Suppose that the owner of Boyer Construction is feeling the pinch of increased premiums associated with worker’s compensation and has decided to cut the wages of its two employees (Albert and Sid) from $25 per hour to $22 per hour. Assume that Albert and Sid view income and leisure as “goods,” that both experience a diminishing rate of marginal substitution between income and leisure, and that the workers have the same before- and after-tax budget constraints at each wage. Draw each worker’s opportunity set for each hourly wage. At the wage of $25 per hour, both Albert and Sid are observed to consume 12 hours of leisure (and, equivalently, supply 12 hours of labor). After wages were cut to $22, Albert consumes 10 hours of leisure and Sid consumes 14 hours of leisure. Determine the number of hours of labor each worker supplies at a wage of $22 per hour. How can you explain the seemingly contradictory result that the workers supply a different number of labor hours? (L
Suppose that the owner of Boyer Construction is feeling the pinch of increased premiums associated with worker’s compensation and has decided to cut the wages of its
two employees (Albert and Sid) from $25 per hour to $22 per hour. Assume that Albert
and Sid view income and leisure as “goods,” that both experience a diminishing rate of
marginal substitution between income and leisure, and that the workers have the same
before- and after-tax budget constraints at each wage. Draw each worker’s opportunity
set for each hourly wage. At the wage of $25 per hour, both Albert and Sid are observed
to consume 12 hours of leisure (and, equivalently, supply 12 hours of labor). After
wages were cut to $22, Albert consumes 10 hours of leisure and Sid consumes 14 hours
of leisure. Determine the number of hours of labor each worker supplies at a wage of
$22 per hour. How can you explain the seemingly contradictory result that the workers
supply a different number of labor hours? (LO2, LO3, LO7)
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
