A. What are the two effects of an increase in the wage rate on an individual's labor supply decision? Briefly explain each effect
b. Explain how a labor supply curve could be backward bending.
What will be an ideal response?
a. There are two effects of a wage rate increase: a substitution effect and an income effect. The substitution effect raises the price of leisure, which causes a worker to consume less leisure and supply more labor. Since leisure is a normal good, the income effect leads the worker to choose more leisure and supply less labor.
b. When the wage rate is low, an increase in the wage rate leads to an increase in the quantity of labor supplied because the substitution effect is greater than the income effect. Therefore, the labor supply curve slopes upward. When the wage rate is high, the income effect may be greater than the substitution effect. If this is so, the quantity of labor supplied will decrease as the wage increases and the labor supply curve would be backward bending.
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During a recession, tax revenues ________ while government transfer payments ________, thereby mitigating part of the adverse effects of a recession and stabilizing the economy
A) fall; decrease B) fall; increase C) rise; decrease D) rise; increase
Which of the following statements is inconsistent with Say's Law?
A) The economy has flexible wages and prices. B) The economy will produces at the full employment level of output. C) The economy has an environment of "laissez faire." D) The economy's level of saving depends solely on the level of income.
Marginal cost pricing regulations for a natural monopolist ensure that
a. b and e b. price reflects the value society places on the last unit produced c. output will continue to grow until the required subsidy is zero d. fair pricing schemes are more profitable e. subsidization will be necessary
For which of the following workers would the substitution effect be more likely to outweigh the income effect of an increase in wage?
A. Air traffic controller B. Marketing manager C. Waitress D. Dentist