Economics 381
Spring 2002
D. Maki
                      Midterm Examination

Instructions:  Answer any four of the following six questions.  Questions are equally weighted.  This is a closed book examination.  Total time allowed:  1 hour and 50 minutes (until 4:20).

1.  (a). Discuss the work incentive effects  of a welfare program with a benefit of $A and a 100% tax on earnings starting at the first dollar.  (b). How would this change if the benefit were reduced to $B and at the same time the 100% tax was made applicable only to earnings over $X per time period?  (c).  How would your answer to part (a) change if recipients were required to work one day a week in order to be eligible?

2.  (a). In a life-cycle context, discuss the work incentive effects of a change in public pensions which reduces the basic pension benefit and payroll taxes by 50%.  (b). How would your answer change if instead there was a tax of 80% applied to earnings of pension recipients, together with an appropriate reduction in payroll taxes?

3.  (a). Assuming only two inputs (capital and labour) explain how the labour demand curve for a profit-maximizing firm can be derived in the long-run (capital variable).  (b). How will this demand curve change if technological change makes it easier to substitute capital for labour?

4.  Unemployment insurance premiums are payable by both employees and employers based on a percentage of earnings up to a ceiling of $X per worker per year.  (a). Will this have an impact on the mix of skilled versus unskilled workers hired?  Explain.  (b).  Is the impact in part (a) affected by the elasticities of the relevant labour demand and supply curves?  Again, explain.

5.  (a).  "The fact that a minimum wage (in some range) may actually increase employment for a monopsonist illustrates the proposition that a monopsonist does not have a demand curve for labour in the usual sense".  Discuss.  (b).  "If the monopsonist in part (a) can practice perfect wage differentiation, the 'problem' disappears".  Discuss.

6.  Consider three types of jobs:  (i) those where overtime work is available if workers want it, (ii) those where overtime work is mandatory, and (iii) those where overtime work is very unusual.  If wages are lower in type (i) jobs than others, and the same in type (ii) and type (iii) jobs, what does this suggest about worker attitudes involving overtime?  Make any assumptions explicit.