SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT

HRM-200 LABOUR ECONOMICS

SESSIONAL EXAMINATION

6TH DECEMBER 2011

09:00-12:00 HOURS

Time allowed: 3 HOURS plus 5 minutes reading time

Instructions to Candidates:
1. Check that you have the correct examination in front of you.
2. Answer ALL questions in section A. Answer FOUR (4) questions in section B. Question
one in section B is COMPULSORY. Fully explain your answers. A graph is not enough.
3. All questions must be answered on the answer sheet only.
4. Write down the number of questions that you have answered on the cover of the
examination answer booklet.
5. Begin each question on a new page.
6. 1 mark will be awarded for neatness and clarity of presentation.
7. Non-programmable silent calculators are allowed.
8. No other books, files or mechanical / electronic aids are permitted.
9. Your exam consists of 8 pages, including this one. Make sure you have all 8 pages.
10. There shall be no form of communication between students during the examination.
Any student caught doing this will be disqualified.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO.

 SECTION A

1 The word monopsony means: (2 marks)

a. One buyer.
b. One seller.
c. One customer.
d. One market

2 In a monopsonistic labor market: (2 marks)

a. The marginal expense of labor curve lies above the labor supply curve.
b. The marginal expense of labor curve is the labor supply curve
c. The marginal revenue product of labor curve will necessarily be horiziontal
d. There is no one profit-maximizing quantity of labor the firm should hire.

3 To minimize production costs, firms should equate ______________ across all

employees. (2 marks)
a. Quasi-fixed and fixed costs
b. The ratio of marginal expense to marginal productivity
c. Wages
d. The ratio of output prices to average factor costs

4 Labor costs which are quasi-fixed: (2 marks)

a. Are strictly proportional to hours of work.
b. Are not strictly proportional to hours of work
c. Are completely variable
d. Never change

5 As one moves down (to the right) on a labor demand curve, what happens to the absolute
value of the elasticity of demand? (2 marks)
a. It reaches zero at the midpoint.
b. It remains unchanged along a linear demand curve
c. It decreases
d. it increases

6 The greater the ease with which firms can substitute across factors of production in
producing their output: (2 marks)
a. The higher the wage elasticity of labor demand
b. The lower the wage elasticity of labor demand
c. The greater the shift of the labor demand curve.
d. The more likely they are to use a fixed ratio of capital-to-labor in the production process

7 As wives’ wages rise relative to husbands, what would we expect to happen to labor
supply choices within the household? (2 marks)
a. Women would take on relatively more market work and husbands would take on
relatively more household work.
b. Women would take on more relatively more household and market work.
c. Husbands would take on relatively more market work and retain the same relative
amount

8 On average, when does a worker’s market productivity reach its apex (peak)?(2 marks)
a. In middle age
b. The year before retirement
c. In the early 30's
d. Between 16 and 18 years of age.
e. The first year after graduating college/university

9 Which of the following is not a factor of demand for leisure? (2 marks)

a. One’s set of preferences
b. One’s wealth
c. The weighted-average currency exchange rate between the U.S. and the most popular
currencies of Europe.
d. The opportunity cost of leisure (equal to the wage rate).

10 The substitution effect of increased wages would: (2 marks)

a. Induce early retirement.
b. Induce people to work less, ceteris paribus
c. Induce people to work more, ceteris paribus
d. None of the above
 SECTION B

QUESTION ONE (COMPULSORY)

1. The marginal product theory assumes that wages are the only cost of employing labor.
a. Describe some other types of costs of employing labour unrelated to the wage
rate, and show how these costs could affect the hiring process. (8 marks)
2. Suppose the extra cost of producing an extra unit of output with an additional worker is
higher than the cost of producing an additional unit of output by having current workers
work more overtime. (MEM/ MPM > MEH/ MPH)
a. Explain what should the firm do to minimize cost and get back to equilibrium in
this situation?
(8 marks)

b. In view of the statement in (question 2) above, why might it be a bad policy to

force firms’ to pay overtime premium which makes it more expensive to have
current workers work more overtime thus forcing the firms to hire more new
workers rather than pay a higher overtime premium?

