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he income effect of a higher wage outweighs the substitution effect when wages are he income effect is the phenomenon that workers choose to work hours when they are given a raise, because

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Theory Of Consumer Choice

Section: Chapter Questions

Problem 9PA

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Question

Labor Supply
1
LABOR (Hours)
he income effect of a higher wage outweighs the substitution effect when wages are
he income effect is the phenomenon that workers choose to work
hours when they are given a raise, because
WAGE RATE
(Dollars per
(unoy

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Akua gains utility from consumption C and leisure L. The most leisure she can consume in any given week is 110 hours. Her utility function is U (C, L) = C × L. Akua receives 660 GHS each week from her great-grandmother—regardless of how much she works. a. What will be Akua’s marginal rate of substitution. b. What will be Akua’s reservation wage? (Explain in detail)
ASAP pls Discuss the possible substitution effect and the income effect of an increase in income on leisure time..
Explain how the wage can adjust to balance thesupply and demand for labor while simultaneouslyequaling the value of the marginal product oflabor.
Illustrate the appropriate change and specify whethereach change represents an increase or a decrease. e. Ian, a manager at Kiddles Supermarket, decides to forego his vacation to NewYork when he learns that all employees’ salaries will be cut by 5 percent at theend of the month.
When deriving labour supply, we assumed that the substitution effect dominated the income effect. What impact would there be on labour supply if this was not the case? Briefly investigate how such a change could theoretically affect the imposition of a minimum wage. (Your answer is likely to benefit if it is supported by a diagram.)
Cindy gains utility from consumption C and leisure L. The most leisure she can consume in any given week is 168 hours. Her utility function is U ( C, L) = C x L. This functional form implies that Cindy’s marginal rate of substitution is C/L. Cindy receives $630 each week from her great-grandmother—regardless of how much Cindy works. What is Cindy’s reservation wage?
Aa1) For a non-participant in the labour market, an increase in non-labour income: a) will have an unknown effect because the income and substitution effects oppose one another b) will increase the reservation wage and leave the individual as a non-participant c) will have a large leisure inducing substitution effect d) will reduce hours worked because it is a pure income effect e) will reduce the reservation wage and (depending how big the reduction is) may coax the individual into the labour market
The lines on the graph are budget constraints, showing the tradeoff between labor and leisure. Suppose that when the wage changes, an individual chooses to move from point A to another point on the graph. For each of the other points, where would it belong on the backward bending labor supply curve? Backward‑bendingportionVerticalportionUpward‑slopingportion Answer Bank B D F C E
An individual’s labour supply curve is positively sloped when: (2)(1) The substitution effect of a wage increase is positive;(2) The substitution effect is greater than the income effect;(3) The income effect of wage increase is negative;(4) The substitution effect is less than the income effect.
What happens to hours of work when the wage rate falls? Decompose the change in hours of work into income and substitution effects.
Labor-Leisure choice. Uses 80 hour maximum work week. Utility = R3C2 R = leisure C = dollar amount of income for consumption Budget Line 1: Wage = $16 per hour. No other income. Draw the Labor-Leisure diagram, including the budget line. Solve the point of optimization, and label it point A. Draw the indifference curve. Label it U1 Budget Line 2: Wage = $22 per hour. No other income. Draw the budget line for this new $22 wage. Solve the point of optimization, and label it point B. Draw the indifference curve. Label it U3 Use an auxiliary budget line to separate the income effect from the substitution effect. Identify the substitution effect as point S. Draw the indifference curve. Label it U2 The point of optimization for part C can be labeled, rather than numerically solved, as long as the drawn answers show expected results for two normal goods.
Suppose the wage you are being paid per hour doubles form $15 to $30. Would you decide to work more hours or fewer hours ? Is there an income and substitution effect involved in your decision about how many hours you choose to work? If so, what is being substituted for what?