14. (Continuing with the situation described in the preceding question.) Consider the model of a schoolteacher's labor supply decision that we discussed in class. Teachers can work up to 180 days in a school year, and they earn the wage w for each day that they work. Assume that sick leave is at the discretion of each individual teacher. In other words, the school does not ask for proof of illness, so teachers can take leave even when they are not sick, and teachers are free to take as much leave as they want. Also assume that teachers have no nonlabor income (i.e., Y=0). In terms of notation, E represents the teacher's annual earnings L represents annual days of sick leave taken by the teacher w represents the wage that the teacher earns for each day of work U(E, L) represents the teacher's utility function Assume that E and L are normal goods. Whenever graphing the model, put E on the vertical axis and L on the horizontal axis. Finally, assume that teachers receive sick pay according to the following policy. For the school year, each teacher is given 20 fully-paid sick days, and after these have been used up, each teacher receives an additional 60 days of sick leave at two-thirds of their normal pay. Before the sick pay policy was instituted, teachers received no pay for days that they did not work. Consider a teacher who, prior to the introduction of sick pay, took 50 days of sick leave. According to labor supply theory, how will introduction of the sick pay policy described above change the amount of sick leave that this teacher takes? Sick leave will increase because of an income effect. ● Sick leave will increase because of a substitution effect. O Sick leave will increase because of substitution and income effects that reinforce each other. O Sick leave will not change. The change in sick leave is indeterminate because of conflicting substitution and income effects.
14. (Continuing with the situation described in the preceding question.) Consider the model of a schoolteacher's labor supply decision that we discussed in class. Teachers can work up to 180 days in a school year, and they earn the wage w for each day that they work. Assume that sick leave is at the discretion of each individual teacher. In other words, the school does not ask for proof of illness, so teachers can take leave even when they are not sick, and teachers are free to take as much leave as they want. Also assume that teachers have no nonlabor income (i.e., Y=0). In terms of notation, E represents the teacher's annual earnings L represents annual days of sick leave taken by the teacher w represents the wage that the teacher earns for each day of work U(E, L) represents the teacher's utility function Assume that E and L are normal goods. Whenever graphing the model, put E on the vertical axis and L on the horizontal axis. Finally, assume that teachers receive sick pay according to the following policy. For the school year, each teacher is given 20 fully-paid sick days, and after these have been used up, each teacher receives an additional 60 days of sick leave at two-thirds of their normal pay. Before the sick pay policy was instituted, teachers received no pay for days that they did not work. Consider a teacher who, prior to the introduction of sick pay, took 50 days of sick leave. According to labor supply theory, how will introduction of the sick pay policy described above change the amount of sick leave that this teacher takes? Sick leave will increase because of an income effect. ● Sick leave will increase because of a substitution effect. O Sick leave will increase because of substitution and income effects that reinforce each other. O Sick leave will not change. The change in sick leave is indeterminate because of conflicting substitution and income effects.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:14. (Continuing with the situation described in the preceding question.) Consider the model of a schoolteacher's labor supply
decision that we discussed in class. Teachers can work up to 180 days in a school year, and they earn the wage w for each day
that they work. Assume that sick leave is at the discretion of each individual teacher. In other words, the school does not ask
for proof of illness, so teachers can take leave even when they are not sick, and teachers are free to take as much leave as they
want. Also assume that teachers have no nonlabor income (i.e., Y=0). In terms of notation,
E represents the teacher's annual earnings
L represents annual days of sick leave taken by the teacher
w represents the wage that the teacher earns for each day of work
U(E, L) represents the teacher's utility function
Assume that E and L are normal goods. Whenever graphing the model, put E on the vertical axis and L on the horizontal axis.
Finally, assume that teachers receive sick pay according to the following policy. For the school year, each teacher is given 20
fully-paid sick days, and after these have been used up, each teacher receives an additional 60 days of sick leave at two-thirds
of their normal pay.
Before the sick pay policy was instituted, teachers received no pay for days that they did not work. Consider a teacher who,
prior to the introduction of sick pay, took 50 days of sick leave. According to labor supply theory, how will introduction of the
sick pay policy described above change the amount of sick leave that this teacher takes?
O Sick leave will increase because of an income effect.
● Sick leave will increase because of a substitution effect.
O Sick leave will increase because of substitution and income effects that reinforce each other.
O Sick leave will not change.
O The change in sick leave is indeterminate because of conflicting substitution and income effects.
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