QUESTION 22

1. Consider the following hypothetical poverty program.Any person who earns less than $15,000 is given a subsidy of $0.50 for each dollar worked.The maximum benefit is equal to $7500 and it is reached if a person earns exactly $15,000.

The phaseout begins immediately afterwards.For each dollar earned beyond $15,000, the benefit is cut by $0.50.The net benefit falls to zero when a person earns $30,000.

The program is shown in the graph that is attached to each answer. The original budget line is AB and it is presumed that there is no unearned income.The plan budget line isAGVB.The slope of AG is equal to 1.5w, where w denotes the wage.

Point G corresponds to the situation where the person is earning exactly $15,000 and is

getting the maximum benefit of $7500.It follows that the vertical distance from the budget line AB to G is equal to $7500.

Point V corresponds to the situation where the person is earning exactly $30,000.At that point the original and plan budget lines coincide because the net benefit is equal to zero.

The line GV is the phase out range between $15,000 and $30,000.In this range the net benefit is equal to 0.5w.

Consider a person who is initially earning $20,000 before the plan is introduced. When the plan is introduced, theincomeeffect (note that we are only dealing with the income effect and not the substitution effect) will cause:

a.

time spent working will unambiguously rise

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

b.

time spent working may rise, fall, or remain the same

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

c.

time spent working will unambiguously fall

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

d.

time spent working will be unchanged

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

QUESTION 23

1. Consider the graph which is attached to the four answers.It shows the preferences and budget constraint of Sheila, who consumes fine

meals and Ranger games.

Suppose that this person moves from R to V.It follows that:

a.

her utility will rise but her total expenditure on goods will be unchanged

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

b.

her utility will be unchanged but her total expenditure on goods will rise

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

c.

her utility and her total expenditure on goods will be unchanged

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

d.

her utility and total expenditure on goods will both rise

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

QUESTION 24

1. Consider the labor supply model.Suppose that the wage rises.This causes:

a.

a substitution effect that raises leisure; an income effect that raises leisure

b.

a substitution effect that reduces leisure;an income effect that raises leisure

c.

a substitution effect that reduces leisure; an income effect that reduces leisure

d.

a substitution effect that raises leisure; an income effect that reduces leisure

QUESTION 25

1. Consider the model presented in class where a person buys movies and Ranger games.Assume that both goods are normal. Suppose that

the price of Ranger games falls.Theneteffect (i.e. the sum of the substitution and income effects) is that:

a.

the number of Ranger games purchased will rise; the number of movies purchased may rise, fall, or

remain constant

b.

the number of Ranger games and movies purchased will both rise

c.

the number of Ranger games purchased will rise; the number of movies purchased will fall

d.

the number of Ranger games purchased will rise; the number of movies purchased will remain

constant

QUESTION 26

1. John buys Ranger games and movies.Suppose that the prices of the two goods are unchanged but his income rises.This causes him to

buy more Ranger games and fewer movies.This implies that:

a.

a movie is a normal good but a Ranger game is an inferior good

b.

movies and Ranger games are both normal goods

c.

a movie is an inferior good but a Ranger game is a normal good

d.

movies and Ranger games are both inferior goods

QUESTION 27

1. Consider the following poverty program.Under this plan, each person who earns less than $30,000 is given a fixed payment of $10,000.

All persons who earn more than $30,000 receive nothing.This plan differs from the ones discussed in class in that there is no phaseout

range; instead, the benefit simply disappears at an income of $30,000.

Now consider a person initially earning $50,000 before the plan is introduced.Which of the following is true after the plan is

introduced?

a.

this person will unambiguously not join the program

b.

this person will unambiguously join the program

c.

this person will work more hours

d.

this person may or may not join the program

QUESTION 28

1. Consider the following hypothetical poverty program.Any person who earns less than $15,000 is given a subsidy of $0.50 for each

dollar worked.The maximum benefit is equal to $7500 and it is reached if a person earns exactly $15,000.

The phaseout begins immediately afterwards.For each dollar earned beyond $15,000, the benefit is cut by $0.50.The net benefit falls to

zero when a person earns $30,000.

The program is shown in the graph that is attached to each answer. The original budget line is AB and it is presumed that there is no

unearned income.The plan budget line isAGVB.The slope of AG is equal to 1.5w, where w denotes the wage.

