Answer Key Midterm Exam Winter 2002

Transcription

1 The University of British Columbia Department of Economics Economics 351: Women in the Economy Answer Key Midterm Exam Winter 2002 I. For each of the following questions, circle the letter corresponding to the correct answer. There is only one unambiguous answer for each question. Circling more than one letter will give you no points. You get 3 points when you circle the right letter. This part is worth a maximum of 45 points. 1. The labour force participation of women over the last 40 years a) has increased to match that of men b) has been increasing at an accelerating rate c) has been increasing at a decelerating rate d) has been increasing mainly among single women 2. The gender wage gap in Canada is a) among the lowest in the world b) is comparable to that of Scandinavian countries (Sweden, Norway, etc.) c) is comparable to that of Anglo-Saxon countries (U.S., U.K.) d) is higher than that of Japan 3. The following economic factor is thought to improve women s relative status e) the relative scarcity of men versus women f) the amount of physical strength required in the production of non-market goods g) the relative amount of market vs. household goods produced by women h) the relative amount of non-market vs. household goods produced by women Correct Answer: g) or third line

2 4. The 19 th century period of industrialization in the North-American is thought to have contributed to the rise of the role of the wife as homemaker because a) household goods were now produced more cheaply by men b) production was done in factories away from the home c) men s trade unions were unfavorable to competition from women d) all of the above Correct Answer: d) 5. The following is an example of the internalization of positive externalities that can arise in multi-person households a) parents buy food in bulk b) parents derive pleasure when their children succeed c) one person watching television is not affected when another household member starts watching as well d) children do not clean up their bedrooms knowing that the parents will not throw them out of the house Correct Answer: b) 6. The following are demand-side factors thought to explain the rise in female labor force participation except: a) increased demand for goods and services following increases in standard of living b) firms using more clerical workers c) technological innovations making work less physically demanding d) decline in the earnings of men Correct Answer: d) 7. The following are supply-side factors thought to explain the rise in female labor force participation except: a) increase in the earnings of women b) increase in pension coverage of women c) time-saving appliances in home production d) higher rates of divorce

3 8. If a woman is a labour market participant, her reservation wage a) is higher than the wage she is offered in the market minus any variable child care costs b) is higher than the wage she is offered in the market c) is lower than the wage she is offered in the market d) is higher than the wage she is offered in the market when she doesn t have any unearned income 9. According to the consumption-leisure model of labour supply, the following unambiguously increase female labour market participation a) decreases in non-earned income b) increases in wages c) increases in reservation wages d) increases in the value of market time Correct Answer: a) 10. In collective models of the family, a) outcomes of individual family members will be affected by policy b) all family members have the same preferences c) the family head is assumed to act altruistically d) the family head is assumed to control the bulk of family resources Correct Answer: a) 11. Women are often thought to have less bargaining power than men in marriage because a) men make more relationship-specific investments than women b) men s earning power is generally higher than women's c) women generally gain custody of the children in divorce settlement d) women s probabilities of remarriage are higher than men's Correct Answer: b)

4 12. In-kind transfers directed at children, such as public education and public medical care are a) more efficient from the standpoint of economic theory than cash transfers b) ineffective to redistribute well-being within the households c) justified under the unitary model of the family d) justified under the separate spheres model of the family Correct Answer: d) 13. The changing technology of nonmarket production over the past 50 years has implied that a) women spend more time in market work b) women spend less time in nonmarket work c) couples consume more nonmarket goods d) couples consume less market goods 14. The following factor can explain the increase in divorce rates over the past 25 years a) more couples marrying younger b) couples having children earlier on in the marriage c) introduction of no-fault divorce d) rising proportion of single-earner families 15. An income tax system that taxes the sum of the husband's and wife's incomes divided by two at the same tax rates than individual incomes (income splitting) implies a) a higher marginal tax rate on the secondary earner than if that earner was allowed to file separately b) an inequitable treatment of single and dual-earner households c) a reduction in the incentives for women to enter the labour force d) all of the above Correct Answer: d)

