Describe the impact of the substitution effect and the income effect on an individual’s labor supply curve.
What will be an ideal response?
Answers will vary but should include discussion of the backward-bending individual
labor supply curve. The substitution effect and the income effect both contribute to the
backward-bending nature of an individual’s labor supply curve. As wages increase, the
cost of forgoing labor time to gain more leisure time increases, producing a tendency to
substitute labor for free time. This creates an upward slope in the individual’s labor
supply curve. At some point, a wage level is reached at which the individual feels his or
her income makes it possible to increase leisure time because he or she can afford it.
This pullback in labor creates a backward bend in the labor supply curve.
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A White House proposal to lower business taxes by increasing tax deductions is an example of
A) progressive taxation. B) contractionary fiscal policy. C) automatic stabilization. D) expansionary fiscal policy.
A number of economic historians have attempted to determine whether US railroads were built ahead of demand. Which of the following statements presents accurate information about the findings of this area of research?
a. Fogel and Mercer found that post-bellum transcontinental had relatively low initial profit rates that grew over time. b. According to Fishlow, antebellum railroads were built ahead of demand, but post-bellum transcontinentals were not. c. Fishlow finds that government aid to antebellum railroads was generous and widespread. d. Mercer finds that rates of return on all post-bellum transcontinental railroads were less than rates on alternative investments.
A consumer's indifference curves are right angles when, for the consumer, the goods in question are __________
Fill in the blank(s) with correct word
The case for free trade is based on the
A. theory of absolute advantage. B. theory of comparative advantage. C. theory of balanced growth. D. argument for a diversified economy.