Suppose wages in the market for plumbers increase. Some plumbers start taking on extra plumbing jobs while others cut back on the number of hours they work. What could explain this?
What will be an ideal response?
An increase in wage has an income effect and a substitution effect. The substitution effect implies that when the price of leisure increases, people will work more (and relax less). The income effect implies that when wages increase, total income increases and more expensive things, like leisure time, become more affordable. Hence, the income effect will cause people to work less after a wage increase. While an increase in wage leads to both these effects, the income effect is likely to have been stronger for plumbers who cut back on the number of hours that they worked while the substitution effect is likely to have been stronger for those plumbers who decided to work more.
You might also like to view...
Once a firm has determined the quantity of output it wishes to sell, the maximum price it can charge for each unit is determined by:
A. the demand curve facing the firm. B. the average cost of making the product. C. the marginal cost of making the product. D. the firm's marginal revenue curve.
During 2003-2007, the price of crude oil increased substantially on the world market. Other things constant, how will an unanticipated increase in oil prices influence the general level of prices and real output of oil-importing nations such as the United States and Japan?
a. Both real output and the general level of prices will decrease. b. Both real output and the general level of prices will increase. c. Real output will increase, and the general level of prices will decrease. d. Real output will decrease, and the general level of prices will increase.
Which of the following is true of dependent variables?
A. A dependent variable can only have a numerical value. B. A dependent variable cannot have more than 2 values. C. A dependent variable can be binary. D. A dependent variable cannot have a qualitative meaning.
If a country's currency depreciates, which of the following will most likely happen?
a. Net exports will fall and aggregate demand will increase. b. Net exports will rise and aggregate demand will increase. c. Net exports will fall and aggregate demand will decrease. d. Net exports will rise and aggregate demand will decrease.