How a decrease in wage rate induces the labor to work for additional hours in terms of income and substitution effect?
Explanation of Solution
In terms of substitute effect, if the wage rate decreases then the price of leisure will decrease, and here, consumers substitute less of other goods for a good whose price has increased. They substitute more of other goods whose price has decreased when their wage rate declines.
A decrease in wage rate decreases the earning of labor which in turn affects their spending. Therefore, the substitution effect of a lower wage induces the labor or workers to substitute leisure time with additional working hours to get high utility or to earn for their spending.
In terms of income effect, if the wage rate decreases, then the income of workers also decreases a decline in the consumption of normal goods. As the wage rate decreases, the real income of people also decreases which affects their leisure time. It induces them to invest their leisure time to work for more hours so that they can become able to consume normal goods.
Introduction: Working hours are the hours which are allowed to work according to the limits and guidelines of the government.
Chapter 71 Solutions
Krugman's Economics For The Ap® Course
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