Point G corresponds to the situation where the person is earning exactly $15,000 and is

getting the maximum benefit of $7500.It follows that the vertical distance from the budget line AB to G is equal to $7500.

Point V corresponds to the situation where the person is earning exactly $30,000.At that point the original and plan budget lines coincide because the net benefit is equal to zero.

The line GV is the phase out range between $15,000 and $30,000.In this range the net benefit is equal to 0.5w.

Consider a person who is initially earning $10,000 before the plan is introduced. When the plan is introduced, thesubstitutioneffect (note that we are only dealing with the substitution effect and not the income effect) will cause:

a.

time spent working to be unchanged

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

b.

time spent workingto unambiguously fall

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

c.

time spent working to perhaps rise, fall, or remain the same

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

d.

time spent working to unambiguously rise

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

QUESTION 29

1. Consider the following version of the earned income tax credit (EITC).

All persons who earn less than $20,000 are given a wage subsidy of $0.50 for each dollar worked.The maximum benefit is therefore $10,000.

All persons who earn between $20,000 and $30,000 are paid the maximum benefit of $10,000.This is the income disregard region.

The phaseout occurs in the income range from $30,000 to $50,000.In this range the maximum benefit $10,000 is cut by $0.50 for each dollar earned.For example, a person who earns $30,001 will get paid $10,000 -$0.50 = $9,999.50.At an income of $50,000 the program has been totally phased out.

Now focus on a person initially working and earning $25,000 before the plan is introduced.

Consider the impact of the income effect (note that in this question we are not talking about the substitution effect!).Which of the following is true?

a.

the income effect will raise time working

b.

there is no income effect in this income range

c.

the income effect will lower time spent working

d.

the income effect may raise or lower time spent working

QUESTION 30

1. Consider the following hypothetical poverty program.Any person who earns less than $15,000 is given a subsidy of $0.50 for each

dollar worked.The maximum benefit is equal to $7500 and it is reached if a person earns exactly $15,000.

The phaseout begins immediately afterwards.For each dollar earned beyond $15,000, the benefit is cut by $0.50.The net benefit falls to

zero when a person earns $30,000.

The program is shown in the graph that is attached to each answer. The original budget line is AB and it is presumed that there is no

unearned income.The plan budget line isAGVB.The slope of AG is equal to 1.5w, where w denotes the wage.

Point G corresponds to the situation where the person is earning exactly $15,000 and is

getting the maximum benefit of $7500.It follows that the vertical distance from the budget line AB to G is equal to $7500.

Point V corresponds to the situation where the person is earning exactly $30,000.At that point the original and plan budget lines coincide because the net benefit is equal to zero.

The line GV is the phase out range between $15,000 and $30,000.In this range the net benefit is equal to 0.5w.

Consider a person who is initially earning $10,000 before the plan is introduced. When the plan is introduced, the income effect (note that we are only dealing with the incomeeffect and not the substitution effect) will cause:

a.

time spent working to perhaps rise, fall, or remain the same

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

b.

time spent working to unambiguously rise

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

c.

time spent workingto unambiguously fall

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

d.

time spent working to be unchanged

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

QUESTION 31

1. Consider the labor supply curve.Suppose that this curve continuously slopes upwards.It does NOT bend backwards. This implies that:

a.

the substitution effect is stronger than the income effect

b.

there is no income effect

c.

the income effect is stronger than the substitution effect

d.

the substitution effect and the income effect exactly cancel each other out

QUESTION 32

1. Consider the following version of the earned income tax credit (EITC).

All persons who earn less than $20,000 are given a wage subsidy of $0.50 for each dollar worked.The maximum benefit is therefore $10,000.

All persons who earn between $20,000 and $30,000 are paid the maximum benefit of $10,000.This is the income disregard region.

The phaseout occurs in the income range from $30,000 to $50,000.In this range the maximum benefit $10,000 is cut by $0.50 for each dollar earned.For example, a person who earns $30,001 will get paid $10,000 -$0.50 = $9,999.50.At an income of $50,000 the program has been totally phased out.

Now focus on a person initially working and earning $25,000 before the plan is introduced.

Consider the impact of the substitution effect (note that in this question we are not talking about the income effect!).Which of the following is true?

a.

the substitution effect will lower time spent working

b.

there is no substitution effect in this income range

c.

the substitution effect may raise or lower time spent working

d.

the substitution effect will raise time working