5 I. Analytical Question: Write your answer on the questionnaire. This part is worth 25 points, with 10 points for a) and 15 points for b). The following table shows how two individuals allocate their time between market and non-market work and the numbers of market and non-market units of output produced: Market Output Non-market Work Kim 2 20 units/hours = units/hour = 96 Robin 6 18 units/hours = units/hour = 36 Total In the presence of comparative advantage, neoclassical economic theory implies that specialization between market and non-market production, and exchange within a couple will lead to higher total production. a) Can you find a reallocation of Kim and Robin's time that will yield more total output of each type and where each individual will specialized in only one type of work? How will you determined who will specialize in what type of work? b) This specialization and exchange model is viewed as the economic foundation of the traditional marriage. Cite one disadvantage of the traditional division of labour, where the wife specializes in homemaking and the husband specializes in market work. Explain carefully how this disadvantage works and why the model of comparative advantage fails to consider it. Answers: a) The reallocation of Kim and Robin s time that will yield more total output of each type Market Output Non-market Work Kim 8 20 units/hours = 160 Robin 8 18 units/hours = 144 Total (3 marks) (3 marks) The opportunity cost of Kim of 1 unit of market work is 4/5 unit non-market work. The opportunity cost of Robin of 1 unit of market work is 1 unit non-market work. Since Kim has lower opportunity cost in market work than Robin has, Kim has comparative advantage in market work (2 mark)

6 Similarly, The opportunity cost of Kim of 1 unit of non-market work is 5/4 unit market work. The opportunity cost of Robin of 1 unit of non-market work is 1 unit market work. Since Robin has lower opportunity cost in non-market work than Kim has, Robin has comparative advantage in non-market work (2 marks) b) List of possible disadvantage this is not an exhaustive list, nor are answers in any way limited to this list. (5 mark for identifying the disadvantage, 5 marks for explanation, 5 marks for why the model of comparative advantage fails to consider the disadvantage) The model of specialization and exchange is a static model that considers only to two goods - market and non-market goods. It assumes a unitary utility function and ignores the utility/disutility of work and the utility/disutility of work for each household member. 1) People may experience declining efficiency as they work more hours at a particular task. In the tradition al model, the wife specializes in homemaking and the husband specializes in market work. As they do more hours on their own task, their productivity would drop and their total output on the task they specialize would be less than we expected. 2) Because only one type of non-market work is considered, the model implies that most often women will have a comparative advantage in non-market work. Would more non-market activities be considered, then surely women would not a comparative advantage in all household tasks. Men, for example, could have a comparable advantage in performing some household tasks not performed in the house (shopping, going to the bank, etc.) Then it would be more efficient for the husband to perform more household work than suggested by the model. 3) The model is static and does not consider the negative life-cycle effects of specialization. Specializing in home work may not be advantageous for the wife or even her family in the long run as it implies lower earnings if she returns to work after a considerable period of time devoted to child-rearing. From a long run perspective, it may be costly for the family to have the wife specialize in housework. 4) Other problems arising over the life-cycle are changes in circumstances such a divorce, death or lay-off are not considered in the model. A spouse that specializes in one type of work will be ill-equipped if such life changing circumstances arise. Most often these problems will be especially serious for the homemaker who may be left with earning and market skills that are obsolete. Other disadvantages may include unequal bargaining power over consumption and other issues.

7 II. Analytical Question: Write your answer on the questionnaire. This part is worth 30 points. Follow the indicated steps to analyze the effects of introducing childcare subsidies on Nancy s labour market choices using the consumption-leisure model of labour supply. Assume that Nancy's potential market wage is $14.00/hour and that her non-earned income (say, equal to her husband's earnings) is $100 per day. a) Draw Nancy s budget constraint assuming that she allocates 16 hours a day (she sleep 8 hours/day) between consumption (market time) and leisure (non-market time). Be careful to label the relevant points of her budget constraint. At that potential wage, Nancy chooses to participate in the labour market, draw an indifference curve showing a choice of 7 hours of work. b) Nancy has a child. When she goes to work, she can purchase child care at the hourly cost of $6.00/hour. Draw Nancy's budget constraint using her wage net of child care costs. At this net wage, Nancy chooses not to participate in the labour market, draw an indifference curve illustrating Nancy's choice. c) Now the government decides to subsidize child care costs at the rate of $4.00/hour. Draw Nancy's budget constraint using her wage net of child care costs but that include the subsidy. At this new net wage, will Nancy choose to participate in the labour market? Draw an indifference curve illustrating Nancy's choice. d) What conclusions can you draw from this example on the effect of child care subsidies on female labour supply? Would these conclusions be different if Nancy had to buy a minimum of six hours/day of child care, that is pay a fixed cost for child care? Are there other considerations not included in the model that could change these results? Answers a) (8 marks 2 marks for correct label, 2 marks for correct intercept, 2 marks for the point where the slope changes, 1 marks for optimum point, 1 marks for indifference curve) C Cmax = Ia=100 9 L*=16 Leisure

