Contemporary Labor Economics
11th Edition
ISBN: 9781259290602
Author: Campbell R. McConnell, Stanley L. Brue, David Macpherson
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 2, Problem 4QS
To determine
The outcome of income tax cut and its impact on income effect and substitution effect.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
If the income effect is smaller than the substitution effect following a change in productivity, variation in
total factor productivity has the potential to generate variation in Real GDP similiar to the ones observed
in the data.
True
False
Consider the following labor-leisure choice model.
Utility function over consumption (C) and leisure (L)
U(C.L) = (1/3L1/3
Total hours: H = 40
Labor hours: NS = H - L
Non-labor income: π = 30
Lumpsum tax: T = 10
Hourly wage: w = 4
Suppose the hourly wage changes to w = 3. What is the substitution effect of this change on labor supply?
A. +2.65
B. -2.65
C. +3.48
D.-3.48
E. None of the above
d. Based on both the consumption-leisure optimality condition obtained in previous part (Based on both of the two first-order conditions, construct the consumption-leisure optimality condition) and on the budget constraint, qualitatively sketch two things in a diagram with the real wage on the vertical axis and labor on the horizontal axis. First, the general shape of the relationship between w and n (perfectly vertical, perfectly horizontal, upward-sloping, downward-sloping, or impossible to tell). Second, how changes. in / affect the relationship (shift it outward, shift it inward, or impossible to deter mine). Briefly describe the economics of how you obtained your conclusions.
Chapter 2 Solutions
Contemporary Labor Economics
Knowledge Booster
Similar questions
- As part of your job as an economist at the Department of Work and Pension, you regularly advise ministers on various economic and social policies that the government plans to introduce. The government is considering a welfare policy to help people to get out of poverty while at the same time reducing the incidence of "out of work" in the population. The ministers are considering whether to (1) give people a cash grant or (2) an earned income tax credit, which pays those in work 30% of the hourly wage they receive from their employer. Discuss the merit of each policy and their implications for labour supply. Make use to illustrate your answer with the use of diagram(s) and to make reference the existing empirical evidence (i.e., from existing studies).arrow_forward2. Let an individual’s utility function be given by where C and L are consumption and leisure respectively, and g, a and b are positive constants with a + b = 1. Derive the individual’s Marshallian labor supply function and comment on the magnitudes of the income and substitution effects of wage change. Derive the general form of Slutsky equation of labor supply.arrow_forwardMike’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?arrow_forward
- Suppose that education is the only factor that affects productivity and that an additional year of education raises wages by 2%. Suppose in 2011 gender wage gap was 13%, and the average man had 15 years of education while the average women had 14 years of schooling. a) Using the wage gap decomposition technique, calculate how much of the 13% wage differential is due to discrimination? b) Now suppose in 2021 the gender wage gap is 10%, but the average woman’s education level is increased to 17 year and the average man’s education increases to16 years. (Assume that the return to education stays same at 2%), Was there a decrease or an increase in wage discrimination in the decade? Why?arrow_forwardMaria earns $15 per hour in her current job and works 40 hours a week. Her disutility of effort is measured as $1 per hour of work. In the case that she loses her job, she receives $5 per hour unemployment benefit. Additionally, being unemployed has psychological and social costs which is a disutility equivalent to $2 per hour. Which of the following statements is correct? Include a brief explanation (one sentence and/or equation) to justify why each statement is correct or incorrect. A). Her employment rent per hour is $3. B). If she can get another job with the same wage rate and weekly hours after 44 weeks of being unemployed, Maria’s total employment rent is more than $10,000. C). If the unemployment benefits she could receive if she lost her job increased to $7/hour, her employment rent would also increase. D). If her disutility of effort at her current job increased to $4/hour, her employment rent increases.arrow_forward1) What would be the substitution effect and the income effect of a wage increase? 2) What do you think accounts for the wide range of savings rates in different countriesarrow_forward
- Consider the following Labour-Leisure Choice model. Utility function over consumption (C) and leisure (L) 1 3 U(CL) = cL4 Total hours H = 20 Labour hours: N = H-L Non-labour income: 1 = 20 Lump-sum tax T= 10 Hourly wage w = 3 Suppose that the hourly wage increases to 5 What is the substitution effect of this wage change on labour supply(N)? A. -1.10 B. -2.10 O C. +1.10 OD. +2. 10 O E. None of the abovearrow_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_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
- Below are three examples of an individual experiencing a wage change at various points in their career: i) After five years of working with their current employer, the individual received a scheduled increase in their hourly wage. ii) In celebration of the firm's 50th anniversary, the individual's employer increased the hourly wage of all employees for the month of February. iii) After a particularly profitable year, the individual's employer increased the hourly wage of all employees. Assume that each wage change generated the same sized substitution effect. Which of the three wage changes do we expect will least motivate the individual to increase their hours worked? Explain.arrow_forwardI would like to know on which portions of the budget constraint where the labor supply effects of the policy are positive relative to the status quo.arrow_forwardConsider a person who can work up to 80 hours each week at a pretax wage of $20 per hour but faces a constant 20 percent payroll tax. Under these conditions, the worker maximizes her utility by choosing to work 50 hours each week. The government proposes a negative income tax whereby everyone is given $300 each week and anyone can supplement her income further by working. To pay for the negative income tax, the payroll tax rate will be increased to 50 percent.a. On a single graph, draw the worker’s original budget line and her budget line under the negative income tax.b. Show that the worker will choose to work fewer hours if the negative income tax is a dopted.c. Will the worker’s utility be greater under the negative income tax?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
