Chapter 12, Problem 5QFR

A consumer earns a wage of 20 dollars per hour and has an unearned income of $100 per day. What would the consumption-leisure budget line look like?   In the graph, also draw the effect of a wage cut, (including the income and substitution effects). Assume she works less after the wage change.

In Britain before 1870, both wages and hours worked rose, while after 1900 working hours fell as wages continued to rise. Based on this information, which of the following statements is correct?   1)After 1900, the substitution effect dominated the income effect, so that hours of free time rose.   2)In the period before 1870, the income effect dominated the substitution effect.   3)Sometime between 1870 and 1900 the substitution effect of a rise in the wage rate on the hours of free time changed from negative to positive.   4)The substitution effect dominated the income effect before 1870, but the income effect dominated the substitution effect after 1900.

Define The income and substitution effects.

In this particular example, what are the contributions of the income and substitution effects?

Explain substitution and income effect by citing an example

Consider an indifference curve for someone deciding how to allocate time between work (and thus consumption) and leisure. Suppose the wage increases. The substitution effect induces a person to work and consume (more , less) ?    in response to higher wages. If consumption is a normal good, the income effect induces the person to consume ( more, less) ?    when the wage rises, but if consumption is an inferior good, the income effect induces the person to consume ( more , less) ?   in response to higher wages.   True or False: The person's consumption may fall as a result of the higher wage if consumption is an inferior good.   True or False

Use the principle of substitution to predict the effect in each of the following situations. a)During the past 30 years, technological advances in the computer industry have led to dramatic reductions in the prices of personal and business computers. At the same time, real wages have increased slowly. b)The ratio of land costs to building costs is much higher in big cities than in small cities. c)A new collective agreement results in a significant increase in wages for pulp and paper workers.

Q..5. Provide an example case for the substitution effect of interest rates on savings, and the income effect of the interest rate on savings. You may get the inspiration from the corresponding concepts for the labor-leisure choice.

If a consumer is rational and maximizing utility, their Marginal Rate of Substitution will be equal to the price ratio. Why is this?