EBK PRINCIPLES OF MICROECONOMICS
EBK PRINCIPLES OF MICROECONOMICS
8th Edition
ISBN: 8220103612159
Author: Mankiw
Publisher: Cengage Learning US
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Chapter 13, Problem 5PA
To determine

Whether the offer should be accepted or not.

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Andrew’s utility depends on consuming L, hours of leisure and Y a composite good. Andrew can work as many hours as he wants to at the wage rate of w, and the price of Y is $1. Andrew’s indifference curves exhibit diminishing MRS. When Andrew’s wage rate decreases, he spends less time working. Answer the following questions using a indifference curve-budget line diagram. Explain your answers carefully. a. Does the substitution effect cause him to work less hours? (If the direction of the effect is ambiguous, say so, and show why on your diagram) b. Does the income effect cause him to work less hours? (If the direction of the effect is ambiguous, say so, and show why on your diagram)
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