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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Chapter 6, Problem 4.4P
To determine
Income and substitution effect generated by Uber.
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Discuss the possible substitution effect and the income effect of an increase in income on leisure time.
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)
Briefly explain the concept of the income-leisure trade-off. What would be the substitution effect and the income effect of a wage change?
Chapter 6 Solutions
Principles of Microeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (12th Edition)
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- 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?arrow_forwardAccording to the Economics Policy Institute (Mishel and Wolfe, 2019) CEO pay has grown 940% since 1978 while the compensation of the average worker has only risen 12%. While you can easily find sources that provide statistics that conflict with these numbers, you would be hard pressed to find any credible source that refutes the idea that the rate of pay of CEO’s and other upper-level managers has not dramatically increased relative to an organization’s lower-level employees in just about any 10 or more year period over the past 60 years. In the world of Adam Smith, the “invisible hand” of the free market capitalistic model would address inequities/out of balances. Are the forces represented by the “invisible hand” working? Why or why not? Is there an ethical dimension to the discussion of upper-level manager compensation? Why or why not? How does (or does it?) levels of pay of upper management impact the rest of us commoners?arrow_forwardAa1) 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 marketarrow_forward
- Consider an individual who had been planning to retire in five years. Unfortunately, they've just been laid off and the highest-paying job they've been able to find pays a lower hourly wage than did their previous job. a) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire earlier than they originally planned. b) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire later than they originally plannedarrow_forwardDiscuss the possible substitution effect and the income effect of an increase in income on leisure time.arrow_forwardIllustrate (using a labor-leisure choice diagram) how a firm may induce a typical employee to lengthen his work week voluntarily by paying him premium wage rates for overtime hours.arrow_forward
- What happens to hours of work when the wage rate falls? Decompose the change in hours of work into income and substitution effects.arrow_forwardUse a diagram to thoroughly explain the backward bending labor supply curve and explain what income and substitution effects are.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? Â 1)After 1900, the substitution effect dominated the income effect, so that hours of free time rose. Â 2)In the period before 1870, the income effect dominated the substitution effect. Â 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. Â 4)The substitution effect dominated the income effect before 1870, but the income effect dominated the substitution effect after 1900.arrow_forward
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