A worker receives CAD 3,000 of lump-sum transfers from the government annually and has 4,160 available hours per year. She is currently working 2,200 hours per year at the wage rate of CAD 20.00 per hour. After being promoted, her wage rate increases to CAD 25.00 per hour, and she decides to work 2,700 hours. She is indifferent between her original work decision and working 2,850 hours at CAD 25.00 per hour. 1. What is the compensated wage elasticity of labor supply implied by her response to the wage increase? Is the compensated labor supply elastic or inelastic? 2. What is the uncompensated wage elasticity of labor supply implied by her response to the wage increase? Is the uncompensated labour supply elastic or inelastic? 3. Why are these elasticities different?
A worker receives CAD 3,000 of lump-sum transfers from the government annually and
has 4,160 available hours per year. She is currently working 2,200 hours per year at the wage rate
of CAD 20.00 per hour. After being promoted, her wage rate increases to CAD 25.00 per hour,
and she decides to work 2,700 hours. She is indifferent between her original work decision and
working 2,850 hours at CAD 25.00 per hour.
1. What is the compensated wage elasticity of labor supply implied by her response to the
wage increase? Is the compensated labor supply elastic or inelastic?
2. What is the uncompensated wage elasticity of labor supply implied by her response to the
wage increase? Is the uncompensated labour supply elastic or inelastic?
3. Why are these elasticities different?
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