QUEEN’S UNIVERSITY MIDTERM EXAMINATION

DEPARTMENT OF ECONOMICS

ECON 361 – Professor Sitian Liu

November 2nd, 2020

This is a 24-hour take-home examination. Please type your answers to questions without
any calculation or equations if possible. Please upload your answers to all questions in a
single Word or PDF file before 10:00am (EDT) on November 3rd. Late submissions are not
accepted. The exam must be taken completely alone. You should not consult any external
resources.

Printed Name:

Student ID:

Good luck!

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Problem 1: Data Analysis (28 points)

Suppose you collected income data over a sample of 10 people: 2,000, 3,000, 5,000, 8,000,
10,000, 12,000, 15,000, 20,000, 22,000, 25,000.

1. Use three ways to measure inequality. You may use figures to show inequality visually.
You may also use indices to measure inequality. (12 points)

2. Conduct the following hypothesis test:

Null hypothesis: “The population mean income is greater than $15,000.”

H0 : µ > 15, 000

Alternative hypothesis: “The population mean income is equal to or lower than $15,000.”

H1 : µ ≤ 15, 000

Remember that a T-statistic is given by

x̄ − µ
t= √ ∼ tn−1
s/ n

where n is the number of observations, x̄ = n1 ni=1 xi is the sample mean, s2 =

P

1
Pn 2
n−1 i=1 (xi − x̄) is the sample variance, and n − 1 is the degree of freedom.

(a) Calculate the sample mean and the sample variance. (6 points)

(b) What is the critical value corresponding to a significance level 0.01? (2 points)

(c) What is your conclusion of the hypothesis test and why? (4 points)

3. Calculate the interval that contains the true population mean with a 99% probability.
(4 points)

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Problem 2: Income Inequality (10 points)

1. Use 1–2 sentences to describe the pattern of income inequality in Europe and the U.S.
in the 20th and 21st centuries. (4 points)

2. Kopczuk, Saez, and Song (2010) motivate their study by arguing that annual earnings
inequality may exaggerate the true economic disparity because the increase in inequal-
ity since the 1970s can be offset by increases in earning mobility. For instance, the
development of performance pays might have increased year-to-year earnings variabil-
ity substantially among top earners. Based on your reading, do you agree with the
argument? Provide two pieces of evidence for your response (i.e., something you learnt
from the paper). (6 points)

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Problem 3: Economics of Education (26 points)

The typical method for estimating the economic return to schooling uses data on earnings and
years of schooling of different workers, and estimates the percentage wage change associated
with an additional year of schooling, after adjusting for differences in workers’ observed
characteristics. The regression model is

log wi = α + βsi + Other variables,

where wi is the wage of worker i and si is the years of schooling of the worker.

1. Discuss how unobserved ability may affect the estimation of the economic return to
education. (4 points)

2. Suppose you have a sample of identical twins, in which each twin reports both earnings
and years of schooling. How can this dataset help you overcome the issue of ability
bias? Do you have any concerns of using the data to estimate the economic return to
education? (8 points)

In 1973, the Indonesian government launched a major school construction program, the
Sekolah Dasar INPRES program. Between 1973–74 and 1978–79, more than 61,000 primary
schools were built. Duflo (2001) evaluates the effect of this program on education and wages,
using the fact the exposure to the school construction program varied by region and date
of birth. First, children born in different regions were affected by the program differently
because the government allocated more schools to regions where initial enrollement was low.
Second, in Indonesia, children typically go to primary school between the ages of 7 and 12.
Therefore, only individuals who were young enough to be in school when the program was
launched were affected by the program.
The following table reports the average educational attainment and earnings of two demo-
graphic groups (i.e., individuals aged 2–6 years old and 12–17 years old as of 1972) residing
in two different regions of Indonesia (i.e., “high-construction” region, where many schools
were built, and “low-construction” region, where few schools were built).

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 Years of Education Log Wages
Aged 12–17 Aged 2–6 Aged 12–17 Aged 2–6
High-construction Region 8.02 8.49 6.87 6.61
Low-construction Region 9.40 9.76 7.02 6.73

3. Use the difference-in-differences strategy to calculate the impact of the program on

education attainment and earnings of the targeted population. What is the meaning
of the estimates? (8 points)

4. What is the identifying assumption of the difference-in-differences strategy? Can you

suggest a way to test for the assumption? (6 points)

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Problem 4: Minimum Wage (10 points)

Suppose the total market demand for labor is given by ED = 1, 000 − 50w, and the total
market supply for labor is given by ES = 100w − 800, where w is the hourly wage.

1. What is the equilibrium wage? How many workers are employed in equilibrium? (4
points)

2. Suppose the government imposes a minimum wage of $16. What is the new level of
employment? What is the unemployment rate under the minimum wage? (6 points)

Problem 5: Immigration (26 points)

1. Assume that natives and immigrants are perfect substitutes. Discuss the difference
between the short-run and long-run impacts of immigration on the wage of native
workers. (6 points)

2. Many studies find a negative but weak correlation between local wages and the fraction
of the workforce that is foreign-born. Discuss the potential issues associated with
estimating the spatial correlation. (8 points)

3. One method to estimate the causal effect of immigration is to use an instrumental

variable (IV) that leads to an exogenous change in the number of immigrants settling
in a given city. The typical IV used in many studies is the settle patterns of past
immigrant waves. What are the assumptions for this IV to be valid? Do you think
these assumptions are likely to be satisfied and why? (12 points)

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