Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 6, Problem 4.3P
To determine
Reason for the changes in substitution and income effect in product market and labor market.
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Consider an indifference curve for someone deciding how to allocate time between work (and thus consumption) and leisure. Suppose the wage increases.
The substitution effect induces a person to work and consume
(more , less) ?
in response to higher wages. If consumption is a normal good, the income effect induces the person to consume ( more, less) ?
when the wage rises, but if consumption is an inferior good, the income effect induces the person to consume ( more , less) ?
in response to higher wages.
True or False: The person's consumption may fall as a result of the higher wage if consumption is an inferior good.
True
or
False
Suppose the price of bananas falls. Explain how the income and substitution effects work in the adjustment to a
new level of banana consumption.
The substitution effect of an increase in the wage rate will:
O always lead to a decrease in the quantity of labor supplied.
O always lead to an increase in the quantity of labor supplied.
O lead to an increase in the quantity of labor supplied only if leisure is a normal good.
O lead to an increase in the quantity of labor supplied only if leisure is not a normal good.
O lead to an increase in the quantity of labor supplied only if the income effect works in the same direction.
Chapter 6 Solutions
Principles of Economics (12th Edition)
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Similar questions
- A consumer earns a wage of 20 dollars per hour and has an unearned income of $100 per day. What would the consumption-leisure budget line look like? In the graph, also draw the effect of a wage cut, (including the income and substitution effects). Assume she works less after the wage change.arrow_forwardwhat is the budget line for consumption and leisure if a person faces a constant wage of $5 per hour , there are 168 hours in the week to work,and she received non-labor income of 200 per weekarrow_forwardIn Britain before 1870, both wages and hours worked rose, while after 1900 working hours fell as wages continued to rise. Based on this information, which of the following statements is correct? 1)After 1900, the substitution effect dominated the income effect, so that hours of free time rose. 2)In the period before 1870, the income effect dominated the substitution effect. 3)Sometime between 1870 and 1900 the substitution effect of a rise in the wage rate on the hours of free time changed from negative to positive. 4)The substitution effect dominated the income effect before 1870, but the income effect dominated the substitution effect after 1900.arrow_forward
- Suppose that a decrease in solar panel prices leads to an increase in a consumer’s demand for solar panels. How could you decompose the increase in demand into an income and substitution effect?arrow_forwardConsider an indifference curve for someone deciding how to allocate time between work (and thus consumption) and leisure. Suppose the wage increases. An increase in the wage rate results in a substitution effect for consumption. If consumption is a normal good, an increase in the wage rate results in a income effect, but if consumption is an inferior good, the income effect is . True or False: The person's consumption may fall as a result of the higher wage if consumption is an inferior good. True Falsearrow_forwardjust subparts a, b and c pleasearrow_forward
- Use the principle of substitution to predict the effect in each of the following situations. a)During the past 30 years, technological advances in the computer industry have led to dramatic reductions in the prices of personal and business computers. At the same time, real wages have increased slowly. b)The ratio of land costs to building costs is much higher in big cities than in small cities. c)A new collective agreement results in a significant increase in wages for pulp and paper workers.arrow_forwardThe standard consumer choice model assumes that preferences are such that the marginal rate of substitution of good X for good Y is decreasing as you more of good Y good X None of these. The stardard model has a constant marginal rate of substitution. both goods.arrow_forwardIf a consumer is rational and maximizing utility, their Marginal Rate of Substitution will be equal to the price ratio. Why is this?arrow_forward
- Joe won $365,000 a year for life in the state lottery ($1000 per day for life). Use a labor-leisurechoice analysis to answer the following questions:a. Show how Joe’s lottery winnings affect the position of his budget line.[Hint: think about the two things Joe “purchases”, goods (G) and relaxation (R).Assume the price of goods is PG (you can assume this is equal to one if that makes themath easier for you) and the “price” of leisure is Joe’s foregone wage (w). It’s alsoeasiest if you think of this in the context of his daily budget constraint.]b. Joe’s utility function for goods per day (G) and hours of leisure (relaxation) per day (R) isU = G + 240R1/2. After winning the lottery, does Joe continue to work the same numberof hours each day? What is the income effect of Joe’s lottery gains on the amount ofgoods he buys per day?arrow_forwardA worker views leisure and income as “goods” and has an opportunity to work at an hourly wage of $15 per hour. a. Illustrate the worker’s opportunity set in a given 24-hour period. b. Suppose the worker is always willing to give up $11 of income for each hour of leisure. Do her preferences exhibit a diminishing marginal rate of substitution? How many hours per day will she choose to work?arrow_forwardConsider an individual who is paid a constant hourly wage and is deciding how many hours to spend working and how many to take as free time per week. Which of the following statements are correct? Select all the correct answers. □ If the wage increased, this would decrease the opportunity cost of leisure time If the wage increased and the substitution effect dominates, the individual will choose to have less free time If the wage increased and the individual chooses to work the same hours, the income effect and substitution effects are both zero If the wage increased and the income effect dominates, the individual will choose to have more free timearrow_forward
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