Suppose your only source of income is work and that you are paid $20 per hour. This determines a budget constraint. You can buy free time at the expense of your income by working less. Likewise, you can get more income at the expense of your free time by working more. Suppose that you can choose how many hours you work. 5- Which of the two effects is the strongest in this example? How can you tell?
Suppose your only source of income is work and that you are paid $20 per hour. This determines a budget constraint. You can buy free time at the expense of your income by working less. Likewise, you can get more income at the expense of your free time by working more. Suppose that you can choose how many hours you work. 5- Which of the two effects is the strongest in this example? How can you tell?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Suppose your only source of income is work and that you are paid $20 per hour. This determines a budget constraint. You can buy free time at the expense of your income by working less. Likewise, you can get more income at the expense of your free time by working more. Suppose that you can choose how many hours you work.
5- Which of the two effects is the strongest in this example? How can you tell?
Expert Solution
Step 1
Higher salaries have a substitution impact, which indicates that workers will forego leisure time in order to work longer hours. Workers will lower the number of hours they work as a result of the income effect of increased earnings because they may maintain a goal level of income by working fewer hours.
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