Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 7, Problem 17CQ
To determine
Identify the job offer that maximizes the
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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.
Use diminishing marginal utility theory to explain why people would prefer stable income to receive the same total income but with much more variation week to week.
Kevin has a wage income of $10,000 in the present and $15,000 in the future. His utility is given as U = min (4cp, 5cf), where cp denotes consumption today and cf consumption in the future. The relevant interest rate is 10%.
a. If the interest rate were to increase to 15 percent,would Kevin be better off or worse off? Explain.
b. Find two measures to indicate how much better off or worse off Kevin is as a result of the increase in interest rates. Explain.
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Economics: Private and Public Choice (MindTap Course List)
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- The reason the substitution effect works to encourage a consumer to buy less of a product when its price increases is: a. the product is now relatively more expensive than it was before. b. other products are now relatively more expensive than they were before. c. the real income of the consumer has been increased. d. the real income of the consumer has been decreasedarrow_forwardElaborate and explain all possible effects of change in income to the equilibrium of consumer.arrow_forwardWhat happens to the probability that a particular person works when the wage rises? Does such a wage increase generate an income effect?arrow_forward
- Suppose housing constitutes 45% of the typical basket of goods for a typical consumer, education constitutes 3%, and all other goods make up the remaining 52%. Assume the price of housing rises by 4%, the price of education falls by 10%, and prices remain constant for all other goods. Based on the information given, we can definitely say Select one: a.because the price of education fell by more than the price of housing rose, the consumer price index (CPI) must have decreased. b.the CPI is higher than in the previous year. c.if consumers get a 4% pay raise, they are worse off in terms of their real income compared to inflation as measured the CPI. d.because housing is a luxury (as is education), consumers are certainly no worse off in terms of their real wages as measured by the CPI. e.the CPI is unchanged from the previous year.arrow_forwardSuppose a person can work up to 80 hours per week at a pre-tax wage of $20 per hour but faces a constant 20% payroll tax. Assume that under these conditions the person maximizes utility by choosing to work 50 hours each week. The government proposes a negative income tax so that everyone receives $300 per week regardless of how much they work. To pay for the negative income tax, the payroll tax would be increased to 50%. Using the labor-leisure model, graphically show whether a person would be better off if the negative income tax is adopted and indicate whether hours worked increases or decreases due to the policy.arrow_forwardAccording to the Permanent Income Hypothesis (PIH), what should a consumer do if she receives news that she will be demoted next year (and her salary will be halved)? Draw the paths of income and consumption for this consumer.arrow_forward
- Using Fisher's Intertemporal Choice model, consider the following scenario: Suppose Milo earns $1,750 in the first period and $2,500 in the second period. If he consumes $1,200 in the first period and $1,550 in the second period, what is the interest rate? Now if Milo’s consumption changes to $1,800 in the first period and $2,000 in the second period, what is the new interest rate?arrow_forwardSuppose you earn an income of $50000 a year. You purchase the bundle of goods and services on your budget constraint line that maximizes your utility. The budget constraint line is shown in the graph below. Over the next year, prices for goods and services increase overall by %5 because of inflation, but your income remains fixed at $50000. Which graph illustrates this change?arrow_forward(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.arrow_forward
- Why does a worker allocate his or her time over the life cycle so as to work more hours in those periods when the wage is highest? Why does the worker not experience an income effect during those periods?arrow_forwardAssume you can work as many hours you wish at £12 per hour (net of tax). If you do not work, you have no income. You have no ability to borrow or lend, so your consumption, c, is simply equal to your income. Assume that your optimal choice of consumption and leisure is to work 8 hours per day. Illustrate this choice diagrammatically using the feasible set and indifference curves.arrow_forwardQ6 Assume that we are referring to a typical consumer named Just Trudeau. If money income increases in Canada and the prices of apples (A) and beans (B) both increase, then Just Trudeau budget line: Multiple Choice will no longer be tangent to Just Trudeau's indifference curve. may shift either to the right or the left. will shift to the right. will shift to the left. will cause Just Trudeau's indifference map to implode.arrow_forward
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