Question 1

Higher isoprofit schedules would imply profits that are_______ the normal, competitive level.

Accepted Answer

A)  higher than 
B)  below 
C)  greater than or equal to 
D)  equal to 
E)  None of the answer choices are correct.

Question 2

In wage-job safety space, workers' indifference (or isoutility) curves slope downwards because:

Accepted Answer

A)  Workers require a higher compensating wage in order to avoid risky jobs. 
B)  Workers require a higher compensating wage in order to remain indifferent to the additional risk. 
C)  Lower wages are required in order to keep profits constant if a higher degree of job safety is required. 
D)  Employers will compensate them for their aversion to risk. 
E)  More hours of labour are supplied when wages are increased.

Question 3

In the context of empirical research on compensating differentials, omitted variable bias may exist when:

Accepted Answer

A)  Important variables are not controlled for in the measurement of the wage-risk tradeoff. 
B)  Irrelevant variables are included in the equation. 
C)  Employers attempt to hide crucial safety information from their employees. 
D)  The information about factors that are correlated with job risk is imperfect. 
E)  Samples have selection issues.

Question 4

In searching for empirical evidence of the existence of compensating differentials, all of the following problems are potentially an issue except:

Accepted Answer

A)  the wage-safety locus problem 
B)  omitted variable bias in the wage equation 
C)  error-in-variables problems for the risk variable 
D)  simultaneous equation bias problem 
E)  sample selection bias for the wage equation

Question 5

Which of the following regarding attracting doctors to rural community is NOT correct?

Accepted Answer

A)  Rural community does not usually have fully staffed and equipped hospitals. 
B)  Given the tight budget constraints, government cannot afford to pay the doctors a premium to attract them in the rural community. 
C)  Most of the doctors prefer to work and live in the urban area. 
D)  If moves to rural community, doctors have to pay higher taxes on the salary premia paid by the government. 
E)  The theory of compensating wages explains that the doctors will move to rural community as long as a premium is paid.

Question 6

• Explain in general, intuitive terms the theory of compensating differentials. There is no need to provide a graphical analysis or to furnish technical details. Your response should address the followi issues:
(1) Explain how it fits onto the primary, neo-classical approach to labour economics.
(2) What are the primary elements (what are the curves in this model actually reflecting)?
(3) What are the two primary implications?
• Illustrate this theory by describing the following phenomena:
• very low wages in the child care sector
• very high wages in the mining sector
• high wages in construction
• Explain why an economist like Adam Smith who subscribes to free-market ideology would find this model so appealing.

Accepted Answer

The answer of • Explain in general, intuitive terms the...

Exam 8: Compensating Wage Differentials

Higher isoprofit schedules would imply profits that are_______ the normal, competitive level.

In wage-job safety space, workers' indifference (or isoutility) curves slope downwards because:

In the context of empirical research on compensating differentials, omitted variable bias may exist when:

In searching for empirical evidence of the existence of compensating differentials, all of the following problems are potentially an issue except:

Which of the following regarding attracting doctors to rural community is NOT correct?