Draw large and clear graphs. Show all your work.1. What's the effect of a decrease in wage rates (w) on hours of work (explain the substitution andincome effects), reservation wage and probability of entering the labor force?2. What's the effect of a decrease in non-labor income (v) on hours of work (explain the incomeeffect), reservation wage and probability of entering the labor force?3. James earns $25 per hour for up to 45 hours of work each week. He is paid $40 per hour forevery hour in excess of 45. James faces a 30 percent payroll tax on every dollar earned throughwork and receives $250 rent payment each week. Graph James' weekly budget line.4. On separate graphs show and explain the effects of lump-sum cash transfers (cash transfer 1),cash transfers which allow for work at reduced wages (cash transfer 2), and the earned incometax credit on labor force participation rates.

A decrease in the wage level can have several effects on an individual's labor supply decisions,…

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What's the effect of a decrease in wage rates (w) on hours of work (explain the substitution and income effects), reservation wage and probability of entering the labor force?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter16: Labor Markets

Section: Chapter Questions

Problem 16.3P

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Question

Draw large and clear graphs. Show all your work.
1. What's the effect of a decrease in wage rates (w) on hours of work (explain the substitution and
income effects), reservation wage and probability of entering the labor force?
2. What's the effect of a decrease in non-labor income (v) on hours of work (explain the income
effect), reservation wage and probability of entering the labor force?
3. James earns $25 per hour for up to 45 hours of work each week. He is paid $40 per hour for
every hour in excess of 45. James faces a 30 percent payroll tax on every dollar earned through
work and receives $250 rent payment each week. Graph James' weekly budget line.
4. On separate graphs show and explain the effects of lump-sum cash transfers (cash transfer 1),
cash transfers which allow for work at reduced wages (cash transfer 2), and the earned income
tax credit on labor force participation rates.

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