8 b) (8 marks 2 marks for correct label, 2 marks for correct intercept, 2 marks for the point where the slope changes, 1 marks for optimum point, 1 marks for indifference curve) C Cmax = Ia=100 L*=16 Leisure Before birth, Nancy earns $14.00/hour. If she goes to work, she has to pay the child care cost at $6.00/hour. Her net hourly wage is $8.00 per hour. Therefore, the Cmax drops from $324 to $228 ($100+$8*16). As Nancy chooses not to participate in the labour market, she maximizes her leisure at L=16 and C=100. c) (8 marks 2 marks for each graph and 4 marks for explanation) C Decrease in wage Increase in work Decrease in consumption Cmax = Ia=100 9 L*=16 Leisure

9 C Cmax = Decrease in wage Decrease in work Decrease in consumption Ia=100 9 L*=16 Leisure Before birth, Nancy earns $14.00/hour. If she goes to work, she has to pay the child care cost at $2.00/hour with the subsidy of $4.00/hour. Her net hourly wage is $12.00/hour. Therefore, the Cmax drops from $324 to $292 ($100+$12*16). As the wage decreases from $14.00 to$12.00, the opportunity cost of leisure falls, causing Nancy to demand more leisure and less consumption (the substitution effect), the potential earned income falls, causing Nancy to demand less of both consumption and leisure (income effect). Therefore, Nancy will unambiguously reduce consumption but leisure may increase or decrease with respect to case a), it however seems likely that she will participate in the labour market. This will depend on whether the negative income effect of a wage decrease on leisure dominates the positive substitution effect (increase in work) or whether the positive substitution effect of the wage decrease on leisure dominates the negative income effect (decrease in work). These effects could also be illustrated graphically with parallel shifts of the budget constraint. d) (6 marks) The effect of child care subsidies on female labour supply depends on the income effect and substitution effect. There are three possible outcomes: 1. If the income effect is greater than the substitution effect, Nancy will increase work 2. If the substitution effect is greater than the income effect but desired leisure is less than L*, then Nancy will decrease work but stay employed. 3. If the substitution effect is so much greater than the income effect that desired leisure is greater than or equal L, then Nancy will stop working. However, if the subsidy is not available, the labour supply will unambiguous decrease.

10 In conclusion, if the absence of child care subsidy, mothers labour force participation and labour supply will be lower than if a subsidy is available. Subsidized child care thus encourages mothers's labour force participation and labour supply. ( 2marks) ii) If Nancy had to buy a minimum of six hours/day of child care (assume start from the base case, no subsidy) C 228 Slope = -8 Slope = -14 Ia= L*=16 Leisure If Nancy had to buy a minimum of six hours/day of child care, she would prefer not go to work. (please see the answer of the Assignment 1). The negative effects of child care costs on women' s labour force participation and labour supply are likely to be larger with fixed costs of daycare than with variable costs. In conclusion, if the absence of child care subsidy, mothers labour force participation and labour supply will be lower than if a subsidy is available. Subsidized child care thus encourages mothers's labour force participation and labour supply. (2 marks) iii) There are a number of other considerations not included in the model that could change the result, among them: ( 2 marks for each consideration. Maximum 2 marks for this question) 1. Change in the mother's preference following childbirth. 2. Availability of other childcare arrangements