Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 3, Problem 6RQ
To determine
The income and substitution effects of a temporary and permanent increase in real wages on labor supply.
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A person is more likely to increase labor supply in response to an increase in the real wage, the ________ is the income effect and the ________ is the substitution effect.
1) 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 countries
Based on this model, households earn income when
firms
purchase
factors
in factor markets.
Suppose Hilary earns $725 per week working as an analyst for A-Plus Accountants. She uses $10 to buy a box of aspirin at Pillmart Pharmacy. Pillmart
Pharmacy pays Edison $250 per week to work the cash register. Edison uses $350 to purchase tax services from A-Plus Accountants.
Identify whether each of the following events in this scenario occurs in the factor market or the product market.
Event
Factor Market
Product Market
Edison spends $350 to purchase tax services from A-Plus Accountants.
Hilary earns $725 per week working for A-Plus Accountants.
Chapter 3 Solutions
Macroeconomics
Ch. 3 - Prob. 1RQCh. 3 - Prob. 2RQCh. 3 - Prob. 3RQCh. 3 - Prob. 4RQCh. 3 - Prob. 5RQCh. 3 - Prob. 6RQCh. 3 - Prob. 7RQCh. 3 - Prob. 8RQCh. 3 - Prob. 9RQCh. 3 - Prob. 10RQ
Ch. 3 - Prob. 11RQCh. 3 - Prob. 12RQCh. 3 - Prob. 13RQCh. 3 - Prob. 14RQCh. 3 - Prob. 15RQCh. 3 - Prob. 1NPCh. 3 - Prob. 2NPCh. 3 - Prob. 3NPCh. 3 - Prob. 4NPCh. 3 - Prob. 5NPCh. 3 - Prob. 6NPCh. 3 - Prob. 7NPCh. 3 - Prob. 8NPCh. 3 - Prob. 9NPCh. 3 - Prob. 10NPCh. 3 - Prob. 1APCh. 3 - Prob. 2APCh. 3 - Prob. 3APCh. 3 - Prob. 4APCh. 3 - Prob. 5APCh. 3 - Prob. 6APCh. 3 - Prob. 7AP
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Similar questions
- Consider the following graph in which the real wage increases. Which effect is prevailing on leisure: income effect, or substitution effect? consumption leisure O Income effect Substitution Effect O Neither (they are offsetting each other) O Botharrow_forwardBased on this model, households earn income whenfirms purchase in factor markets. Suppose Amy earns $525 per week working as an analyst for A-Plus Accountants. She uses $10 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Van $225 per week to work the cash register. Van uses $150 to purchase tax services from A-Plus Accountants. Identify whether each of the following events in this scenario occurs in the factor market or the product market. Event Factor Market Product Market Amy spends $10 to buy a box of aspirin. Van earns $225 per week working for Pillmart Pharmacy. Van spends $150 to purchase tax services from A-Plus Accountants. Which of the elements of this scenario represent a flow from a firm to a household? This could be a flow of dollars, inputs, or outputs. Check all that apply. The $225 per week Van earns working for Pillmart Pharmacy The $150 Van spends to purchase tax services from A-Plus Accountants The aspirin Amy receives Amy's laborarrow_forwardLeslie works from home as an IT consultant and consumes only two goods: work (W), which is measured in hours, and consumption (C), which is measured in dollars. Normally she works 40 hours a week and is paid $25 per hour. However, she can be contracted for an additional 30 hours a week at $44 per hour. Leslie cannot work for more than 70 hours a week. For all following questions, round answers to 3 decimal places where necessary. a) What is the maximum consumption available to Leslie if she works 35 hours a week? b) What is the minimum number of hours Leslie must work to attain $600 of consumption? c) At which level of consumption does the kink in the budget line occur? d) What is the maximum consumption available to Leslie if she works 70 hours a week?arrow_forward
- Explain in detail Discuss the possible substitution effect and the income effect of an increase in income on leisure time.arrow_forwardPizza production requires labor (cooks) and capital (ovens). If the wage rate for cooks is $15 per hour and the rental rate on ovens is $20 an hour and the MPP for cooks is 4 pizzas and the MPP for ovens is 10 pizzas, and a pizza costs $20, what should the firm do? Hire more labor because the MRP per dollar spent on labor is higher than capital. Hire more capital because the MRP per dollar spent on capital is hire than for labor. Hire more of both because they generate more revenue than they cost. O Do nothing.arrow_forward2. The circular-flow model The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Markets for Goods and Services Firms Households Markets for Factors of Production Based on this model, households earn income when firms purchase factors in factor markets. Suppose Teresa earns $775 per week working as jewelry appraiser for Classy's Jewelry Store. She uses $9 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Sam $450 per week to work the cash register. Sam uses $325 to purchase necklace from Classy's Jewelry Store.arrow_forward
- Which of the following statements is most accurate about goods and services? They are purchased by households in the factor market. They flow in a clockwise direction. They are sold by businesses in the factor market. They flow in a counterclockwise direction.arrow_forwardQ = K x L (Quantity = capital X labor) Are MPk and MPL diminishing? Is MRTSL,k diminishing? (Marginal rate of technical substitution)arrow_forwardIn the United States economy, there is a great deal of focus on technological advancements. These advances are said to increase worker productivity (like Zoom) or increase the productivity of capital (such as technology that makes the supply chain more efficient).What effect does advancement in technology have on the equilibrium real rental price and capital, assuming that the supply of capital is fixed? Explain, using the terms in the production function, how you know this to be true.arrow_forward
- Patrick has the following labour supply curve: WAGE RATE (Dollars per hour) W3 W2 W1 Labour Supply HOURS WORKED The substitution effect of a higher wage outweighs the income effect when wages are The substitution effect is the phenomenon that workers choose to work raise, because hours when they are given aarrow_forwardThe picture in this exercise describes an economy that is experiencing a boom in total factor productivity Z. The economy, after the boom, has reached point B. Point A is the evaluation of the substitution effect induced by the total factor productivity boom. What can you say about the consumption and leisure levels in the economy BEFORE the productivity boom? Select a point on the original indifference curve (purple curve) where consumption (and leisure) may have been before the productivity boom. B A w** h-l Selected Coordinates Cleararrow_forwardSuppose that land is specific to corn, capital is specific to automobiles, labor is mobile between sectors, and payments are as follows: Sales revenue = 400; payments to labor = 100; payments to capital = 300 Corn:Sales revenue = 300; payments to labor = 250; payments to land = 50. Holding the price of automobiles constant, suppose the increase in the price of corn is 10% and the increase in the wage is 5%. What is the impact of this on the rental of land and the rental of capital?arrow_forward
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