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Discuss the possible substitution effect and the income effect of an increase in income on leisure time.
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- Income $240 $192 0 15 16 17 a) Using the above diagram, decompose the effect of a wage decrease for this individual into Income Effect (IE) and Substitution Effect (SE). Leisure 24 b) How many hours of work is effected because of the IE? c) How many hours of work is effected because of the SE? d) What is the net effect of this wage decrease on hours of work for this individual?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.A family of four has an income of $15,000 today and will earn $24,000 tomorrow. i). If the family consumes $11,500 in the first period and $15,000 in the second period, whatis the interest rate? ii). If the family consumes $15,000 in the first period and $13,500 in the second period, whatis the interest rate? iii). Explain the income and substitution effects and discuss which effect dominated after theinterest rate change from part (a.) to part (b.).
- 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 FalseAssume that, in response to a wage increase, Professor C retires sooner. a. (4) Explain -VERY BRIEFLY- the income effect of the wage increase (on both consumption and leisure)? b. (4) Explain - VERY BRIEFLY- the substitution effect of the wage increase (on both consumption and leisure)? c. (2) Explain - VERY BRIEFLY- whether the substitution or income effect is larger (in terms of leisure / labour).Suppose the price of bananas falls. Explain how the income and substitution effects work in the adjustment to a new level of banana consumption.
- Explain the income effect with the diagramWhat is the concept of diminishing marginal utility of consumers? How consumer use Marginal Rate of Substitution to reach consumer equilibrium level where MRTS = Px/Py?Sally believes that any market basket on the income-consumption curve shares the same marginal rate of substitution. Do you agree with Sally? Why?
- Define The income and substitution effects.Selena has utility U=lnX + 2lnY Calculate the formula for her marginal rate of substitution between X and Y, showing your work.Terry attends college and works part-time in a drug store. She can work up to 40 hours each week and is paid $9 per hour. The following table shows her utility from different levels of leisure and income. Hours of Leisure Total Utility from Leisure Marginal Utility of Leisure Work Hours Income Total Utility from Income Marginal Utility from Income 5 18 0 5 45 35 0 10 34 3.2 10 90 59 4.8 15 48 2.8 15 135 77 3.6 20 56 1.6 20 180 86 1.8 25 60 0.8 25 225 92 1.2 30 65 1 30 270 98 1.2 35 69 0.8 35 315 103 1 40 72 0.6 40 360 107 0.8 Terry decides to decrease her work hours from 20 to 10. What would be her marginal utility gain from having additional leisure time? What would be marginal utility loss from less income? What will be her total utility from both leisure and income when working 10 hours per week? Does it make sense from the…