Joe won $365,000 a year for life in the state lottery. Use a labor-leisure choice analysis to answer the following questions. Joe's budget constraint before winning the lottery (L') is illustrated in the figure to the right. Let the price of consumption be $1, so that 1 thousand units of consumption corresponds to income of $1 thousand. Show how Joe's lottery winnings affect the position of his budget line. Use the line drawing tool to graph Joe's budget constraint after winning the lottery. Label this line 'LW. Carefully follow the instructions above, and only draw the required object. After winning the lottery, Joe continues to work the same number of hours each day. What is the income effect of Joe's lottery gains? The income effect is zero Suppose Joe's employer the same week increases Joe's hourly wage rate. Use the income effect you derived above as well as the substitution effect to analyze whether Joe chooses to work more hours per week. With the wage increase, Joe will O A. work fewer hours because his substitution effect is negative and his income effect is zero. B. work more hours because his positive substitution effect is bigger than his negative income effect. OC. work more hours because his substitution effect is positive and his income effect is zero. OD. work the same number of hours because his income effect is zero. OE. work more hours because his substitution effect and his income effect are positive. Y, Goods per day (in thousands) 365 LW L, Leisure hours per day Time constraint
Joe won $365,000 a year for life in the state lottery. Use a labor-leisure choice analysis to answer the following questions. Joe's budget constraint before winning the lottery (L') is illustrated in the figure to the right. Let the price of consumption be $1, so that 1 thousand units of consumption corresponds to income of $1 thousand. Show how Joe's lottery winnings affect the position of his budget line. Use the line drawing tool to graph Joe's budget constraint after winning the lottery. Label this line 'LW. Carefully follow the instructions above, and only draw the required object. After winning the lottery, Joe continues to work the same number of hours each day. What is the income effect of Joe's lottery gains? The income effect is zero Suppose Joe's employer the same week increases Joe's hourly wage rate. Use the income effect you derived above as well as the substitution effect to analyze whether Joe chooses to work more hours per week. With the wage increase, Joe will O A. work fewer hours because his substitution effect is negative and his income effect is zero. B. work more hours because his positive substitution effect is bigger than his negative income effect. OC. work more hours because his substitution effect is positive and his income effect is zero. OD. work the same number of hours because his income effect is zero. OE. work more hours because his substitution effect and his income effect are positive. Y, Goods per day (in thousands) 365 LW L, Leisure hours per day Time constraint
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Theory Of Consumer Choice
Section: Chapter Questions
Problem 1PA
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Transcribed Image Text:Joe won $365,000 a year for life in the state lottery. Use a labor-leisure choice analysis to answer the
following questions.
Joe's budget constraint before winning the lottery (L') is illustrated in the figure to the right. Let the
price of consumption be $1, so that 1 thousand units of consumption corresponds to income of $1
thousand.
Show how Joe's lottery winnings affect the position of his budget line.
Use the line drawing tool to graph Joe's budget constraint after winning the lottery. Label this line
'LW.
Carefully follow the instructions above, and only draw the required object.
After winning the lottery, Joe continues to work the same number of hours each day. What is the
income effect of Joe's lottery gains?
The income effect is zero
Suppose Joe's employer the same week increases Joe's hourly wage rate. Use the income effect you
derived above as well as the substitution effect to analyze whether Joe chooses to work more hours
per week.
With the wage increase, Joe will
O A. work fewer hours because his substitution effect is negative and his income effect is zero.
B. work more hours because his positive substitution effect is bigger than his negative income
effect.
OC. work more hours because his substitution effect is positive and his income effect is zero.
OD. work the same number of hours because his income effect is zero.
OE. work more hours because his substitution effect and his income effect are positive.
Y, Goods per day (in thousands)
365
LW
L, Leisure hours per day
Time constraint
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