Principles of Microeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (12th Edition)
12th Edition
ISBN: 9780134421315
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 6, Problem 4.3P
To determine
Reason for the changes in substitution and income effect in product market and labor market.
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(Substitution and Income Effects) Suppose that the cost of living increases, thereby reducing the purchasing power of your income. If your money wage doesn’t increase, you may work more hours because of this cost-of-living increase. Is this response predominantly an income effect or a substitution effect? Explain.
With the substitution effect an individual will substitute their time between leisure and work, choosing to work more and take less leisure when wages ______________
Suppose that the cost of living increases, thereby reducing the purchasing power of your income. If your money wage doesn’t increase, you may work more hours because of this cost-of-living increase. Is this response predominantly an income effect or a substitution effect? Explain.
Chapter 6 Solutions
Principles of Microeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (12th Edition)
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Similar questions
- Suppose that the cost of living increases, thereby reducing the purchasing power of your income. If your money wage doesn’t increase, you may work more hours because of this cost-of-living increase. Is this response predominantly an income effect or a substitution effect? Explain. with simple examplearrow_forwardUse 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.arrow_forwardConsider 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 Falsearrow_forward
- Illustrate and discuss how a change in the price of a commodity can generate income and substitution effects.arrow_forwardIn 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.arrow_forwardSuppose that a decrease in solar panel prices leads to an increase in a consumer’s demand for solar panels. How could you decompose the increase in demand into an income and substitution effect?arrow_forward
- What is the budget line for consumption (C) and leisure (L) if a person faces a constant wage of $12 per hour, there are 110 hours in the week to work, and she receives nonlabor income of $300 per week?arrow_forwardWhat examples do you have of the substitution and income effects? Why is the downward slope of the demand curve explained by the substitution and income effects?arrow_forwardIf a consumer is rational and maximizing utility, their Marginal Rate of Substitution will be equal to the price ratio. Why is this?arrow_forward
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