ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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please answer question a b c

### Using the Labor-Leisure Trade-off Model: #### A. **Graph and explain how a typical worker chooses how many hours to work** - **Graph:** Illustrate the budget constraint and the indifference curves. - **Explanation:** A typical worker will balance their desire for leisure with the need for income until the marginal rate of substitution between leisure and income matches the wage rate. The point of tangency between the budget constraint and the highest attainable indifference curve determines the optimal number of hours worked. #### B. **What happens to hours worked when non-labor income increases? Graph and explain both examples.** - **Graph:** Show shifts in the budget constraint due to changes in non-labor income. - **Explanation:** When non-labor income increases, the budget line shifts upwards, indicating more available income. This can lead to: - A decrease in hours worked (income effect: worker chooses more leisure as they can afford it with increased non-labor income). - An increase in hours worked (substitution effect: worker substitutes leisure with work due to higher effective wage rate). #### C. **Graph and explain what happens to hours at work when the wage increases for both types of workers.** - **Graph:** Illustrate changes in the budget constraint with an increased wage. - **Explanation:** If the wage increases, the budget line rotates outward, making leisure more expensive and potentially causing workers to substitute leisure with more work (substitution effect). However, higher income can also lead to more leisure and less work (income effect). #### D. **Graph and explain the backward bending labor supply curve. Under what conditions does the individual supply curve have a positive slope? Under what condition does the individual supply curve have a negative slope?** - **Graph:** Show the labor supply curve bending backward. - **Explanation:** - Positive Slope: At lower wage levels, higher wages incentivize more work (substitution effect dominates). - Negative Slope: At higher wage levels, further wage increases lead to more leisure and less work (income effect dominates). #### E. **Decompose the change in hours of work into income and wage (substitution) effects.** - **Graph:** Use budget constraint and indifference curve analysis to separate the effects. - **Explanation:** An increase in wages can be split into: - **Income Effect:** With more income, workers may choose more leisure and thus work fewer hours. - **Substitution Effect:** Higher
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Transcribed Image Text:### Using the Labor-Leisure Trade-off Model: #### A. **Graph and explain how a typical worker chooses how many hours to work** - **Graph:** Illustrate the budget constraint and the indifference curves. - **Explanation:** A typical worker will balance their desire for leisure with the need for income until the marginal rate of substitution between leisure and income matches the wage rate. The point of tangency between the budget constraint and the highest attainable indifference curve determines the optimal number of hours worked. #### B. **What happens to hours worked when non-labor income increases? Graph and explain both examples.** - **Graph:** Show shifts in the budget constraint due to changes in non-labor income. - **Explanation:** When non-labor income increases, the budget line shifts upwards, indicating more available income. This can lead to: - A decrease in hours worked (income effect: worker chooses more leisure as they can afford it with increased non-labor income). - An increase in hours worked (substitution effect: worker substitutes leisure with work due to higher effective wage rate). #### C. **Graph and explain what happens to hours at work when the wage increases for both types of workers.** - **Graph:** Illustrate changes in the budget constraint with an increased wage. - **Explanation:** If the wage increases, the budget line rotates outward, making leisure more expensive and potentially causing workers to substitute leisure with more work (substitution effect). However, higher income can also lead to more leisure and less work (income effect). #### D. **Graph and explain the backward bending labor supply curve. Under what conditions does the individual supply curve have a positive slope? Under what condition does the individual supply curve have a negative slope?** - **Graph:** Show the labor supply curve bending backward. - **Explanation:** - Positive Slope: At lower wage levels, higher wages incentivize more work (substitution effect dominates). - Negative Slope: At higher wage levels, further wage increases lead to more leisure and less work (income effect dominates). #### E. **Decompose the change in hours of work into income and wage (substitution) effects.** - **Graph:** Use budget constraint and indifference curve analysis to separate the effects. - **Explanation:** An increase in wages can be split into: - **Income Effect:** With more income, workers may choose more leisure and thus work fewer hours. - **Substitution Effect:** Higher
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