if they broke up.In which case is it likely that both the employer and the worker will be honest and hard-working?
A) If they break up, the employer makes $60,000 and the worker $80,000.
B) If they break up, the employer makes $20,000 and the worker $175,000.
C) If they break up, the employer makes $75,000 and the worker $175,000.
D) If they break up, the employer makes $25,000 and the worker $125,000.
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Chapter 12: Gender,Race,and Ethnicity in the Labor Market
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Q1) Suppose that females and males are equally productive and that some employers discriminate against females.If some employers begin discriminating against males,which of these CANNOT happen (assuming that nothing else changes)?
A) The relative wages of women will rise.
B) The relative wages of women will fall.
C) The relative wages of women will stay the same.
D) The relative wages of women will rise above that of men.
Q2) Federal antidiscrimination programs appear to
A) have made no difference in raising relative earnings of black workers.
B) have made little difference raising relative earnings of black workers, probably because individual programs have had only small effects.
C) have helped to raise relative earnings of black workers.
D) have hurt the relative earnings of black workers.
Q3) 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
Q4) What is affirmative action?
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Chapter 13: Unions and the Labor Market
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Q1) What is interest arbitration?
Q2) Which of the following statements is generally true about unions?
A) Unions raise wages in the range from 30 to 40%.
B) Public sector unions raise wages more than private sector unions.
C) The union wage advantage is higher in Europe than it is in the United States.
D) Unions reduce the dispersion of earnings among workers.
Q3) 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.
Q4) Large union wage increases in declining sectors can be explained by
A) industries' inability to substitute capital for labor while product demand is falling.
B) unions' decision to make wage gains more important than employment guarantees.
C) industries' unwillingness to negotiate with unions.
D) industries' ability to sell used capital if necessary.
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Chapter 14: Unemployment
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Q1) What are the sources of unemployment identified by the U.S.Department of Labor? Give some sense of the relative importance of each category in a non-recession year.
Q2) Paying efficiency wages to reduce turnover may be profit-maximizing for companies,but it also contributes to ________ unemployment.
A) frictional
B) regional
C) cyclical
D) structural
Q3) The largest source of unemployed workers is ________ and the second largest is ________.
A) job losers; new entrants
B) job losers; reentrants
C) job leavers; new entrants
D) job leavers; reentrants
Q4) What is the wage curve? What is the efficiency wage explanation of the wage curve?
Q5) How is unemployment defined in the United States? How is the number of unemployed counted in the United States? What is the unemployment rate?
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Chapter 15: Inequality in Earnings
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Q1) Which of these decades had the greatest increase in inequality?
A) The 80s
B) The 90s
C) 2000-2008
D) Inequality has had about the same increase in each decade.
Q2) An increase in inequality will always be accompanied by A) a reduction of earnings of those in the lowest percentiles. B) an increase of earnings of those in the highest percentiles.
C) an increase in the dispersion of incomes.
D) all of the above.
Q3) Suppose that earnings instability (such that income can go up or down)increases for the lower 20 percent of the workforce.The increase in inequality as measured by the 90:10 ratio will ________ the increase as measured by the 80:20 ratio.
A) be smaller than B) be about the same as C) be greater than
D) None of the above: inequality will decrease.
Q4) What institutional forces might account for the increase in earnings inequality observed since 1980? Explain.
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Chapter 16: The Labor-Market Effects of International Trade and
Production Sharing
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Q1) Suppose Nation X gave goods to the United States for free and asked for nothing in return.This most likely would make most people in the United States
A) better off.
B) worse off.
C) no better nor no worse off.
D) better off but only if the United States could get Nation X to buy an equivalent amount of U.S. goods.
Q2) When companies outsource jobs to foreign countries,the price of the outsourced inputs is effectively reduced.The cross-wage effect on the demand for other workers will be positive
A) if the substitution effect dominates the scale effect.
B) only if the substitution effect is positive.
C) if the scale effect dominates the substitution effect.
D) only if the reduction in prices increases the real wage of all workers.
Q3) The wages of workers displaced by international trade will fall less when A) the substitution effect is larger.
B) the scale effect is larger.
C) workers are close substitutes with foreign workers.
D) unemployment benefits are made less generous.
Page 18
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