Contemporary Labor Economics
11th Edition
ISBN: 9781259290602
Author: Campbell R. McConnell, Stanley L. Brue, David Macpherson
Publisher: McGraw-Hill Education
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Chapter 2, Problem 12QS
To determine
Check whether the statement is correct or not in the light of work-leisure model.
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What is two factors that may influence the shape of individuals’ indifference curves (flat or steep) which reflect their preferences for work or leisure?
What is the difference between income effect and substitution effect under the basic work-leisure decision model?
Mike’s utility function for consumption and leisure is U=CL and T=168. Mike earns $10 per hour. What is Mike’s optimal amount of C and L? If the government starts a welfare policy that pays B dollars to all nonworkers and $0 to all worker, at what value of B will Mike find it optimum being out of the labour force in order to go on welfare?
If a negative income tax is adopted, work effort will decrease if
1.
2.
3.
Leisure is inferior
Leisure is normal
The income effect offsets the substitution effect
(a)
1 only
(b)
2 only
(c)
3 only
(d)
1 and 3 only
(e)
2 and 3 only
Use a labor-leisure choice diagram to explain your answer.
Chapter 2 Solutions
Contemporary Labor Economics
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Similar questions
- True or False. Explain why. Deniz’s preferences for consumption and leisure is as follows:U(C,L)=C2LDeniz has 100 hours in the week available to split between work and leisure. She earns $10 per hour after taxes. She also receives $260 worth of welfare benefits each week. Deniz’s optimal amount of leisure time will be 45 whereas labour supply will be 55.arrow_forwardWhen focusing on a married couple, one person’s non-labor income includes the laborearnings of his/her partner. Using a graph of budget constraints and indifference curves,describe what would happen to the labor supply of one spouse if the other experiences aninvoluntary job loss. Your answer does not depend on whether the spouse you’regraphing is initially supplying labor or not.arrow_forwardThe AB line in the below graph represents a worker's budget constraint (AB line). A utility- maximizing worker chooses the consumption- leisure bundle at point P, where the indifference curve is tangent to the budget line. Please analyze the impact of a new unemployment benefit program that consists in an amount "AG" if the worker is unemployed. This benefit is lost if the worker finds a job (even if he only works for one hour). B G A U1 Hours of Leisurearrow_forward
- 1. 6. Consider an individual who initially works T-L. hours per week, where (T-L.)>0. They earn an hourly wage (W) and no non-labour income. a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U.) and choice of leisure hours (L). b) The government then implements a wage subsidy program in which worker wages are increased by 10%. This wage subsidy program has no limits, so there is no phase-in/out. This wage subsidy produces both an income effect and a substitution effect on the worker's choice of leisure hours. Assume that the substitution effect is stronger than the income effect. On the same graph as parta, draw this individual's new income-leisure constraint, utility- maximizing indifference curve (U.) and choice of leisure hours (Ls). [Note: When incorporating the 10% wage subsidy into the graph in part b, I am not expecting perfect precision. Just try your best to draw the new income-leisure constraint as though a 10%…arrow_forwardConsider an individual who lives in an economy without a welfare program. They initially work T-Lo hours per week, where (T-Lo)>0. They earn an hourly wage (W) and no non-labour income. a) Draw a graph that reflects this individual's income- leisure constraint, utility-maximizing indifference curve (Uo), choice of leisure hours (Lo) and income (Yo). b) Now, assume that a welfare program has been implemented in this economy. The welfare benefit is smaller than the individual's initial income level (Yo) and there is a 50% clawback on any labour income earned. The individual now maximizes their utility by working and collecting a partial welfare benefit. On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (U₁), choice of leisure hours (L₁) and income (Y₁).arrow_forwardDefine the income-leisure trade-off that makes up the labor supply functionand the intuition for the upward sloping labor supply curve. What two effectsare involved in this trade-off? Explain.arrow_forward
- 4. The different programs discussed in this chapter often have ambiguous effects on work effort. It is, nonetheless, possible to compare the work incentives of two programs by looking at what happens when the individual is indifferent between two programs. Use this approach to compare the work incentives of the following two pairs of programs: a. Earned income tax credit compared to welfare (discuss this only during the phase-in part of the EITC which would be the more likely scenario for an agent to be at risk of non-participating in the labor market). b. Wages subsidy compared to a negative income tax. In both cases, use graphs to show the hours of work chosen under the two programs by an individual who is indifferent between the two programs.arrow_forwardExplain in detail Discuss the possible substitution effect and the income effect of an increase in income on leisure time.arrow_forwardWhich of the following would cause our budget line (labor-leisure tradeoff) to shift outward? Declining health, which causes a reduction in available productive time. Declining health, which causes an increase in available productive time. Improving health, which causes a reduction in available productive time. Improving health, which causes an increase in available productive time. Oarrow_forward
- Raya has 80 hours per week that she can devote to time spent working or on leisure activities. Assume that Raya is paid by the hour, and that her job will always allow her to work as many hours as she chooses. The following graph presents Raya's weekly leisure-income tradeoff. The three lines labeled BC, BC, and BC, show her time allocation budget at three different hourly wage levels. The given points A, B, and C represent her optimal time allocation choices along each of these constraints. 1920 BC3 1280 BC₂ 640 BC₁ 5 0 35 40 45 LEISURE (Hours) For each listed point, use the preceding graph to complete the following table by indicating the hourly wage as well as the number of hours per week Raya will spend on labor and leisure. Point Wage (Dollars per hour) (Hours) Leisure Labor (Hours) A B C Based on the data you entered in the preceding table, use the orange curve (square symbols) to plot Raya's labor supply curve on the following graph, showing how much labor she supplies each week…arrow_forwardAkua gains utility from consumption C and leisure L. The most leisure she can consume in any given week is 110 hours. Her utility function is U (C, L) = C × L. Akua receives 660 GHS each week from her great-grandmother—regardless of how much she works. a. What will be Akua’s marginal rate of substitution. b. What will be Akua’s reservation wage? (Explain in detail)arrow_forwardA significant number of economists assume that that typical workers initially increase their labor supply when their wage increases but ultimately they decrease their labor supply when their wage gets higher. Show on two different graphs with indifference Curves and budget line, showing labor income tradeoff, how a worker that increases its labor supply when wage increases from a worker that decreases his labor supply. Do you think the assumption above is a reasonable assumption? Explain your answer.arrow_forward
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