Suppose that the owner of Boyer Construction is feeling the pinch of increased premiums associated with workers’ compensation and has decided to cut the wages of its two employees (Albert and Sid) from $23 per hour to $20 per hour. Assume that Albert and Sid view income and leisure as “goods,” that both experience a diminishing rate of marginal substitution between income and leisure, and that the workers have the same before- and after-tax budget constraints at each wage. Albert and Sid's opportunity set is presented below: "The horizontal axis labeled leisure hours ranges from 0 to 30 in increments of 5. The vertical axis is labeled income. A line begins at point A on the vertical axis goes down to the right and ends at the point (25, 0)." What is the value of A when the wage is $23? (Assume a 24-hour work day.) What is the value of A when the wage is $20? (Assume a 24-hour work day.) At the wage of $23 per hour, both Albert and Sid are observed to consume 13 hours of leisure (and equivalently supply 11 hours of labor). After wages were cut to $20, Albert consumes 10 hours of leisure and Sid consumes 16 hours of leisure. Determine the number of hours of labor each worker supplies at a wage of $20 per hour: Albert's supply of labor = Sid's supply of labor = How can you explain the seemingly contradictory result that the workers supply a different number of labor hours? multiple choice Albert's income effect dominates his substitution effect when the wage declines to $20, and vice versa for Sid. Albert has no income effect, and Sid has no substitution effect when the wage declines to $20. Albert has no substitution effect, and Sid has no income effect when the wage declines to $20. Albert's substitution effect dominates his income effect when the wage declines to $20, and vice versa for Sid.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that the owner of Boyer Construction is feeling the pinch of increased premiums associated with workers’ compensation and has decided to cut the wages of its two employees (Albert and Sid) from $23 per hour to $20 per hour. Assume that Albert and Sid view income and leisure as “goods,” that both experience a diminishing rate of marginal substitution between income and leisure, and that the workers have the same before- and after-tax budget constraints at each wage. Albert and Sid's opportunity set is presented below:

"The horizontal axis labeled leisure hours ranges from 0 to 30 in increments of 5. The vertical axis is labeled income. A line begins at point A on the vertical axis goes down to the right and ends at the point (25, 0)."

What is the value of A when the wage is $23?

(Assume a 24-hour work day.)

What is the value of A when the wage is $20?

(Assume a 24-hour work day.)

At the wage of $23 per hour, both Albert and Sid are observed to consume 13 hours of leisure (and equivalently supply 11 hours of labor). After wages were cut to $20, Albert consumes 10 hours of leisure and Sid consumes 16 hours of leisure. Determine the number of hours of labor each worker supplies at a wage of $20 per hour:

Albert's supply of labor =

Sid's supply of labor =

How can you explain the seemingly contradictory result that the workers supply a different number of labor hours?

multiple choice

Albert's income effect dominates his substitution effect when the wage declines to $20, and vice versa for Sid.
Albert has no income effect, and Sid has no substitution effect when the wage declines to $20.
Albert has no substitution effect, and Sid has no income effect when the wage declines to $20.
Albert's substitution effect dominates his income effect when the wage declines to $20, and vice versa for Sid.

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