(3 marks)
 QUESTION TWO

1. Using an appropriate diagram, illustrate and explain the scale and substitution effects on
the quantity of labour demanded given an increase in the price of capital.
(6 marks)
2. Suppose we have a monopsony in the labour market (and a perfectly competitive product
market), with no wage discrimination, as depicted below:
Marginal expense of Labor
Wage,

MEL
($)
Supply of
16 Labor

12

10 Marginal Revenue
Product of Labour

11 14 Employment

a. How many employees will the monopsonist employ and at what wage rate? Explain.
(4 marks)
b. Now suppose minimum wage were imposed of $20. Briefly explain the expected effect
on N* and W* and MEL (relative to part a). You may use the graph above to help explain
your answer (and show the new MEL curve).
(4 marks)
c. For what range of minimum wages (actual $/hour) would minimum wage legislation
cause employment increase (relative to part a)?
(2 marks)
d. If the monopsony is broken up in too many perfectly competitive firms and the minimum
wage law is removed, what is the expected impact on N* and W* (relative to part a)?
(4 marks)
QUESTION THREE

1. Union A wants to represent workers in a firm that hires 20,000 person workers when the
wage rate is $4 and hires 10,000 workers when the wage rate is $5. Union B wants to
represent workers in a firm that hires 30,000 workers when the wage is $6 and hires
33,000 workers when the wage is $5. Which union would be more successful in an
organizing drive?
(10 marks)

2. If the elasticity of demand for labor is .3, a 10% increase in the wage rate will cause
employment to fall by ____ % and cause total income received by workers to (rise, fall)
by ____%. [Show calculations and be sure to indicate whether income would rise or fall
in your answer!]

(10 points)

QUESTION FOUR

1. Suppose that in Zambia there is a dramatic outflow of road construction workers seeking
higher wages in neighboring countries and at the same time, the demand for their services
rises due to the upcoming elections within Zambia. Graphically represent these two shifts
of supply and demand, and then use the graph to predict the direction of change in wages
and employment within Zambia’s construction sector?
(10 marks)
2. Analyze the impact of the following changes on wages and employment in a given
occupation:
a) An increase in product demand
(5 marks)
b) Increased wages in alternative occupations
 (5 marks)

QUESTION FIVE

1 Suppose that the demand for human resource personnel is, , where L=
the number of dental hygienist, W= the daily wage.
a. What is the own-wage elasticity of demand when, , per day?
(8 marks)
i. Is the demand curve elastic or inelastic at this point?
(2 Mark)
b. What is the own wage elasticity of demand when per day?
(8 Marks)
ii. Is the demand curve elastic or inelastic at this point?
(2 mark)

QUESTION SIX

1. The following two questions are based on the backward bending individual labor supply.
a. What set of circumstances would generate a backward-bending labor supply curve?
(5 marks)
b. What happens to labor supply if the wage increases, and the labor supply curve is
backward bending?
(5 marks)

2. The following two questions are based on labour supply.

a. The work leisure equilibrium for an individual occurs where the slopes of the
indifference curve and budget constraint are equal. Graphically depict the equilibrium
point for an individual who desires no work at all. Take care to label your graph and
give a brief explanation.
(5 marks)
b. The graph below shows an individual’s work leisure equilibrium given by point A.
On the vertical axis is the income depicted by “Y”. On the Horizontal axis, the
amount of leisure time an individual can have is between “0” and “T” where “L” is
Leisure. “H” is work effort and the time an individual spends in it also lies between
“0” and “T”. The individuals’ indifference curve is depicted by U0 and U1.Now
suppose the individual’s real wage rate increases the budget line swivels around point
T outwards from to on the graph. Use the graph to explain the behavior of

the individual after the wage increase (hint- income and substitution effect)
(5 marks)