Weiwei gets a part-time job in high school that pays $5 per hour with flexible hours. She chooses to work 6 hours per week, earning $30 per week. After a while, her job reduces her pay to $4 an hour. In response, she cuts back to working 5 hours per week, earning only $20 per week. Weiwei’s parents feel bad about the pay cut, and decide to give her a weekly allowance, in cash, to make up for it. If they want to get her back to her old utility level, how much should they give her and why? (Select one answer from below) : (a) $10: that is her total amount of
Weiwei gets a part-time job in high school that pays $5 per hour with flexible hours. She
chooses to work 6 hours per week, earning $30 per week. After a while, her job reduces her
pay to $4 an hour. In response, she cuts back to working 5 hours per week, earning only
$20 per week. Weiwei’s parents feel bad about the pay cut, and decide to give her a weekly
allowance, in cash, to make up for it. If they want to get her back to her old utility level,
how much should they give her and why?
(Select one answer from below) :
(a) $10: that is her total amount of lost earnings
(b) Between $10 and $6: that is the income effect minus the substitution effect
(c) Between $10 and $6: leisure is a luxury good for high school students
(d) $6: that is how much she would have lost if she kept working 6 hours
(e) $5: the substitution effect offsets the change in labor hours
(f) Between $6 and $0: she will substitute away from labor at the old bundle
(g) Between $5 and $0: a pay cut is like a negative in-kind transfer
(h) $0: the pay cut is inframarginal because she is still working
(i) $0: there is no income effect from a
(j) Unknown: we need to know her total endowment to calculate compensating variation
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