Suppose that the representative consumer's div- idend income increases, and his or her wage rate falls at the same time. Determine the effects on consumption and labor supply, and explain your results in terms of income and substitution effects.

Suppose that the representative consumer's div- idend income increases, and his or her wage rate falls at the same time. Determine the effects on consumption and labor supply, and explain your results in terms of income and substitution effects.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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6. Suppose that the representative consumer's div-
idend income increases, and his or her wage
rate falls at the same time. Determine the effects
on consumption and labor supply, and explain
your results in terms of income and substitution
effects.

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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 $21 per hour to $17 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: Albert and Sid's Opportunity Set Income 0 5 10 15 20 25 30 Leisure Hours What is the value of A when the wage is $21? (Assume a 24-hour work day.) What is the value of A when the wage is $17? (Assume a 24-hour work day) At the wage of $21 per hour, both Albert and Sid are observed to consume 12 hours of leisure (and equivalently supply 12 hours of labor). After wages were cut to $17, Albert consumes 10 hours of leisure and Sid consumes 14 hours of leisure.…
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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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For this question, assume that indifference curves are strictly convex, consumption andleisure are normal goods, and the optimal amounts of consumption, leisure, and labor arealways positive. A wage increase ______. (SE = substitution effect; IE = income effect)(a) increases labor supply via the SE and decreases labor supply via the IE(b) decreases labor supply via the SE and decreases labor supply via the IE(c) increases labor supply via the SE and increases labor supply via the IE(d) decreases labor supply via the SE and increases labor supply via the IE(e) Can’t tell without knowing the utility function
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ASAP
Refer to the following diagram which reflects Sam's tradeoffs of income and leisure: $240 Income $192 0 15 16 17 24 Leisure
Sally believes that any market basket on the income-consumption curve shares the same marginal rate of substitution. Do you agree with Sally? Why?